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Renovations: Lifeline or Millstone?

As the economy lumbers on in low gear—though no longer in reverse, if the economical pundits are to be believed—new construction remains at anemic levels, with contractors growing increasingly hungry for work.

The one segment of the industry that does show signs of life, however, is the aftermarket of renovations, remodels and restorations, and many contractors who two years ago would not even have considered renovation work, are now looking in this direction for sustenance.

But is this field a lifeline that will save your business, or is it a millstone that might sink it?

First, let’s clarify some of these aftermarket terms, which are often used interchangeably though they have different meanings.

When remodeling something, we would, by definition, be changing, or altering, its use or layout. We might have a floor plan that just doesn’t work anymore; we’d reconfigure the thing, perhaps even add rooms, and so change the model of the structure.

Renovating something, on the other hand, means improving an existing building by “making it new” — which is the derivation of the word. We would stick to the existing floor plan and re-do the floors, re-drywall rooms, etc., replacing the old with the new, updated version.

Renovation differs from restoration in that we do not have to use “original” parts or material—or material that appears original. A plastered wall will be replaced by a plastered wall during restoration, but will most likely be replaced by drywall during a renovation.

It seems, though, that Improvement (which at root means “increase the profit of”) covers both renovation and remodel, since both actions do increase both the resale value and the usage-value for the current occupants.

Tenant Improvements or Build Out is a purely commercial term, and is, in fact, the term contractors are most likely to encounter. Each tenant in a new (or existing) office building has its own requirement, and in the aftermarket such improvements often entail demolishing and clearing out what is there, and providing new walls, partitions, etc., according to the incoming tenant’s specifications.

Renovation Growth

All across the country, it is evident that the renovation segment of the industry is growing.

According to Jason Price, estimator at Sides Drywall in Alabama, 50 percent of their current business is now renovation. “People don’t have sufficient funds for new construction,” he says, “so instead they renovate their existing offices and schools—yes, there are a lot of school renovations today. I think they’re using government stimulus money for that.”

Leo Sheehan, vice president of Dan J. Sheehan Company in Georgia, concurs. He says, “People do not build new at this point. Only the government seems to be able to afford that, since military buildings and schools are about the only new construction going.

“Instead, people try to revitalize what they have and invest in existing properties to make it last a little longer. In this part of the country, new construction is way down.”

Daniel Turgeon of Green Mountain Drywall in Vermont has reached the same conclusion: “People are fixing up their places, rather than building new. Also, they know that prices are as good now as they’ll ever be.”

Jay Leavitt, senior estimator at Arizona Stucco System, agrees. “Three years ago, we hardly did any renovation work—perhaps 5 percent or so,” he says. “Now, in terms of what we’re bidding, renovations are easily 30 percent, so we’ve definitely seen an increase of the renovation market.

“I see two reasons for this: Owners cannot afford to build new so they choose to renovate what they have; and construction work is comparatively cheap today, because increased competition keeps chasing the price down for all types of work.”

A Banker’s Perspective

In this economy, skittish banks have demonstrated their reluctance to finance new commercial construction for several reasons.

Glut. In many areas, such as Arizona, the commercial sector is over-built, and there is now a glut of empty office space, meaning existing buildings are not generating sufficient income for owners to service a loan, so new buildings would not be likely to, either.

Speculation. New construction often carries a strong element of speculation. In this economy, a sure thing sounds much better to lenders than speculation, so they shy away from anything that even smells like an uncertainty.

Bad Debts. Many lenders are still struggling with existing bad debts and do not have the surplus funds to lend, even should they desire to.

Equity. The equity in a new building—serving as security to the lender—is only as large as the owner’s contribution to the project, which seldom comes close to covering the lender’s risk.

Renovation Loans. Little of the above holds true for the renovation aftermarket, however.

An owner who wants to renovate his property normally has substantial equity in such buildings, all of which can be offered as security to the lender.

Further, a commercial renovation project, such as a build-out, as a rule entails a new tenant contract, with its guarantee of owner revenue to service the debt.

Contractor experience confirms this view.

John Drexel, division manager at Anning-Johnson Company in Los Angeles, says, “Today, banks are not lending money to build new buildings, but they’re definitely lending money for renovations or tenant improvements.”

Russell Kenney, president of R.J. Kenny Associates, Inc., a Massachusetts construction consultant, says, “Banks are more willing to finance renovations because these buildings contain plenty of equity. The banks have a way of getting their money back.”

This willingness of banks to lend is another factor that has spurred the renovation aftermarket. Money appears readily available for those who want to improve existing property.

The Renovation Market

Traditionally, renovation jobs were generated almost exclusively through repeat business, customer referrals and other types of word-of-mouth about the qualities of given contractors. Contracts were negotiated, and jobs rarely went out to bid … for good reason.

Renovation: A Specialty Field. The renovation market is a specialty field, often calling for a different skill-set than that of new construction. Gabriel Castillo of Pillar Construction in Virginia says that “renovation is definitely a different breed.”

Gerald Roach, owner of Forks Lath & Plaster in North Dakota, puts it this way: “Renovation is its own animal, calling for a different type of contract. Contractors tend to find their own segments within our industry, and the renovation piece of the pie is definitely its own segment—one that we don’t chase too much.

“Now, the bigger renovations, where they shut down half a building and completely demo it out and redo it—hospitals and clinics come to mind—I would consider those. But, say, a bank branch, which has to stay in operation while you renovate or remodel, I would not even look at it unless I was really, really hungry.”

Price says, “Renovations usually mean a lot of patching work, where labor doubles as compared to new construction. If someone is not familiar with that and lacks this experience, when quoting that job, they will go in with low labor prices, as if it were new construction. They don’t realize that renovation is its own discipline.”

An east-coast renovation specialist (who prizes his anonymity) puts it this way: “A lot of things come into play when you renovate buildings. For one, if you’re doing the demolition, too, you need to be aware of the risk. How is it coming down?

He continues: “You have environmental risks. You have safety risks. You have asbestos risks. And this is all building specific.

“We see guys now getting into places where we’ve typically done the original work, and they’re missing a whole lot: They don’t have the safety plan in place, they don’t have the environmental plan in place, they don’t have an abatement contractor ready to go in case they find something. They lack the knowledge that comes from doing the work originally, and you need that to see you through a renovation job.”

Negotiated versus Bid. Given the special qualities needed by a renovation contractor, and given that owners were quite aware of this a few years ago, few renovation jobs went the bid route. Instead, the owner would return to a contractor who served him well in the past, or take the recommendation of another owner.

The owner would then involve the contractor from the beginning, including the investigation (locating plans and documentation for the existing building) and inspection (physically walking the job, thoroughly inspecting the existing conditions) phases of the project.

After that, the contract would be negotiated based on what was found, and what, precisely, the owner wanted done. Owners knew that cutting corners on a renovation job was a quick path to grief, and that quality of work, above all, was what counted with his contractor.

Therefore, renovation jobs rarely went to bid.

Castillo confirms this when he says, “Realistically, renovation jobs cannot be competitively bid because you never know that you’re going to find when you start opening up walls. You therefore have to work closely with the owner and the architect, because you simply cannot do a competitive renovation bid like you do with new construction, where all factors are known.”

Current Environment. Today, however, due to the financial climate, it is as if caution has been cast to the wind, along with common sense, for owners are now not only putting most, if not all, renovations out for bid, they also only award the job to lowest bidder, who, in desperation and ignorance of what they’re in for, may bid well below cost.

It is a buyer’s market, and it seems owners are not only aware of this, but are taking full—and often foolhardy—advantage of that fact.

Price says, “This used to be a word-of-mouth market, where we negotiated contracts, but that’s not happening now. Everything is bid.

“Of course, renovation is almost impossible to price unless you’ve investigated the existing building. But I think they are counting on someone to make a mistake and overlook something, and bid that low price. We were negotiating these jobs, but no more.”

Sheehan sees the same thing: “It used to be by word-of-mouth, and negotiated, but everything is bid now, and everyone’s competitive.”

“Today,” says Leavitt, “renovations are even listed in the Dodge Report, which a year or so ago only used to carry new construction projects. Three years ago, renovation work would only be done by a closed set of specialty contractors, but now it’s being picked up and bid by mainstream contractors as well.

“Even the GCs we felt we had relationships with, those that would always give us a second look, are going lowest bid now, and that might be a guy out of the back of his pick-up with a mixer—someone we know cannot do the quality of work we can and do. So, they’re definitely only going lowest bid now.”

Kenney says his area is seeing non-renovation type contractors bid these jobs and bidding low. But, because they are being unfamiliar with the discipline, the owners are burned.

“Renovation contractors have to know what they’re doing,” Kenney says. “They have to be very well organized, and they need a certain amount of their own people. You will not make money by subbing everything out.”

Leads. That said, Russell goes on to give a helpful hint for those looking for renovation projects: “Renovations jobs are normally not advertised, or didn’t use to be. A good way to get a foot in the door is to go to the large property management companies. They know what jobs are coming up. You should visit them, and promote to them. That’s the best way. You will rarely find renovation work in the newspapers.”

Know Before You Go

If you find yourself in the now-common boat of having to chase anything that moves as far as work is concerned, renovations might just be a perfect target, and you should obviously pursue it—but with the caveat: Know before you go.

Not New Construction. The great thing about new construction is that most, if not all, factors are known. Things are also, as a rule—and unless you are unlucky—fairly well organized: You know exactly when to show up, and you’ll find what you expect to find at the job site. You perform, clear out, send an invoice and are paid.

enovations are not as straightforward. Even if the contract is negotiated and you are experienced, the only constant seems to be “surprise.”

As Castillo puts it, “Be aware that you’re doing something very different from new construction. You cannot treat the jobs the same way. You need more experience and you need to know what you’re doing. And be ready for surprises when you open things up.

“Also, the older the structure, the less information you will have. You may not have the drawings, you may not have structural information, so you’re basically going by eyes, ears and nose.”

Specs. You also have to be aware of how the specs are written.

Roach says, “Architects write specs to cover themselves, for misses they make. Let’s say you’re to renovate an older, wood-framed building. The plans call for demo’ing parts of the plaster ceiling for the new sprinkler system, and then call for “patch the plaster” to re-finish the ceiling.

“However, the plan will also call for a two-hour fire rating, and once you open the ceiling up you realize that just patching the plaster is not going to do it, and here you’re stuck [drywalling] the whole ceiling to comply with the fire rating called for in the plan.

“The plans and specs rarely agree with what you actually find once you begin the job.”

Kenney adds: “You need to look at the job to see how long it is going to take you to do it. On remodeling, unit pricing does not work. And you have to determine whether the plans and specifications are sufficiently detailed to bid.

“When we spec, we specify, in detail, precisely what our contractors have to do, based on our own investigation and inspection, including any needed mold-remediation—everything. This way the contractor knows exactly what we’re asking him to do. We investigate our jobs well enough that the contractors know what to do.

“If the specs are ambiguous as to quantities and needed work, you don’t know precisely what to bid, and you don’t know what has to be done. That’s one way to lose your shirt. Architects like to give very general specs, which always cause trouble down the line, especially during renovations.”

Coast and Age. Robert Aird, president of Robert A. Aird, Inc. in Maryland, made the observation that renovation projects might differ greatly between the coasts, simply because buildings in the Eastern United States tend to be older than out West.

“Arizona does not have 200-year-old buildings,” Aird says, “but we have a lot of them in D.C. and Baltimore. That fact alone can make renovations here radically different from renovations west of the Mississippi.

“Also, you need to consider the age of the building. A building less than 50 years old will probably contain drywall, while an older building was made with plaster. You can rip a piece of drywall off the wall in three minutes, the same amount of plaster off a wall, half an hour.”

Future Boom Market

Another observation shared by many is that current construction, and that done over recent years, has been performed increasingly by lowest bidders, with less and less expensive labor, and under increasing time pressure, resulting is less-than-high-quality projects.

This—ironically—may result in a booming renovation market in years to come as shoddy projects may soon need renovation to remain functional.

“The president of a large contractor told me, nine months ago, that he was bidding work at cost,” Aird divulges. “That’s zero mark-up, just to turn dollars and keep men busy. And he was being beaten at a rate of 20 to 25 percent.

“You can’t do work like that. It is not possible. So the guys who get these jobs will fail, or cheat and cut corners and hire illegally and do shoddy work, put people at risk, and build a building that will not function well.”

Kenney has seen similar work. He says, “Over recent years, I’ve observed the quality of construction slip: Poor detail, poor construction—all done by the lowest bidder. I now see fairly new buildings that soon will cost millions to fix.”

This, however, may be good news for the contractor who takes the time to learn renovation and become skilled at it.

A Lifeline

For the contractor who knows what to expect, and is prepared and equipped to handle what he finds, renovations may well be the lifeline that sustains business survival through this economic downturn.

But the key is this: Know what you are getting into, and even then, expect to be surprised.

Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.

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