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February 19, 2019 at 8:41 am · · Comments Off on The times they are a changin’

The times they are a changin’

by Justin Lamontagne, CCIM, SIOR, Partner, Broker at NAI The Dunham Group

My mind wandered recently while on a long solo drive, as it often does. I had the music cranking and, in typical Maine fashion, cell phone coverage was spotty. It was nice to effortlessly jump from thoughts of the holiday season with my young kids… to my (gulp) 20-year high school reunion and old friends… to the prospects of another long playoff run by my beloved Patriots. But as I passed commercial buildings and warehouses, my attention drifted to the bricks and mortar of the Greater Portland industrial market.

And sure enough, some classics from the past lined up nicely with my thoughts on the near future of our market:

The times they are a changin’ – Bob Dylan said it simply. And the statistics in our market suggest the same. The nearly 8-year run of a clear Landlord’s market has finally shown indicators (albeit slight) that the pendulum is swinging the other way.  This year’s overall vacancy rate of 3.47 percent is significant increase from our historically low 2017 rate of 1.25%.

Of course, a 3.47% rate is still what I would call a “Landlord’s market”. However, what concerns me is that our added industrial units are highly comparable spaces and competing with one another. Since early Spring we have seen several 10-20k SF Class-A/B industrial spaces come on the market and linger. In years past, we’d often have prospects on the sideline ready to pounce. In 2018, these spaces sat (and are sitting) vacant for months at a time. The challenge is lack of tenants. In Maine, we simply have a limited number of industrial style businesses to put into spaces that size. And when 5-6 of the same quality and size come on-line at roughly the same time, all of a sudden the 1-2 larger tenants in the market carry leverage they haven’t had in years.

In the air tonight – Phil Collins sensed something was amiss. And so did we in the industrial market. The phones slowed down mid-year. Quality inventory that we turned over with such regularity, started to sit. What was wrong? We began to hypothesize and then confirm through conversations with our Tenant clients. There were some big-picture concerns happening.

The macroeconomic pressures we have been tracking, primarily inflation and lack of labor force, finally became material reasons not to expand or relocate. Tenant’s began to tell us that they couldn’t hire enough people to support the workload that would come with additional square footage. Additionally, the cost of virtually everything rose. From taxes, to gas, to electricity, to raw materials, to a loaf of bread… everything got more expensive in 2018. Which indirectly squeezed real estate budgets.

Hold on… this classic Wilson Philips song (of course belted at the top of your lungs – admit it) raises a good question. Will the interest and activity we’ve seen in industrial new-construction “hold-on”? I am not entirely sure. The existing lease inventory we’ve added is renting well under new construction rates. And the cost of construction continues to skyrocket. Add to that, a lack of quality industrial land, a rising interest rate environment and unsteady economic trends, and my unfortunate prediction is that, yes, the new construction window of opportunity will close in 2019. Farewell, we hardly knew thee…

For the Love of Money – President Trump’s favorite tune is best known for the simple yet powerful chorus, “Money, money, money, moooonnnneey…. Money!” So how did we close any deals this year, with all the challenges referenced above? Sales prices continued to climb as we have a dramatic lack of purchase opportunities. Rising interest rates did not temper owner/user interest in acquiring industrial real estate. However, as sales prices climbed (cresting $100/sf for Class-A owner/user space) our sales volume was down. This was largely due to lack of motivated sellers.

And leasing demand didn’t just drop off a cliff. We have had steady interest in smaller units, under 10,000 SF. And there are currently a handful of large end-users touring the market in the 50k+ range. Interestingly, the most consistent demand is coming from traditional industrial businesses. Until recently, these companies have been begrudgingly on the sidelines, often losing out to start-up and well-funded industries like craft brewing and the marijuana cultivation trade.

Much like my long-drive, the industrial market has been a nice ride. But there are clearly bumps in the road forthcoming. For the first time in over eight years, the data suggests a softening market. Tenants finally have some leverage and can expect more incentives and better overall deals. And Landlords? Well, they may be singing a different tune. Regardless, it should make for a rocking 2019.

Click to view NAI The Dunham Group’s 2019 Greater Portland Industrial Market Survey

February 12, 2019 at 8:42 am · · Comments Off on Selecting the Right Project Delivery Method

Selecting the Right Project Delivery Method

Kenneth E. Rubinstein, Attorney, Preti Flaherty
Ben Piper, Attorney, Preti Flaherty
Cordelia Pitman, Director of Preconstruction Services, Wright-Ryan Construction

Identifying the right construction project delivery method is critical to successful execution. Three of the most common delivery methods are Design-Bid-Build, Construction Manager (CM) at Risk, and Design-Build. Each of these methods has benefits and drawbacks. Choosing the right one will depend on your unique needs and the project requirements, and will allow you to better manage risk, quality, budget, and schedule. This article identifies the key features, benefits, and aspects to consider within each of these three delivery methods and describes the types of projects for which each method is best suited.

Design-Bid-Build

Design-Bid-Build is perhaps the best known and most traditional form of delivery. However, the method does present certain limitations. Within the Design-Bid-Build delivery method,  the owner contracts separately with a design professional and a contractor. The design professional fully develops and delivers complete construction documents before the owner solicits bids from prospective contractors. A contractor is usually then selected based on the lowest price, which is often viewed as an objective criterion. The payment structure is most commonly lump sum, but it may also be cost-plus (based on a unit price), or cost-plus with a guaranteed maximum price (GMP).

Typical rationale assumes that bidding promotes transparency and impartial decision making, delivers the lowest cost, and provides all contractor candidates with a balanced opportunity for selection based on price. Design-Bid-Build provides the owner control over design and a clear division of responsibility among the various roles. However, it does not engage the experience, insight, and counsel of a contractor during the design phase.

This method may be preferable for simpler projects, and is often favored where collaboration is less important. However, Design-Bid-Build may not be an appropriate fit for more complex projects where early and consistent engagement from a construction professional is beneficial. It also might not be the right choice in a heated market because the method isn’t optimal when expedited completion is essential.

Construction Manager (CM) at Risk

In the CM at Risk method, a CM is hired during the project’s design phase (typically early on at the conceptual or schematic design stage) to provide pre-construction services regarding constructability, including systems and materials comparisons, schedule development, and milestone estimates. The owner contracts with the CM who works collaboratively with a design team hired under a separate contract with the Owner. The construction contract is then executed on a cost-plus with GMP basis, with the CM who provided pre-construction services during the design phase usually contracted as the builder under terms established at the outset.

The heightened collaboration between contractor and design professionals in the CM at Risk method typically leads to improved coordination, less conflict, and creative solutions that yield best-value results for the owner. It enables the design team and the owner to compare costs and benefits of various systems early in the project, allowing them to select the most cost-effective systems. This method also enables fast-tracking projects through phased scheduling.

CM at Risk engages a Construction Manager as an equal participant and contributor within a collaborative team. The process allows clients to hand-pick a CM based on the firm’s relevant knowledge, credentials, and expertise managing work similar to the proposed project. The method also consolidates and streamlines construction responsibility through one contract; yields more practicable and foreseeable outcomes; produces a GMP that is fully bonded; and most often results in schedule and cost savings while reducing risk.

The CM at Risk method may be appropriate in complex projects requiring customization since it allows owners to maintain cost controls. The owner can also maximize the value for their dollar on an expedited schedule. Because the CM can propose strategies to gain interest from appropriate subcontractors, it is often the right choice for owners in a heated market.

Design-Build

In the Design-Build method, the owner contracts with a single entity for design and construction, typically on a lump sum, cost-plus, or cost-plus with GMP basis. The single entity may be a builder who subcontracts the design role or a design professional who subcontracts the building role. In either case, the owner provides a “Basis of Design” identifying program requirements, and the design-builder controls aspects of the project not enumerated or defined in the contract.

The Design-Build method eliminates any conflict between design professional and builder, since a single entity holds both responsibilities. Combining the roles may also allow for lower cost and expedited completion due to enhanced collaboration and the ability to commence construction before the completion of design. Moreover, the owner has a single point of contact for simplified communication.

This method, however, requires the owner to put a great deal of trust in a single entity.  Often, the owner will cede control of the design of the project at inception, which may lead to concerns of compromised quality and detail for any item not specifically called out in the basis of design. Fewer checks and balances may present challenges and create risk for less experienced owners.

The efficiencies of the design-build method are nevertheless useful for highly scheduled and cost-sensitive projects. And the risk of losing design control is mitigated in projects featuring repetition or more-formulaic models, such as hotels or dormitories where design elements are well-established.

The selection of a project delivery method is an early decision that will have ramifications throughout the lifetime of a project. Whether you are an owner, contractor, or design professional it is a decision worth informed consideration, taking into account the nature of the project, the needs of the parties, and the construction market.

January 29, 2019 at 8:16 am · · Comments Off on Four Real Estate Leaders Honored at the MEREDA Forecast Conference in Portland

Four Real Estate Leaders Honored at the MEREDA Forecast Conference in Portland

A record of nearly 1000 of Maine’s real estate professionals gathered on January 17 to hear experts give statewide economic projections at the Maine Real Estate & Development Association’s (MEREDA)’s annual Forecast Conference, sponsored by TD Bank, in Portland.

In addition to a daylong event featuring economic overviews by region and by industry, the 2019 MEREDA Forecast Conference included an awards ceremony to recognize four outstanding industry professionals, each selected for their contributions to MEREDA and, more generally, to the health of the Maine real estate market over the last several years.

Watch a video of MEREDA’s 2019 award winners.

From left to right: MEREDA President, Gary Vogel, Bev Uhlenhake, Noel Graydon, Roxane Cole, Senator Nate Libby, Vice President of Operations, Shelly R. Clark

Noel Graydon, of Kennebunkport, was selected for the Robert B. Patterson, Jr. Founders’ Award, for his significant contributions to the state’s real estate industry and stalwart support of MEREDA over the years.  An active member of MEREDA’s Board of Directors from 2009-2018, Noel also served on MEREDA’s Membership & Marketing Committee, and was recognized with MEREDA’s Volunteer of the Year Award in 2011. MEREDA is also appreciative of Noel’s and Norway Savings Bank’s involvement and support of MEREDA’s morning menu breakfast series over the past 13 years.

With a banking career spanning over 40 years, Noel has worked in both commercial and retail banking and held executive positions in regional and community banks across New England.  Most recently, Noel has served as Regional Vice President of Commercial Lending for Norway Savings Bank and is responsible for the bank’s commercial lending in Southern Maine.

Noel is also active in his community as a youth hockey coach and firefighter.  He has been with the Kennebunkport Fire Department for the past 25 years where he serves as the district chief.

This year’s President’s Award went to Roxane Cole of Falmouth, in recognition of her significant contributions on MEREDA’s behalf.

With her 30 years of experience as a commercial broker, Roxane Cole of Roxane Cole Commercial Real Estate has made an indelible impact on Maine’s real estate industry and MEREDA.  Roxane has been an active member of MEREDA’s Board of Directors since 2003, having served as president from 2006-2008. Her leadership was instrumental in her work on Portland’s Business Diversity Task Force, where she was able to help create consensus and craft a workable ordinance.  For her contributions, she received MEREDA’s 2009 Public Policy Award.  Roxane’s strong support of MEREDA continues—from participating on MEREDA’s public relations search committee to providing commentary for the current edition of the MEREDA Index—Roxane will always step up to help.

Roxane has also served the Portland community over the years in various roles such as: past Chair of the Greater Portland Regional Chamber of Commerce, past president of Portland’s Rotary Club, founding board member of the Maine Commercial Association of Realtors, and as a founding board member of the University of Southern Maine Foundation.

Senator Nate Libby, of Androscoggin County, received MEREDA’s Public Policy Award for his significant impact on public policy changes to benefit responsible real estate development and ownership in Maine.

As an advocate for responsible development, home ownership, and reasonable regulation, Senator Libby has distinguished himself as a champion of the issues that matter most to MEREDA. He has demonstrated a willingness to engage with members of the development community, respond to the concerns of the industry, and serve as a tireless advocate.

During his 6 years of service in the Maine Legislature, Senator Libby has sponsored, co-sponsored and supported numerous pieces of legislation of interest to our association, including bills to clarify and simplify the permitting process at the state and municipal levels. He has, in fact, sponsored several bills that were drafted by MEREDA’s public policy committee, and he has worked closely with us to help secure their passage.  In addition, he has sponsored legislation to expand the Maine New Markets Tax Credit, fund the Maine Historic Tax Credit program, fund housing for seniors and support the Tax Increment Financing program.  As a former property manager and a consultant in the economic development community, Senator Libby truly exemplifies the value of a citizen’s legislature, bringing his every day experiences and practical knowledge to the development of public policies for the state of Maine.

Senator Nate Libby currently serves as the Majority Leader in the Maine Senate, having previously served one term in the House and two terms in the Senate, including as Assistant Minority Leader.

Bev Uhlenhake, of Brewer, received MEREDA’s Volunteer of the Year Award for enthusiastically sharing her time and energy and passions with the organization.

Bev has served on MEREDA’s Board since 2012 and has been an essential partner helping MEREDA grow its presence in the Bangor area.  From helping to organize and emcee our Bangor-area events, participating as a speaker at several of MEREDA’s annual conferences, participating on the Public Policy Committee, to contributing to our Developer Roundtable session which helped shape MEREDA’s upcoming legislative agenda—Bev continually devotes her skills and her enthusiasm to help MEREDA and its mission to promote responsible development in the state of Maine.

A broker at Epstein Commercial Real Estate, Bev works in all sectors of the commercial market and has brokered a range of sales, leases, and build to suits for local and national clients.  Bev is currently serving her second term as Mayor of the city of Brewer, where she has been on the city council since 2013.  She also serves as the Immediate Past President of the Rotary Club of Bangor and is involved in a number of other statewide and local organizations including the Brewer Business Alliance. Bev also ran for the Maine State Senate in 2018.

Next, MEREDA will recognize notable projects from the last year in Maine commercial real estate. That awards ceremony is scheduled as part of the organization’s spring conference, on May 7, 2019.

January 22, 2019 at 9:05 am · · Comments Off on Want to Know What’s Really Happening in Maine Real Estate? The MEREDA Index Has More Than Just The Numbers.

Want to Know What’s Really Happening in Maine Real Estate? The MEREDA Index Has More Than Just The Numbers.

The MEREDA Index, a key economic indicator for the state of Maine, was presented yesterday at the Maine Real Estate & Development Association’s (MEREDA) 2019 Annual Forecast Conference.  While the Index was little changed in the last six months, declining by 0.2% since the first quarter of 2018, the individual components of the Index—commercial, residential, and construction—help tell the story beyond the numbers.

“When we elected to embark on this project in 2013, we understood that this was information that over time would become more meaningful, as a way to compare and chart the progress of the real estate industry in Maine,” says Gary Vogel, MEREDA President and attorney at Drummond Woodsum.

The MEREDA Index is a measure of real estate activity designed to track changes in Maine’s real estate markets.  The Index is a composite of nine seasonally adjusted measures reflecting both new development and transactions involving existing properties and it covers both the commercial and residential markets statewide.  This most recent release covers the middle two quarters of 2018.

“We asked our commentators to share their ‘boots on the ground’ perspective for their sectors so we can all have a deeper understanding of what the nine data points of the Index demonstrate not just for the real estate industry, but also for everyone in Maine,” continues Vogel.  “Relating the broader market data to individual experiences and local variations is part of what makes this project so interesting.”

The MEREDA Index was tabulated by economist Dr. Charles Colgan with commentary from Roxane Cole of Roxane Commercial Real Estate, LLC; Tom Landry of Benchmark Residential & Industrial Real Estate; and Tim Hebert of Hebert Construction, LLC.

Overall, the Index showed small changes in this edition, the result of growth in the residential and construction components offset by declines in the commercial component.

Per Dr. Colgan’s report, the commercial component recovered to pre-recession levels in 2013 and peaked in the second quarter of 2016.  Since then the volume of transactions and the total volume of building square feet leased and sold has been declining.  Over the past six months, these have declined 10% and 20% respectively. However, the per square foot lease and sales price indexes have showed continued growth over the past six months, the former Index up 2.4% and the latter up 8.7%.  Overall, the commercial component declined 2% over the past two quarters.

“The commercial component continues to show great energy even with the slight decline measured in the Index,” says Roxane Cole.  “While the bulk of the activity is in southern Maine, the pockets of activity throughout the state are equally interesting.  One example is the investments being made in downtowns around the state.”

Sales of existing houses and permits for new residential construction continued to grow at 1.9% and 2.3% respectively over the past two quarters.  Mortgage originations also grew apace with sales of existing units at 1.3%.  But the seasonally adjusted median price showed little change through the first three quarters of 2018, falling 0.5% from the first to second quarter and rising 0.4% from the second to third.  Overall, the Index for the median price fell 0.2% over the past two quarters.  The net effect of these changes was a rise in the residential component of 1.3% over the past 6 months.

“It’s all about location, location, location,” says Tom Landry.  “[I]t’s a great time to invest in Maine’s urban areas,” Landry continues.  “And it’s not just Portland, smaller cities and towns like Westbrook, Yarmouth, Brunswick, and Biddeford, for example, are investing in their infrastructure, business community and town centers as well.”

The construction employment component also showed strong performance over the past six months up 5.1%.  At 29,100, construction employment in Maine is still 2,300 below the pre-recession peak of 2006Q1, but 5,000 above the lowest level in the recession in 2009Q4.

“I would equate the current pace of the construction industry to that of a startup company,” says Tim Hebert.  “Opportunities arise faster than there are people available to perform the work.  Contractors are turning away work because the projects have such accelerated timelines for the work to be under contract and complete.”

This edition of the MEREDA Index was underwritten by Eaton Peabody, with support from Benchmark Residential & Investment Real Estate, Katahdin Trust Company, Redstone, Reger Dasco Properties, and XPress Copy

To download a copy of the report or watch a video about the MEREDA Index, please click here.

December 18, 2018 at 8:00 am · · Comments Off on The Right Equation for Responsible Development: Spotlight on Huston Commons

The Right Equation for Responsible Development: Spotlight on Huston Commons

In multi-part series, exclusive to the Maine Real Estate Insider, we’ll provide an up-close look at the most notable commercial development projects of the past year that are helping to fuel Maine’s economy in terms of investment and job creation.  MEREDA is proud to recognize responsible development based upon criteria including environmental sustainability, economic impact, energy efficiency, social impact and job creation.

Please join with us in celebrating Huston Commons.

MEREDA:  Describe the building and project.

Huston Commons: Huston Commons is a Housing First development for 30 disabled individuals who have experienced chronic homelessness. Through a unique series of nonprofit collaborations, Huston Commons provides essential 24-hour support services, including a medical care room to accommodate regular practitioner hours and telemedicine services for residents, all of whom have disabilities. Avesta Housing is the developer and property manager for Huston Commons, and Preble Street provides 24/7 support services. The project includes a partnership with Greater Portland Health to address specific health concerns and more generally ensure that residents have access to the health and personal care services that medically-compromised individuals typically benefit from in their homes. The onsite medical care room allows Greater Portland Health to schedule regular practitioner hours and telemedicine services for use in treating residents. Portland Housing Authority provides rental assistance to all of the residents to make the rent affordable.

MEREDA:  What was the impetus for this project?

Huston Commons: The impetus for this project was an urgent need for safe, affordable, permanent housing for homeless individuals in Portland. The target population for Huston Commons is disabled, medically-vulnerable individuals who are experiencing chronic homelessness. There is an immense need for permanent supportive housing for chronically homeless individuals in the Portland area. The number of people seeking emergency shelter has increased by 20% over the past four years, and City shelters have been full for years, creating the need for the continued maintenance of overflow shelters. These overflow shelters have also become filled to capacity, forcing dozens of people to spend their nights sitting in chairs in local government offices or worse. Maine’s most recent annual Point-in-Time survey identified 1,200 experiencing homelessness statewide, and more than half identified themselves as having a chronic disability. In Portland, 497 people were identified as experiencing homeless, and 48% had a chronic disability. A Task Force on Homelessness was formed by the Portland City Council in December 2011 to create a strategic plan to prevent and end homelessness, and one of its key recommendations was the development of three “Housing First” projects with in-house supportive services for residents. Huston Commons represents the first of those three projects. Studies have shown that such Housing First projects achieve savings by reducing the need for shelter stays, emergency room visits, jail stays and mental health hospitalizations.

MEREDA:  That sounds like quite a process.  How long were you in the planning stages before construction started?

Huston Commons: We began working with City officials to identify a site in early 2014, applied for and received an allocation for tax credits in late 2014, received planning board approval in July 2015, and began construction in April 2016.

MEREDA:  Tell us about the most challenging aspect of getting this project completed

Huston Commons: Huston Commons had a unique development challenge in that the property it sits on had three separate zones running through it. Avesta Housing worked closely with the City of Portland to convert the three zones into one new zone to allow for the construction of Huston Commons.

MEREDA:  Something unexpected you learned along the way was…

Huston Commons: Working with mentally and physically handicapped individuals who have been homeless for as much as a decade prior to moving in presents copious challenges that need to be addressed by the entire team – property management, support services, etc.

MEREDA:  Now that it’s complete, what feature of the project do you think makes it the most notable?

Huston Commons: The number of people seeking emergency shelter in Portland has grown 20% over the past four years. Homelessness is a growing problem with shrinking budgets and solutions. All 30 units are restricted to individuals who have experienced chronic homelessness and have medical challenges. Needless to say, Huston Commons filled up rapidly. Between Avesta’s three Housing First properties in Portland, there are over 100 people on the waitlist – all of whom are homeless today, most of whom have been homeless for quite awhile. The feature of this project that is most notable is its ability to serve our community’s most vulnerable residents with the help of unique organizational partnerships.

 

December 11, 2018 at 8:00 am · · Comments Off on Thinking about renting space to a marijuana operator? Take care and consider these important caveats.

Thinking about renting space to a marijuana operator? Take care and consider these important caveats.

By Hannah E. King and Edward (Ted) Kelleher, Attorneys at Drummond Woodsum.

The marijuana industry poses profitable possibilities and serious challenges to the real estate industry.  As Maine continues to work on the regulatory structure of its recreational marijuana marketplace, a land rush has already started as businesses begin to position themselves for legal marijuana sales.  Warehouse space for cultivators and processors and downtown storefronts for potential marijuana retailers are renting out at multiples of usual market prices.

However, while the economic excitement is justified by the track of record of the marijuana industry in other states, here are some important caveats that should be considered soberly and clearly by any property owner thinking about renting space to a marijuana operator.

Federal illegality:  Marijuana is still completely illegal under federal law.   Every business person growing, processing and selling marijuana under a state legalization regime is breaking federal law every day.  The Obama administration had a cautious hands-off policy toward the industry, but the Trump administration position is very unclear.  Landlords expose themselves to potential direct criminal liability, and also the risk of civil asset forfeiture.   The practical reality of these risks is hard to assess.  One clear guidepost however, is that if tenants are violating state law, by for example, growing or selling more than they are allowed to, selling over interstate lines or selling to minors, they attract law enforcement attention and put the landlord at risk as well.  Thus vetting tenants is even more important in this industry than usual.   Additionally, the federal illegality of marijuana may affect things like the ability to get title insurance, to get property and casualty insurance at affordable rates and many commercial banks are beginning to expressly prohibit marijuana operations in properties they finance.

Municipal control.  Under Maine’s marijuana laws, municipalities have enormous power to regulate marijuana operations within their jurisdictions.  Many Maine towns have moved very slowly and have not yet grappled with zoning or local permitting issues.  Tenants and landlords both need to understand what kinds of rules and processes the local municipality will put in place, and what kinds of obligations these rules will impose on property owners.

Operational concerns.  Marijuana cultivation creates odor issues and uses huge amounts of electricity for indoor lighting.  Cultivation and retailing both pose security concerns because of the valuable nature of the product and the cash-based nature of the businesses, since marijuana businesses have difficulty getting credit card services.   Landlords need to understand the operational issues posed by these kinds of businesses and make include appropriate lease provisions to address them.

Timelines.   The Maine legislature approved a final version of the legalization law in May 2018.  Now, the State is in the process of creating the specific rules that will govern the recreational marijuana industry.  The rules will likely be final at some point in mid-2019.  The state then needs to accept and process licensure applications, which likely means first sales of recreational marijuana in Maine in early 2020.  This schedule, could of course, slip farther out into the future.  Landlords and tenants need to recognize these timelines since they directly affect the ability of a location to produce the cash-flow that will support rent levels.

The marijuana industry has caused excitement in many circles in Maine because of the economic potential just around the corner, but care must be taken, especially by landowners, in assessing and jumping into this business.

December 4, 2018 at 8:39 am · · Comments Off on The Right Equation for Responsible Development: Spotlight on 65 Munjoy Street Condominiums

The Right Equation for Responsible Development: Spotlight on 65 Munjoy Street Condominiums

In multi-part series, exclusive to the Maine Real Estate Insider, we’ll provide an up-close look at the most notable commercial development projects of the past year that are helping to fuel Maine’s economy in terms of investment and job creation.  MEREDA is proud to recognize responsible development based upon criteria including environmental sustainability, economic impact, energy efficiency, difficulty of the development, uniqueness, social impact and job creation.

Please join with us in celebrating 65 Munjoy Street Condominiums.

MEREDA:  Describe the building and project.

65 Munjoy Street Condominiums:  65 Munjoy is a partnership between local Portland developers Peter Bass of Random Orbit and Ethan Boxer-Macomber of Anew Development.

65 Munjoy Street is a three-story, walk-up building offering 8 high-quality and amenity rich condominium units in a range of 1, 2 and 3-bedrooms. 65 Munjoy presents the best of modern design and materials while respecting the traditional architectural forms, organization and massing that characterize Munjoy Hill.

Most importantly, 65 Munjoy is a unique and innovative response to Portland’s call for quality and efficient ownership housing created to be affordable to middle-income buyers. While the housing units at 65 Munjoy would appeal to buyers in any segment of the market, they were designed and developed to be sold at reduced price points and made available exclusively to buyers with maximum household incomes at or below 120% of the Portland area median income. 

MEREDA:  What was the impetus for this project?

65 Munjoy Street Condominiums:  As Portland has grown in recent years it has actively produced hundreds of new workforce housing units for low-income residents as well as scores of new houses and condominium units for people of higher than average means. However, in that same period, the typical moderate-income resident experienced a concerning decline in affordable housing options.

Being Portland residents themselves, Bass (Peter) and Boxer-Macomber (Ethan) had each participated over the years in an ongoing community dialogue about the problem of suppling new housing opportunities for middle-income residents. While this problem had been the topic of much study, discussion, and debate- Peter and Ethan had seen few tangible solutions had come out of the development community.

They decided it was time to apply their housing skills and experience toward creating a tangible housing project that would seek to address the problem and perhaps provide a model that could be replicated.

MEREDA:  That sounds like quite a process.  How long were you in the planning stages before construction started?

65 Munjoy Street Condominiums:  Before ever starting the project, the developers had spent years contemplating and sketching potential ways to viably create affordable middle-income housing, but it wasn’t until 2014 that a feasible and tangible opportunity presented itself.

In that year, The City of Portland released a Request for Proposals (RFP) for the sale and reuse of an 80’ x 85’ vacant parcel of land it owned at 65 Munjoy Street. The City’s RFP was crafted in such a way that it required the creation of affordable housing generally, but was wisely left flexible and non-prescriptive in terms of affordability strategy; e.g. apartments vs. condos, level of income targeting, design of units, legal framework for income restrictions, etc. The City’s RFP also offered ways that the City could potentially assist in the creation of affordable housing through both the terms of sale and with various potential forms of soft secondary financing.

It was the City’s flexible, non-prescriptive approach to the RFP, combined with flexible finance opportunities that made it possible for the developers to see a feasible path forward towards creating middle-income condominiums.

The developers planned and prepared their response in late 2014 and submitted a response to the RFP in January of 2015.  The developer’s response was reviewed through a series of public meetings and accepted by the City Council later that year. Through late 2015 and into late 2016, the developers negotiated project costs, financing, and City and State land use and environmental permitting.

Construction of 65 Munjoy started in the summer of 2016, was completed in the spring of 2017. The final unit was sold in the summer of 2018.

From first consideration to the sale of the final unit, the project took almost exactly 4 years.

MEREDA:  Tell us about the most challenging aspect of getting this project completed.

65 Munjoy Street Condominiums:  Over the 4 years that the developers planned and implemented the project, they experienced numerous challenges such as environmental mitigation, legal and financial terms negotiation with strategic partners, a frivolous NIMBY law suite, escalating material and labor costs, and all of the delay and expense associated with each.

While each of these challenges was significant, they were all potential risks that the developers understood and had prepared for. In the end, it was the challenge least expected that turned out to be the greatest….

*See “Something unexpected” below.

MEREDA:  Something unexpected you learned along the way was….

65 Munjoy Street Condominiums:  When the developers managed to devise a plan that would create hi-quality, highly desirable new units in the heart of Munjoy Hill priced aggressively below market value, the assumption was that all 8 units would probably be under contract before construction ended. In the end, however, only one unit went under contract during construction and it took a full 14-months for the market to absorb the remaining seven.

The slow absorption at 65 Munjoy was by no means for lack of excitement in the market. Each passing month the sales team fielded a steady stream of would-be buyers that enthusiastically inquired about the property, scheduled showings, and floated offers.

The problem was that the very large majority of inquires hit dead ends with the would-be buyers earning either too little or too much to qualify. Several of the buyers assumed that they would be 120% AMI income eligible but came to find that they were just slightly over income. Others had income soundly below 120% AMI but then struggled to pull together the down payment and loan approvals needed to satisfy their lender.

The window of Portland area buyers who who’s earnings were modest enough to meet the income restrictions but high enough to secure financing turned out to be far more narrow than expected.

MEREDA:  Now that it’s complete, what feature of the project do you think makes it the most notable? 

65 Munjoy Street Condominiums:  The developers are extremely pleased and proud to have contributed positively to the current urban renaissance of Munjoy Hill following over 60 years of disinvestment, deferred maintenance, and population loss. The 65 Munjoy project addressed pre-existing environmental concerns, added to the social and economic vitality of the neighborhood and created and sustained local jobs while also adding new revenue to the City’s tax rolls.

However, despite all of these successes, 65 Munjoy’s most notable feature is clearly the way that it provides precious, one-of-a-kind opportunity for middle-income residents to own a quality new condominium unit on Munjoy Hill at price point they can afford.

November 13, 2018 at 8:30 am · · Comments Off on Are you in for a (price) shock?

Are you in for a (price) shock?

Strategic considerations in allocating risks of Tariffs, price escalation and supply chain disruptions in construction contracting

By:  Robert Ruesch, Esq., Verrill Dana, LLP

Compared to where we were ten years ago, the real estate and construction segments of our economy are booming.  The uptick in development in hotels, condominiums, apartments and commercial facilities, particularly in southern Maine, has been well documented.  Beyond Maine, metropolitan Boston, southern New Hampshire and indeed many parts of the United States are enjoying record growth.  This positive news is tempered somewhat by the reality that increased demand for construction materials, equipment and skilled labor has pushed up prices and increased building costs in Maine and across the U.S.  Added to this price dynamic is the U.S. government’s recent threatened and actual tariffs which have further disrupted markets resulting in increased prices for lumber, steel, aluminum and other key construction materials.

In response to these price fluctuations, private developers, owners, public procurement officials, design professionals, contractors and construction managers (CMs) are having frank conversations about how to handle the risks of price increases.  All project participants agree that limiting and allocating exposure to price escalation is paramount.  One of the common steps that the parties opt for is to accelerate delivery of the entire project or procurement of those items that might be subject to price escalation due to tariffs or other factors, particularly structural steel.  Efforts to fast track purchases of steel or other items earlier than anticipated may make sense, but creates potential for risks down the road that may flow from expedited design, hasty review of submittals, changes in the owner’s program or handling and storage costs.  Often these considerations are not given a second thought in the contract process.  That is probably a mistake.

Project owners, designers and contractors should pay closer attention to how price escalation and risks of fast track procurement are handled in their contracts.  In addition to the risks of accelerated procurement, owners often assume that once the contractor commits to a lump sum price or a guaranteed maximum price (GMP), there is no further need to worry about price increases regardless of what happens in the marketplace. That is not always the case and will depend on the nature of the price escalation and the specific contract terms. Like it or not, contracts may allow for the possibility of price adjustment relief in the face of cost escalation under certain circumstances.   In addition, in the current marketplace contractors faced with price instability will likely hedge against the risk of price escalation by increasing lump sum and GMP quotes to the owner’s detriment.

Here are some of the contract provisions that may allow for price adjustments:

Unit Prices:  Some contracts, including those that incorporate state or federal procurement provisions may allow for unit price adjustments due to cost escalation outside of certain pre-defined parameters (say, beyond 10%).

Force Majeure:  More common place are contracts containing force majeure provisions which allow for relief from contract obligations for a range of events that are generally considered to be outside the contractor’s control.  Are tariffs and supply chain disruptions covered by that clause?

Taxes/Fees:  Some contracts provide that the owner is responsible for taxes or government fees that take effect after the contract is signed.  Do tariffs fall within the scope of that type of clause?

Allowances:  Still more common in GMP and lump sum contracts are allowance provisions that cap contractor costs to budgeted line items.  Costs beyond the budgeted allowances flow to the owner.

Contingency:  Depending on who controls the contract contingency, what, if any, latitude does the contract provide to use the contingency for price increases?

Regardless of the type of contract, owners and contractors should review even the most familiar contract forms to evaluate price escalation risks.  Most of the time there are ways to deal with the risk of price escalation in a transparent fashion in which the true cost of the risk is identified, quantified and allocated up front.  This provides some predictability for the contractor that it will not suffer losses outside its control due to commodity price changes.  In addition, the owner will have the benefit of knowing that the bid prices are not being irrationally adjusted to hedge against the risk of price escalation that may not actually occur.  As always, open communication and a fair allocation of risk produces a preferred result.  The alternative is to just sign the contract and hope for the best.

November 6, 2018 at 8:14 am · · Comments Off on The Right Equation for Responsible Development: Spotlight on Hodgkins School Apartments

The Right Equation for Responsible Development: Spotlight on Hodgkins School Apartments

In multi-part series, exclusive to the Maine Real Estate Insider, we’ll provide an up-close look at the most notable commercial development projects of the past year that are helping to fuel Maine’s economy in terms of investment and job creation.  MEREDA is proud to recognize responsible development based upon criteria including environmental sustainability, economic impact, energy efficiency, difficulty of the development, uniqueness, social impact and job creation.

Please join with us in celebrating Hodgkins School Apartments.

MEREDA:  Describe the building and project.

Hodgkins School Apartments:  The Ella R. Hodgkins Intermediate School was constructed in 1958 as part of a comprehensive school building campaign in Augusta, Maine to improve the quality of education for students of the city. The school is on the National Register of Historic Places. The school is significant architecturally as an intact example of a modern, mid-century school building following the most recent trends in design and construction. Original architectural drawings indicate the building retains much of its integrity encompassing a total footprint of approximately 30,575 square feet.  As the second intermediate school constructed in the city, the Hodgkins School represents the conclusion of an effort to create modern elementary school buildings. Basement areas of the school are located beneath the north and south wings of the building which were used as a bomb shelter in the 1960’s. The central portion of the building is constructed on a slab-on-grade concrete foundation. The exterior walls are brick, with masonry and plaster interior walls. This historically significant school has been renovated into 47 apartment units for low income elderly.

The Augusta Housing Authority (AHA) partnered with Developers Collaborative (DC) to take on a major redevelopment project that ended up with the highest score in the MaineHousing annual 9% round.  DC has redeveloped many historic schools, and is one of the most prolific affordable housing developers in the state. The combination of DC’s experience and AHA’s position as a leader in the community proved to be especially productive in this instance.  This project focused on hiring local businesses whenever possible. The Hodgkins School Apartments project employed 233 men and women from around the area.

MEREDA:  What was the impetus for this project?

Hodgkins School Apartments:  The Hodgkins School building had been siting vacant since the end of the 2009 school year prior to Augusta Housing Authority and Developers Collaborative’s successful redevelopment plan. The City had begun discussions of setting aside several hundred thousand dollars with which to remediate and tear down the building despite its prime neighborhood location and relatively recent use as a school. Anything of intrinsic value was removed as soon as the building was no longer occupied. Unfortunately the back of the building is hidden from neighboring residences. The renovated building grounds now contain numerous landscaping additions that improve the esthetics and the livability of the area.  Raised beds were added for the residents to grow flowers and vegetables.  While a meditative stone and grass labyrinth is set next to the apartment building. It is one of only a handful of permanent labyrinths in the State.

MEREDA:  That sounds like quite a process.  How long were you in the planning stages before construction started?

Hodgkins School Apartments:  We began planning in early 2014 and began construction in September 2015.

MEREDA:  Tell us about the most challenging aspect of getting this project completed

Hodgkins School Apartments:  There were many challenges during the renovation project. The hallways were made of cream colored glossy glazed tile.  After removing various school noticeboards from the hallways hundreds of holes in the tiles were evident and visually unsightly. As a solution, color matched tiles were created through a special glaze firing.  Each damaged tile was carefully removed from the wall and replaced. This process was precise and labor intensive work. The doors from the hallway into the units created another problem.  Unknown until the wall interiors were revealed, some of the original structural members were too close to the classroom/unit doorways to accommodate wheelchair standards. To bring the building into ADA compliance seven pillars and footings needed to be moved in the building. The strong team of contractors, developers and owners resolved any challenges quickly keeping the project on budget and on schedule.

MEREDA:  Something unexpected you learned along the way was…

Hodgkins School Apartments:  The unique historic details in a midcentury building was something unexpected that we discovered. Through careful preservation and enhancement of key areas we were able to buff a diamond out from the rough.

MEREDA:  Now that it’s complete, what feature of the project do you think makes it the most notable?

Hodgkins School Apartments:  There are many features of this project that are notable. But as far as the structure is concerned the glass block is the most notable. While the building was vacant vandals broke skylights along with a considerable amount of the ridged glass block at the rear of the building. Fortunately matching glass block was sourced to replace the damaged ones. Hodgkins School was one of the first buildings of its kind to be evaluated by the National Park Service that contained a large amount of glass block in its facade. Making this building not only unique to Maine, but also to the entire U.S.A. The NPS approval process for the glass block details required setting a precedent for future historic renovations of this era throughout the U.S.A. and thus required more than typical dialog between SHPO, NPS, Owner, and MaineHousing.

October 30, 2018 at 7:57 am · · Comments Off on Change is Necessary to Propel Housing Forward

Change is Necessary to Propel Housing Forward

Investment in off-site building is the first step toward addressing the country’s shortages of labor and housing.

By George Casey, Stockbridge Associates

In November 2016, I put forth the thesis that the home building industry was reaching the point of severe labor constraint and that new thinking and business models were needed. The constraint was occurring at a level of production equivalent to only two-thirds of the average production level of housing achieved regularly from 1950 to 2010. If we were going to produce enough housing to alleviate the growing housing shortage and affordability crisis, we were going to have to figure out how to create more housing than the current industry was doing.

In the past, the solution to such an issue would be to open the immigration gates to fill the need. It is what America has done to fill labor needs for nearly two centuries. But these are different times, and the so-called immigration relief valve now has a “closed” sign on it.

The next logical solution is to evolve to automation in the production of homes, building all or pieces of homes in factories using new technologies. It is what Europe has done over the past couple of decades as it faced a similar labor problem.

The industry has done this before. After World War II and up until the early 1970s, there was a vibrant factory-built housing business in the U.S. as defense plants, tooling, and skills rotated from building tanks, planes, and munitions to building homes. Companies such as National Homes built homes and communities that last to this day.

The recession of the early 1970s and the subsequent reorganization of the mortgage and construction financing businesses left us with an industry with over 93% of production performed stick-built from scratch on-site. There has been a price to remaining in this stick-built, on-site method, however.

Currently available data by industry since 1945 reported in February 2017 by the McKinsey Global Institute demonstrates that most other industries had achieved a 1500% improvement in productivity over that 70-year period. The construction industry showed a 0% improvement in the same period.

McKinsey notes a tremendous opportunity for productivity improvement through the creation of factory environments and the adoption of technologies and automation that all the other industries, save construction, had gravitated toward.

Move Toward Off-Site

In the past six to 12 months, we are now seeing movement in this direction—finally.

Prescient materials suppliers, such as LP and CertainTeed, have made investments in and with factory-built entities Entekra and Unity Homes, respectively. Both Entekra and Unity Homes focus on high collaboration and the adoption of BIM modeling up front so that all quantities, measurements, and tolerances are known, and value engineering is done prior to the creation of the house pieces and parts.

California-based Katerra has taken this model further with the sourcing of supplies in its own supply chain, and other fully integrated modular manufacturers such as Kasita, BluHomes, Blokable, Blueprint Robotics, Plant Prefab, and Proto have received varying levels of institutional interest and/or financing recently.

Japanese industrial giants involved with factory-built housing solutions, such as Daiwa House and Sekisui House, have purchased U.S. home builders in the past two years. Although they have yet to bring their factory-built expertise to bear yet, most analysts believe this is the inevitable direction.

Manufactured housing behemoth Clayton Homes (owned by Berkshire Hathaway and owning a 50% market share of the U.S. manufactured housing market) has purchased several site-built builders over the past two years, including Oakwood Homes in Denver, which is known for building efficiently.

The foundation of the factory-built revolution has begun.

Interestingly, most of the public builders are still on the sidelines in this game. Only Toll Brothers and NVR have factory-built component capabilities in-house; both for several decades. This may start to change, however.

The labor shortage that’s limiting housing production appears to be in the early innings of a potential solution, and that solution has initial outlines of the way housing is successfully produced overseas.

As Gerry McCaughey, the CEO of Entekra, has noted, we don’t have a labor problem, we have a process problem. By solving the process problem, we can get more out of the labor that is there.

My belief is that we are going to need both for a while: better processes and more labor. During the transition, as the factory-built business spools up, we will still need more labor, both in factories and on the jobsite, using the current model for production.

Composition Change

However, there is another issue that the industry has ignored for too long when it comes to labor availability. When a trade labor shortage has been discussed, we have actually meant a male trade labor shortage. The facts indicate that the industry has artificially limited the number of available workers to build homes: female participation in construction, particularly at the trade level, is not even discussed as a potential source or solution.

Here are some relevant facts:
· 47% of the active U.S. labor force is women. After climbing for the past four decades, this has leveled off or slightly declined
· 29% of manufacturing jobs are filled by women
· 4% of construction and trade labor is filled by women (ranging from 1% for masons and bricklayers to 5.7% for painters)

With current site-built construction techniques, brute force labor is still the norm, and we tolerate a sex exclusion culture on the jobsite, just as the military did until recently, even when brute force is not required for all of the work to be done.

It is not easy to change cultural norms. At least in the military, there is a command structure that can set policy and enforce it. However, builders do not fully control their subcontractor and supply chains.

Factory-built solutions offer a new and more inclusive opportunity for the industry and is not without precedent. During World War II, women assembled tanks, ships, planes, guns and munitions in factories when necessary, and the result was highly successful.

Go to manufacturing environments today, and women on the shop floor and in production management are not rare.

I was on a panel recently at ULI with Margaret Whelan of Whelan Advisory. She noted that Buddy Raney of RCI Construction in Orlando, Fla., employs more women than she’s ever seen on a factory floor, as they deliver their Vertically Integrated Total Solution (VITS) to the national builders in their markets. Raney estimates that VITS reduces the typical framing cycle by 10 days; allowing for their builder customers to close 10% more homes as a result.

If more of housing production is able to move to factory environments, that data seems to indicate that there is about a seven-times-higher probability of attracting female labor into the industry than currently exists. That could swell the number of people available to build homes and, most likely, the total number of homes produced.

How many homes per year might that mean? What would it mean in terms of new thinking, new management, and new blood into a stale industry?

By changing the methods that we use to create housing and the gender composition of those doing the creation, might we get better results than we do currently?

It is time that we all recognize how women have been excluded from the construction labor force for too long and that a change is needed. The shift toward factory-built houses and housing components offers a tipping-point opportunity to begin the correction of this situation for the benefit of many.

Originally published in Builder Online on May 14, 2018 and can be found at https://www.builderonline.com/building/change-is-necessary-to-propel-housing-forward_o?utm_source=newsletter&utm_content=Article&utm_medium=email&utm_campaign=BBU_051818A%20(1)%20A&he=acb26dfc22037f8627bb26d072d9871f0bba5969