Part of the charm of the multifamily industry is that a wide variety of tactics can be used to achieve results, and virtually every operator has a unique strategy. Those divergent methods certainly apply to how operators handle their construction processes, as well.
Some completely outsource their construction and renovation projects to various third-party outlets, others use preferred vendors, and some utilize the vertical integration approach by deploying their own in-house construction teams. While all have their advantages, the latter would seem to be the most beneficial for an owner/operator. The decision to opt for in-house construction, however, doesn’t instantly serve as a magic wand to increase productivity at new developments or rehab projects.
“You should only create an in-house construction department if you know you can do it better than your current third-party contractor,” says Frank Roessler, founder and CEO of Ashcroft Capital. “It is a huge undertaking. If you’re doing it for any other reason, then I’d strongly recommend against it, because you can screw it up easier than you can do it right.”
The benefits of in-house construction can be enormous, according to multiple operators. But to Roessler’s point, a measured and diligent approach is a prerequisite in order to experience those benefits.
According to Roessler, apartment owners can sometimes create their own construction divisions for shortsighted reasons. Some may simply want to tout their vertical integration in hopes of catching the eye of hefty-pocketed investors, he says, while others may be more focused on the potential revenue streams an in-house construction team might create.
“Why should you do it then?” Roessler says. “One of the reasons is because you’ll be overseeing your own assets, and you are motivated because you own these assets. Having it in-house, you’ll do a better job innately because you care more. And if you partner with the right people, your construction efforts will become much more streamlined and efficient.”
A handful of operators, including Ashcroft, have experienced the multifaceted advantages of in-house construction and share some of the benefits they’ve experienced.
Mill Creek Residential utilizes its own in-house construction team and serves as its own general contractor. The company only uses general contractors in rare instances in select markets.
Chip Bay, chief construction officer of Mill Creek, outlines the multifaceted advantages to this approach.
“First and foremost, our interests are completely aligned between the construction, development, and property management teams,” he says. “We’re all rowing in the same direction. Construction is involved from the very beginning. They work with development on design, the intent of the community, and budgeting from the get-go. It allows development to have the best numbers possible during the entitlement process and while they’re securing financing.
“When we’re ready to start the development, we’re better prepared to execute because everyone has been involved since day one. “
Another sizable advantage is risk mitigation. Construction teams involved from the outset are aware of any concerns surrounding the development. They know the intent of ownership and have been a part of the decision-making process since the planning stages and are prepared to execute accordingly.
“Fundamentally what we do in this business is create value and manage risk,” Bay says. “The most risk is often on the construction side. Our job is to manage that risk and minimize it to any extent that we can. By having our own in-house construction division, we have created a team approach on each development, which gives us the maximum amount of control.”
The vertical integration model fosters consistency in approach, makes it easier to adhere to national building standards and enhances quality control. The holistic approach prevents any “we versus them” or “you do your job and I’ll do mine” disconnect between the teams, Bay says. The in-house construction team is more focused on building a world-class community than viewing it as a prime financial opportunity.
Mill Creek has separate teams for ground-up developments and value-add efforts but exhibits the same approach in both types of construction endeavors. The company has been diligent, Bay says, to hire construction personnel that are not only greater builders, but also outstanding business people.
“They are partners in the business itself, so they have a vested interest in the development being successful,” Bay says. “That motivation permeates through the entire organization. It provides professionalism to the construction side that you might not get if you’re outsourcing that effort. The same culture that exists in the construction division exists in the development division and throughout the entire company. They’re one and the same.”
JVM Realty Corp. instituted an in-house renovation program and has served as its own general contractor since 2014, when the company first began renovating within its portfolio. According to Kevin Villont, senior vice president of asset management for JVM, the company has experienced three primary benefits: cost effectiveness, control, and customer service.
“We have been able to reduce the overall management cost by 20% since we began to perform general contracting in-house,” Villont says. “In addition, our procurement methods allow us to buy materials such as quartz countertops, luxury vinyl tile flooring, and electrical fixtures in bulk.”
The approach has also allowed JVM to be more competitive when hiring subcontractors, when needed, for tasks such as electrical or plumbing or various other nuances of the value-add projects. The method also has led to increased control, as JVM’s formula calls for a renovation project manager to be on-site 100% of the time to manage the process, schedule, workflow, and communication during unit turns.
“This allows the on-site property management team to remain focused on the day-to-day operations with minimal distractions from the renovation process,” Villont says. “Our process also involves weekly meetings to review the workflow of units in the pipeline with the on-site staff, so they are informed which units are in process and which are next for renovation.”
With the resident experience one of the most crucial components of the industry, JVM is firmly aware of the need to create as little disruption as possible during the renovation process. As such, the in-house renovation program is designed with several customer service elements in mind.
For starters, JVM aims to turn every unit within 10 days, which includes a full scope of work from paint, flooring, fixtures, appliances, hardware, cabinets, and countertops. The standardized timeframe allows property teams to continue to prelease and ensure move-in thresholds are met.
JVM makes certain all renovated homes are inspected and approved by the community manager or regional manager. The renovation teams treat the operations team as an internal customer, Villont says, to ensure the scope of work and expectations are being met. Benefits of JVM’s process also translate to the investor-relations side, he says, as investors observe higher returns on in-house renovation projects due to the consistent approach.
“We also subscribe to the idea that unit turns should be completed at move-out and not before,” Villont says. “The industry has adopted the idea that unit renovations should begin while the customer is still in the unit, but this strategy benefits the general contractor and not the owner of the community. Our approach enables us to create rent growth the next time a unit is vacated and undergoes the renovation process.”
Market conditions regularly fluctuate, sometimes significantly so. Adjusting strategy is much easier when the construction team and management team are on the same side, Roessler says, as opposed to trying to have effective communications with a third-party outlet.
Additionally, while operators agree that the decision to opt for in-house construction shouldn’t be purely rooted in finances, this approach can lead to significant cost savings. The fee to outsource a general contractor often equates to about 20% of the entire construction cost.
As Roessler alludes to, in-house construction has a multitude of benefits, but operators shouldn’t adopt the approach haphazardly. They should consider that an in-house construction division results in increased liability and creates higher workers’ compensation costs, because those employees are now on your payroll.
But when done correctly and for the right reasons, the vertically integrated approach can greatly boost efficiency.
“At the end of the day, our business is about providing housing and maintaining a good quality of life for people that live at our communities,” Roessler says. “And if you have construction in-house and everyone has the goal in mind of creating a better quality of life for your residents, then you’re going to do better all around.”