DUE DILIGENCE MORE CRUCIAL THAN EVER IN A DOWN MARKET
by Randall Etnyre
(July, 2009 Newsletter... volume II, issue 3)

During a building boom, less experienced contractors and developers unwittingly become involved with projects beyond their capacity.

Plenty of confusion surrounds the current financial crisis, commonly understood to be the product of a boom-and-bust housing bubble. It is shocking how little we learned from the dot-com speculation bust. The scandals of massive insurance giants should remind us of the end of the last political cycle, when Enron and Arthur Andersen struggled for financial survival. Many like to compare the current recession with the fallout of the 1982 S&L collapse. Though each scenario has its own unique pathology, two factors are inherent to both: human folly and poor due diligence. Due diligence is essentially a tool for assessing risk. Each industry has its own standards. In real estate, the projected return on investment is justified by an accurate appraisal of value. Lenders rely on due diligence to limit exposure to risk. Just like a medical exam, the value of the due diligence is based on the quality of the diagnosis.

Whether investing in the stock market or doubling down at the casino, capital investment requires some type of risk-versus-reward analysis. Much of the construction due-diligence process is based on quantitative analysis of a project easily translated into costs. Common sense dictates that new construction projects generally involve less risk than renovation projects, due to unknown variables. Since the S&L collapse in the early 80s, lenders and investors have understood the value of quantifying risks. Quality of construction documents is another area that can impact costs if not properly evaluated. Construction-issued drawings obviously involve less risk than design development drawings. Another qualitative factor involved in determining the risks relates to the experience of the contractor and developer.

No matter how accurate a contractor’s estimate, if it excludes city code requirements, adequate structural design or owner-selected finishes/fixtures, it will not represent the actual construction costs. During a building boom, the less experienced parties unwittingly become involved with projects beyond their capacity. This can be due to ineffective project management, poor understanding of risks or both. As well, the quality of land declines after a prolonged construction boom; the easiest land to develop is developed first. When this happens, greater due diligence is required. Although the land sale may be somewhat lower, the cost to improve infrastructure, remove existing structures or remediate environmental conditions must be evaluated. As lending regulations remain at the center of the financial controversy, thorough due diligence will continue to be a critical part of a healthy construction industry.

Since construction is considered a leading financial indicator, many people are looking to the industry for signs of a recovery. Although there is plenty of data available, a clear picture is not yet apparent. In February, housing starts increased for the first time in approximately eight months, with most of the increase relating to multi-family construction.

After years of material price increases, material prices are showing sign of stabilizing. The Turner Construction Co.’s first quarter 2009 building cost index shows a decrease in domestic commercial material costs. The index number of 866 is down 5.8% from the fourth quarter 2008 index of 919. The previous downturn in new project starts has made the labor market more competitive as well.

The real estate bubble burst was in large part due to manipulated demand in the form of low interest rates. The political powers will initiate building with infrastructure improvements, community development and public works projects. The construction industry appears to be at a critical juncture. Lending institutions are waiting to see what kind of regulations will be required, and developers are waiting for banks to start lending again. Optimists are hoping for a slow start to construction in 2009, with a potential recovery starting in 2010. No doubt, wise use of government intervention could help to stabilize the credit markets. History does seem to have a tendency to repeat itself, with the help of human folly. Let’s hope that the construction industry can lead the recovery by example, with a proper respect for the all-too-often lost art of due diligence.

Randall Etnyre is a project manager with CA Partners Inc., a Dallas-based construction consulting firm specializing in reporting to real estate lenders and investors. He can be reached at retnyre@capartnersinc.com.

Article originally published in Texas Construction, July 2009
Text can be found on their website

THE DAWN OF THE ERA OF THE INTELLIGENT BUILDING?
by Paul Ehrlich & Ira Goldschmidt
(July, 2009 Newsletter... volume II, issue 2)

The simple answer is that a convergence that has been building for years is now occurring.

“Don’t you know – Talking about a revolution sounds like a whisper?”
Lyrics by Tracy Chapman

For years there has been lots of discussion (and debate) about the concept of the Smart, Intelligent, or Connected Building. The idea being to have integrated building systems that result in improved operations, efficiency and productivity. In fact some argue that this is a concept that originated over 20 years ago. But despite all of the articles, conferences, and reports the delivery of Intelligent Buildings in the US has occurred on isolated projects and has been far from what we might consider mainstream. But it appears that it may be that we are in the edge of a dramatic change – in fact you could argue that this may be a revolution in Building Automation.

But seriously, why would we make such an audacious prediction, especially in the midst of a major recession? The simple answer is that a convergence that has been building for years is now occurring. Here are the elements:

Sustainable Operations:

The drive for sustainability and carbon reduction continues, fueled by corporate and Government mandates for improved efficiency. As part of the recently passed American Recovery and Reinvestment Act (ARRA), billions will be spent over the next 60 months to convert existing government buildings to become high performance green buildings. We are seeing similar programs being implemented by private industry as well. But there is a realization that delivery of a high performance building needs to have the necessary tools in place so that they can be properly operated, measured, and monitored to achieve and measure their performance. This leads them to implement Intelligent Building technologies.

Smart Grid meets Smart Buildings:

There is a strong drive to transform the utility grid to make it more rugged and reliable. This program, called Smart Grid, is also going to more closely connect the utility to the building. This will allow the utility to better match generating capacity with grid demand allowing for improved efficiency. Smart Grid demonstration projects are already up and running in Boulder, Colorado and significant funding is now available as part of ARRA.

New Suppliers:

The concept of the Intelligent Building is rooted in the concept of converging building systems onto the IT system. In the last six months we have seen several major IT companies announce Smart Building solutions including Cisco and IBM.

What’s Next?

The necessary technology and open standards for the delivery of Intelligent Building projects are largely commercially available and owners are starting to do broad scale implementations. So what is holding us back? The challenge remains with the traditional process used for the design and delivery of buildings. New processes for integrated design, construction, commissioning, validation and operation are required. This opens opportunities for “next generation” designers, contractors and operators who are knowledgeable in skills including systems optimization, integration, user interface and use of software tools.

About the Authors

Paul and IraPaul and Ira first worked together on a series of ASHRAE projects including the BACnet committee and Guideline 13 – Specifying DDC Controls. The formation of Building Intelligence Group provided them the ability to work together professionally providing assistance to owners with the planning, design and development of Intelligent Building Systems. Building Intelligence Group provides services for clients worldwide including leading Universities, Corporations, and Developers. More information can be found at www.buildingintelligencegroup.com We also invite you to contact us directly at Paul@buildingintelligencegroup.com or ira@buildingintelligencegroup.com

BE PRODUCTIVE
by Christien Bumpus
(July, 2009 Newsletter... volume II, issue 1)

The year I graduated from high school was 1989. That also happened to be the year that a man named Stephen R. Covey published a book called The 7 Habits of Highly Effective People. It became a bible for many influential people, but seems to have slipped out of vogue lately. I was recently perusing the copy that I was given as a graduation present and realizing that the principles still apply, and make much more sense as I approach my twenty-year reunion than they did the year I graduated. I guess I really didn’t know everything back then! The 18 year old me would be so disappointed!

For those of you not familiar with the book, I thought I’d share some thoughts I had while re-reading each of the habits. BE Services & Trade came out of some personally trying times for us: We moved to Texas because of Bryan’s job as an estimator for a California company that wanted to expand, but got caught in the economic crisis. He lost his job six months after moving; we had a new house, new friends and no desire to move back to California. We took stock of our assets and set about offering a service to others in the situation his former boss was in: needing more work with limited resources for bidding it. We truly believe that BEST offers an opportunity to our customers to seize on the chance to be proactive, the first habit.

Habit #1 is called, “Be Proactive.”

Of all of the animals in the world man is the only species that is self-aware. Need proof? Think about this article. I’d bet just about anything that you are wondering what the point is and how it applies to you: self-awareness. This is the essence of the human condition. I’m sure you’ve often heard it said that we are human “beings” not human “doings” right? Covey would wholeheartedly agree. To be is to make a choice on what one does, to do is to react. Reactive behavior is not proactive, but I’m getting ahead of myself.

For most of us, unfortunately, being proactive requires a major paradigm shift—a change in our core belief of how the world works and how we function within it. According to Covey, it is in our basic human nature to be proactive, but it takes work. Something like sitting up straight. When was the last time that your back hurt from sitting up straight? I can’t remember, but probably because I tend to slump when I sit, enough so that when I stand I’m stiff and usually sore. I know it isn’t good for me to slouch, I ride my son constantly for the same thing, but I still do it. Why? Because I’ve allowed myself to be conditioned to slouching when I sit. It’s a habit that I’ve developed.

According to a Forbes magazine article, education isn’t the key to changing habits. We know that things are bad for us, but we do them anyway. So why do we keep doing these awful things like over-eating, swearing, slouching, not exercising, procrastinating (I could go on, but naming so many of my own bad habits is getting embarrassing)? Covey says that we are a product of our environment, according to the current social paradigm. Hollywood, the media, heck, our uncle Joe says that we only have liberty. Human nature says that we have freedom. What’s the difference? Liberty is the external options that we have to choose from, freedom is the internal power to exercise those options. You have the liberty to call me whatever names you wish, I have the freedom to choose how I react to you. I can be reactive or proactive. Covey defines the difference: “Reactive people are driven by feelings, by circumstances, by conditions, by their environment. Proactive people are driven by values—carefully thought about, selected and internalized values.” We are becoming conditioned to believe that we are a product of our environment and being taught to abdicate our responsibility… if we give up our freedom how long before we give up our liberty?

Thomas Payne (1737-1809), author of Common Sense wrote, “Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it.” Good habits take work. Freedom, as they say, isn’t free. It takes effort and determination to choose continually the more effective response. It’s much easier to blame someone or something else, to blame lack of time to eat a healthy meal rather than going to the nearest drive-thru, to blame the economy for lack of income rather than looking for ways to improve our own circumstances. It takes an attitude of being rather than having. Being proactive isn’t focusing on the “haves.” Focusing on a problem that involves having or not having is reactive. Instead focus on what we can BE: be more diligent, be more productive, be more understanding, be more patient. Be more responsible… be more “able” to “respond.”

We have one choice in everything that we do: act or be acted upon.