March 14, 2021

Staying Proactive: Capital Improvement Strategy Going Forward

After a year when revenues may have been down drastically for owners and tenants, it’s natural to want to wait for a full recovery before putting out money on construction—but in 2021 it’s vital to have big-picture thinking that will pay off financially and in terms of tenant satisfaction over the long run.

COVID impacted the construction management segment of commercial real estate in seismic proportions, just as it did for property leasing, management and sales. But the changes have different implications for construction projects. The demand for space—and the requirements for that space—are both changing, and it will have a ripple effect on construction and construction management.

Put off that project? Maybe not

When the pandemic hit, everyone held their breath to see how it would play out. Then, as we better understood the overall impacts, owners and managers made decisions based on their own perceptions of risk and timelines. Most frequently, maintenance and repair projects were put on hold.

That’s understandable. But as the pandemic timeline stretches out, we must consider the reasons not to defer maintenance and repair projects for too long. First, tackling these items now rather than later is usually much less expensive and less disruptive to tenants and their customers, as opposed to the risk of waiting making the issues worse. Also, the cost of construction and repairs is increasing year to year, so while delaying a project will put off the expense temporarily, that cost could significantly increase once the project is finally performed. Finally, if the deferred work results in an equipment failure that requires an emergency repair or replacement, the project cost could be exponentially higher, and could leave systems down for days or weeks while waiting for replacement parts.

Positive outcomes to embrace  

There are tangible positives that have resulted from the pandemic. The situation has led to better public awareness regarding the importance of safe, sanitary practices for individuals and cleaning service providers. And individuals working in construction, facilities and property management have become more educated and aware of best practices associated with air filtration and proper ventilation, including how to manage that using existing HVAC equipment as much as possible.

Moving forward: Be proactive, not reactive

Sometimes circumstances materialize that force an instant reaction, but NAI Elliott’s process is designed to implement as many proactive practices as possible for our clients.

Between the budgets we create and the tools we use for planning, we’re able to minimize the need to be reactive as we manage client properties—and of course this reaches down to construction projects. Quickly identifying the capital projects that are most critical for keeping a property functional, and focusing on addressing those items first, helps you avoid the need to operate from a reactive position.

Top considerations for capital planning

Set aside the time to take stock: for each property, take into consideration which projects you deferred from 2020, and what new projects should be completed in 2021. Then prioritize all the items—regardless of what year they would normally have been done, and list the projected cost for each task. Now you can determine how many you can realistically complete in 2021 without exceeding the amount of year-to-year expenses the property can support financially.

There may be cases where it could take two or three years to catch back up on necessary maintenance and repairs, but having a framework like this will give you clarity on the actual timeline. This in turn could make it necessary to postpone improvement projects that are less crucial to the functionality of the property, so installing that fountain in the landscaping bed may need to be put off until 2022 or later.

I believe that as we come out of this pandemic, construction pricing will be stable through the rest of 2021. However, if the economy stays reasonably strong into 2022, we could see significant construction-cost increases at that time. This will result from pent-up demand combined with sharp increases in labor and materials costs from employers and manufacturers as they make up for normal increases that had to be suppressed through the pandemic.

Planning capital improvements for 2021 and beyond

At NAI Elliott, we’re planning 2021 capital improvements primarily by working from the budgets we collaborated on with the real estate management teams in 2020. Our construction and facilities management teams use Building Engines software as a resource for equipment information and as a database to store, organize and track capital improvement projects that are either being planned or are in progress. From it, we create what we call Useful Life Analysis documents for individual properties.

We use these documents in-house as a planning tool for future work, as well as a reference tool for work performed in the past. As an example, we maintain these documents for properties to manage HVAC inventory and projects, parking lot projects, roof replacement work and work performed on building envelopes. The information is presented in graphs, and embedded links can be used to access contract records from completed work. These documents are particularly popular with our clients as a reference tool during budget meetings, as we look to a post-pandemic future and make adjustments to ensure their ongoing success.

As we maintain our focus on future success, it’s important to maintain a big-picture mindset, position yourself to be proactive rather than reactive, and make a solid, detailed plan that outlines where you stand—and where you’re going.

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© 2022 NAI Elliott - All Rights Reserved

© 2022 NAI Elliott - All Rights Reserved


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