Value engineering is an accepted inevitability in construction, and it’s become increasingly important as construction costs have been on the rise in senior living. But while smart value engineering will identify the best ways to cut costs without sacrificing quality, too much value engineering can compromise the vision and integrity of a project, and cause a developer to deliver a building that may be practically obsolete upon arrival.
Veteran senior housing developers and operators recognize that a thorough, detailed pre-construction process can minimize the need for value engineering before the foundation of a building is laid, particularly since senior housing development presents its own unique challenges, Jim Moore, President of Moore Diversified Services, a senior living and health care consultancy firm in Ft. Worth, Texas, told Senior Housing News.
“The design features (for senior housing) are much more complex than most conventional real estate,” Moore said. “It falls into three primary areas: living units, common space and back-of-the-house space which contains storage, commercial kitchens and other amenities.”
Variabilities in terms of details such as unit finishes, cabinets, and mechanical and electrical systems to service the needs of senior housing residents add gray area to what is typically a cut-and-dried pre-construction process, Solera Senior Living founder and CEO Adam Kaplan told SHN. Solera, based in Chicago, has four new senior housing developments in its pipeline, in various stages of construction in Denver, suburban Washington, D.C, Philadelphia and Austin, Texas.
“When building another product type, like a self-storage or a retail building, you’re building a box and it’s a commoditized process,” Kaplan said. “The challenge with pre-construction in senior housing early on is to get an indication of pricing from general contractors (GCs), and then do an apples-to-apples comparison.”
Lock in pricing, labor ASAP
The current construction boom period is facing growing pressures from a tight construction labor market and rising materials costs. A February report from the Cato Institute revealed the unemployment rate in the construction industry is at its lowest since 2000. The tight labor market is creating problems for GCs, and some delays for projects, when it comes to subcontracting for specific materials and services, according to Joe Pecoraro, Project Executive for Chicago-based construction services firm Skender.
“Subcontractors are being extremely selective as to what jobs they’ll accept and are only committing to projects where they have good relationships with GCs,” he told SHN.
Rising materials costs are causing suppliers to pressure developers and GCs to lock in the lowest price quotes as soon as possible. Pecoraro, who specializes in multifamily and senior housing for Skender, said he has had suppliers increase their quotes for materials at least a half-dozen times in recent months.
“Many times the ultimate client has already created a pro forma budget for the task,” Moore said. “However, the costs tend to rise as more thought goes into the construction planning process.”
The impact of the Trump administration’s tariffs on steel and aluminum had already impacted the pricing of raw materials, but had little impact on construction projects underway because the materials pricing was already locked in. Now they’re beginning to affect the pricing of finished products, Kaplan said, particularly if these products require parts manufactured in China.
Rising materials costs are giving GCs and subcontractors some leverage over developers, and developers are finding creative ways to reduce the risk. For Solera’s Denver project, the GC wanted assurances that the firm would bear responsibility if costs escalated over a set percentage. Solera circumvented this by entering into a guaranteed matching price (GMP) contract.
“This will be a continuing challenge throughout 2019 and beyond,” Moore said.
The developer/operator has an advantage
Pre-construction planning is easier for the developer who will also operate a senior housing community when it opens. They have an advantage in facilitating pre-construction negotiations versus having a developer and operator separately, Moore said.
The biggest advantage a developer/operator has is an understanding of how senior living works, as well as the market where the company wants to build.
“We can communicate that to architects/designers early on to come up with conceptual plans and present to GC offering guidance,” Kaplan said. “We don’t need to call on a third party to answer questions that are integral to the success of the project. The only person we’re answering to is ourselves.”
A developer/operator can also offer better pricing than having the two separate entities, Moore said.
It behooves developers working with third-party operators to be involved as soon as possible in the pre-construction process. The sooner a developer can lock in an operator, the more smoothly the pre-construction process can begin, Joe Pecoraro, senior project manager for Chicago-based construction services firm Skender, told SHN.
“The operator, who is going to live with the project well after the construction certificate of occupancy, needs to be intimately involved in influencing the pre-construction planning,” Moore said.
Communication is key
A veteran GC has a general knowledge of everything in the construction process. These GCs employ well-organized, process-driven managers who can ask the right questions about a project, get developers, operators and subcontractors on the same page early, and push back when developers propose something that can be value engineered out of a project.
“The best partners provide opinions when it isn’t popular,” Pecoraro said.
Solera is very aggressive in locking in a GC with relevant senior housing experience, and begins its search for one before it submits a letter of intent (LOI) for a development, Kaplan said.
“We’ll engage our architects and interior designers for conceptual plans to determine the scale and range of care levels, which allows us to build out an operating pro forma and marry it with construction estimates,” he said.
This allows Solera to be as precise as possible with its math on the front end of a development as well as build escalations into the estimates so it can generate realistic returns for its equity investors.
“The last thing we want to do, as a company in an early growth phase, is submit an LOI and retrade with sellers because we didn’t have accurate info on front end, or worse, go back to an equity investor and say we’re compressing returns,” Kaplan said.
Written by Chuck Sudo