RENOVATION VS NEW CONSTRUCTION
Things to Consider
In Commercial Real Estate (CRE) the choice between renovating an existing building or simply starting from ground-up very much depends on many different variables. Both options have their advantages and both have difficulties, meaning the best choice is the one that will serve the bigger picture. Ultimately it boils down to several major factors, cost in, timing, market area forecast, ROI and finally your expected outcome (flip or hold & why).
Building ground-up is a more costly option up front, but usually will be more appealing to new renters and fewer issues (considering it was built correctly). But it also comes with several benefits and can be less restrictive than renovating. These include:
1. Environmental sustainability
Designing and building a new facility from scratch allows for more control over energy consumption allowing new technology to be incorporated. The building materials, floor plans, and electrical and plumbing systems can all be built with energy efficiency in mind, thus reducing energy costs in the long term.
2. Modern technology
Older buildings are often unequipped for modern technological needs, especially when it comes to electrical systems. One of the advantages of creating a new building is the ability to integrate all modern technology across the board from concrete countertops to acid stain floors to latest and greatest HVAC, Electrical and Plumbing.
3. More options
Control over design can lead to cost effective and energy-efficient use of space, position and maximized land to building use ratio. Allowing you to achieve a better bang for your buck as well as more appealing features to your market.
4. More efficient layout
It’s much easier to design a building with a specific purpose in mind than to convert a building intended for a different use. Depending on how drastic the difference in intended uses are, it’s quite possible that renovating an older building could cost more than a new building.
5. Less Maintenance
New materials combined with construction warranties means your building will likely require less maintenance over a long-term period, which means happier tenants and bigger returns (happier investors).
Things to consider with Renovation
Renovating an existing building can often be more cost effective and sustainable up front. However, what seems like a more affordable option might not always be the best choice when weighed against long-term goals or other factors. For example:
1. Possible system upgrades
New building codes are constantly changing, and it’s likely that additional requirements have gone into effect since the time the original building was built. If you choose to renovate, you may be required to bring the entire building up to the current code. This can potentially change the cost, depending on how old or outdated the existing building is, and how much additional work is required to meet current building codes.
2. Cost – long term & short term
After every angle has been taken into consideration, how much will the renovation cost in the long and short term? More specifically, is it worth the cost compared to simply building from the ground up? This can be difficult to determine since there are so many moving parts. For example, renovating a building while it is in use will have a much different scope of work than renovating a vacant building.
Renovating a retail store in an area where there is no economic growth is a good example of why the location is crucial. Is the building in a location where renovations will actually generate a return on the investment?
4. Lifespan of Building
You can only keep putting lipstick on top of lipstick (paint) until it all has to be taken down; walls and all. Is this the first time the building will be renovated? What is the lifespan of the original structure? Are accurate records available for past upgrades or renovations? The history of a building speaks a great deal towards how long it will be able to serve a purpose from a physical standpoint, but there is also the possibility that the building has sentimental value for the community. It’s important to take both of these factors into account before making a final decision.
5. Intended use of the building
Not all renovations are created equal and a matter of taking something old and giving it a simple facelift can be very risky. Some renovations require a complete transformation both inside and out. For example, turning a retail building into a school may require structural reinforcement, upgrades to sewage systems, or other drastic changes. It’s important to do your research on how the intended use will change the requirements of the project.
6. Potential Hazardous Materials
More than likely if the building was build in the 70’s or 80’s you going to be dealing with some type of PHM issue. Asbestos, certain paints, and cleaning materials can have a substantial influence on the cost and progress of renovation, given the current laws surrounding these chemicals. If you suddenly find these chemicals in the middle of a renovation, it can cause time delays and rack up additional costs.
Solid Starting Points
The best place to start is through initial discussions with everyone involved. Topics that should be on the table include the purpose of the building, the budget, possible issues among the people or teams involved, the amount of time in which the project must be completed and the compromises everyone is willing to make. These won’t be the only discussion points, but they provide a solid start towards making a beneficial decision. Once there is more clarity regarding the project as a whole, the different options can be weighed against each other.
Another Potential Option
If new construction is too costly and renovating cannot be justified, it may be worth considering partial deconstruction. Essentially, parts of the building that are not worth saving can be demolished and rebuilt, while other sections are simply renovated.
Ultimately there is no one “correct” answer, and the decision will heavily depend on the circumstances. Every situation will have different challenges, and the above-mentioned factors are a great starting point to help you and your team reach the best solution.
Construction, in general, has many levels of complications from contract language, to mastery of each trade, to understanding standards, principles of methods and best practices, project management skills, forecasting ability, negotiations skills, understanding of construction law (very easy to get in trouble if you don’t follow best practices). From internal complications to external forces and your worst enemy “unknown or unforeseen” issues.
Both new construction and rehabs have their little or big monsters waiting to be awakened, so it comes down to experience, education and having someone on your team that prevents or mitigate those monsters when they arise. Either a
CRE Rehab or New Construction investment can be an incredible investment if you understand the big picture and complete scope of what’s ahead of you.
Rene Gonzalez has 30 years of commercial general contracting experience in both renovation and new construction projects.