December 12, 2022

It'll take longer & cost more? Planning advice for an unpredictable market

Budgets, buildouts and tenant improvement (TI) projects are often laid out on a Gantt chart – linear steps, on a neat and predictable path. But right now, the reality is much messier. Supply delays and rising costs have scrambled even the best-laid plans. These days I think of budgets and project management more like a Venn diagram: everything overlaps something. And when any piece is late or costs more, it affects multiple elements—and, in turn, the entire process.

Today, when you plan a project or create a budget you start out knowing that the continuity and relative stability we’ve enjoyed over the years is no longer reliably there. You have to be in a proverbial crouch, on the balls of your feet, to keep your balance and be poised for whatever comes at you. It’s a constant state of pivot.

The impact of this uncertainty is undeniable: You know something’s going to happen, but what will it be, and how bad? For example, a lot of new-build projects are currently stalled; the developers are waiting for them to pencil out. Today’s fluctuating prices and timing uncertainty make the projects unworkable.

As another example, take a typical TI buildout. The broker, tenant and landlord plot it out, and agree on a budget, cost responsibilities and a timeline. The landlord’s investment in the project, negotiated rent and tenant move-in have to be net-positive financially. The tenant has to manage the costs and timing of moving in, setting up and being open quickly enough to start generating revenue.

When you start, the costs make sense. But when they go up, they don’t. The planned timeline worked for the tenant’s situation. But now you can’t get the flooring for three months, and the schedule falls apart. You can pay extra to get it done in time, or you can wait until all the dominoes line up in order. Who chooses, and who pays? The project becomes an uroboros—an unending circle of frustration.

Looks like it’s time for the brokers and property managers to step up and play superhero. As the people working for both sides, who have a vested interest in the project being successfully completed, and are interested in long-term relationships, brokers and property managers need to marshal all their resources and wisdom for this to work.

Here are some solid ideas for how to make that happen.

1. Increase the focus on communication.

You know timelines and costs are going to be ever-changing, so your communication with everyone involved is even more important. You should have more conversations than normal, to make sure everyone understands what’s feasible—landlords, tenants, vendors and anyone else involved. The initial conversation should include the fact that the variables of any project or operating budget are…well, more variable now. Make sure everyone knows that changes will be coming and that they’re ready to accept that and deal with them. A broker or property manager is often the best intermediary in challenging, shifting situations. You’re managing both expectations and relationships—and the unstated role here is to build and reinforce social capital and trust, because you’ll need to rely on them at some point.

2. Know the tenant’s and the landlord’s needs.

This seems like a “duh” point, but going deeper into both parties’ constraints, attitudes and expectations can provide a huge advantage later on. These days tenants are coming in asking, “What are my options?” It’s not a deal, it’s an inquiry—because they know things can go sideways in a flash. Whether it’s a build or an annual budget, you must have a detailed understanding of everyone’s needs to get to the target, and their real-world timeline—which pieces and steps are integral, and when. This also includes identifying ahead of time where there might be flexibility anywhere.

3. Identify process steps that can’t be controlled.

My colleague George Macoubray, our Vice President of Retail Brokerage, points out that you should also, “make sure everyone understands that some obstacles aren’t under the control of the landlord, the tenant, or the broker or property manager. Government approvals, national-chain tenants who have to get corporate approval, contractor labor shortages…there are a number of factors that can slow things down and cost you more time or money. You should prepare everyone, so each hiccup doesn’t come as a complete surprise.”

4. Keep the balance between the landlord and tenant.

In this environment, both tenants and landlords are more likely to come into a deal ready to negotiate variables in advance. Tenants might be planning further ahead, anticipating delays. Landlords will be wary of extended timelines that delay ROI. Your job is to encourage everyone involved to be realistic—we’re all dealing with this and we all need to accept that. The landlord promises a scope of work; if it increases, will they eat the increased cost? The tenant may have an improvement allowance; if it runs out, will they come up with more? A budget gets blown up by a sudden price increase; can you and the landlord work around it? A truly crucial factor here is that all parties have to be willing to be flexible. For example, if a tenant pushes hard for highly favorable lease terms, the landlord is less likely to be helpful if the tenant runs into problems later.

5. Plan projects differently.

The entire planning process has to address the current environment. Of course, I always build a cost contingency into projects and budgets—but it used to be 5%, and now it’s more like, “15% and cross your fingers.” Right now, no cost or date number is a hard number. Time will put pressure on that number, as well as the people who wrote or agreed to it. Every number has a sweet spot, but that spot is flying around like a drunk housefly. And beyond planning for general price increases and delays, it’s even more important to stay connected with vendors and suppliers; they’re the ones who can tell you what’s happening now or next week or month (maybe).

One thing is for sure: budgeting and project planning in commercial real estate are certainly not boring these days. It’s like riding a roller-coaster all day, every day. The best you can do is recognize it, accept it, understand it and react to it. And make sure you’re in a position where you can pivot.

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© 2022 NAI Elliott - All Rights Reserved

© 2022 NAI Elliott - All Rights Reserved


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