17 August 2009

The Project Renovation Paradox

When times are good, property owners don't want to impact revenues by embarking on a renovation project; causing site disruptions which impact tenants, visitors and shoppers. Paradoxically, today, poorly performing properties in need of a facelift lack the necessary revenue to do anything about it.

Alas, a Catch-22: If your property is making money, you don't feel the need to renovate. But when sales and rents are down and you feel the need, you don't have the money to renovate.
So, when is a good time to renovate?

John F. Kennedy once said, "The time to fix the roof is when the sun is shining." In terms of the economic climate, these are cloudy times at best (even stormy, in many locations). So, what can a property owner do today who is strapped for cash?

Find some money. Invest in capital expenditures and make decisions with an eye on ROI.

The most obvious advantage of renovating in this environment is cost savings. Now is the first time in the 30 years that construction costs have actually come down. Historically, they have gone up steadily, if not sharply. Today, in many parts of the world, costs are down by over 10% from just six months ago. According to statistics compiled by Rider Levett Buchnall (http://www.americas.rlb.com/documents/cost/reports/2009_q2_qcr.pdf), construction costs in cities like Denver and Seattle declined by as much as 8% in the first quarter of 2009 alone.

A second advantage: When business is slow and there are vacanies, there is less disruption to guests and less impact on cash flow from operations. On top of that, construction can proceed more quickly, and property owners and managers can get the word out that their property is newly renovated and open for business.

Properties that have been newly renovated will be in the best position to restore and/or raise rents and increase occupancies. Properties that defer needed maintenance and refurbishment and wait until times are better will miss being able to take full advantage of the inevitable upturn. When thinking about where to shop or go see a movie families most often go to the ones that are either new or newly renovated. Research data from a recent study conducted by STR shows that, over a five-year period, revenues for renovated properties increase at three-and-a-half times the rate of un-renovated properties.

Bottom line: Hard times are good times to prepare for better times.

Images courtesy of: Global Graphica, Mission Viejo Life
Some Text Courtesy of: WATG