Our goal as a design-build firm is to create value for our clients through outstanding service-delivery and building trusted relationships. One of the many ways we achieve our goal is how we structure our contracts. Our clients want to know what they’re paying for, and we are able to clearly spell that out by providing stipulated sum agreements.
What is a Stipulated Sum?
Also referred to as a lump sum contract, a stipulated sum requires a builder to agree to provide specified services for a fixed price based on labor and material costs. The builder is responsible for executing the job properly and will provide its own means and methods to complete the project. Specifically, we use stipulated sum agreements with our multifamily and commercial projects, and they allow us to better define the scope and schedule of projects.
“The Mosaic Construction way is to be a client-first company in which we anticipate needs and focus on relationship-building,” said Singer. “We’ve always led with this approach, and our clients understand the value of that.” – Ira Singer
Why We Use Stipulated Sums
Mosaic Construction uses stipulated sums so that our clients know what they’re getting, and we know exactly what we need to deliver. Our contracts are predictable and easy to manage and benefit our clients in the following ways:
No Hidden Fees
One of Mosaic Construction’s key differentiators is that we never stick our clients with hidden fees, compared to cost-plus-fixed-fee and other contracts. “Our fees are transparent compared to other contractors,” said Ira Singer, Principal of Mosaic Construction on the This is the Real Estate Investing for Cash Flow podcast. “We have no incentive to say, ‘Okay, it’s going to be this much money for cost.’ Stipulated sums are integral in forging trusted relationships with our clients.”
Our clients value the predictability of stipulated sum agreements, especially since they reduce risk and give them more confidence. With an agreed upon sum in place, our clients are not liable for any cost overruns. “We formulate construction based on our time and our investment to manage that project and steward it,” added Singer. “Whatever the cost of the project, our timeframe for completion and our fees will remain the same. In this respect, both parties are incentivized to stay on schedule and finish the job on time.”
We find that stipulated sum arrangements foster a greater degree of collaboration between Mosaic Construction and our clients. We are able to execute tight project management and more efficient communication to ensure that both parties are adhering to the scope of work. “The Mosaic Construction way is to be a client-first company in which we anticipate needs and focus on relationship-building,” said Singer. “We’ve always led with this approach, and our clients understand the value of that.”
The design-build methodology supports our goal because it allows us to streamline the construction process, which ultimately benefits our clients and our management team. “We view our projects as investments in our clients’ growth and development,” added Singer. “We never think in terms of being one and done; rather, we create an atmosphere where our clients can focus on business development, while we do the best work possible for them.”
As we previously reported, 2018 was a banner year for multifamily housing, with a 44% increase in sales accounting for more than 30% of the total U.S. real estate investment sales. What is the health of the 2019 multifamily housing market through the first two quarters, and where will it go from here? Freddie Mac has answered these questions and more in its Multifamily 2019 Midyear Outlook. Overall, the outlook is positive, showing signs of sustainability and growth for the remainder of the year and beyond.
According to Freddie Mac, “In our research, we find that strong economic growth and the robust labor market continue to support the strength in the multifamily market. Last year ended much stronger than anticipated with near record absorptions and stronger rent growth compared with the prior few years. The first two quarters of 2019 saw mixed results, with slower growth in the first quarter, but preliminary second quarter information indicating the spring leasing season is off to a strong start. Along with the strong fundamentals, lower interest rates continue to drive origination volume higher throughout 2019.”
Low Unemployment is Having a Favorable Impact
It is anticipated that the labor market–with low unemployment and wage growth–will continue to drive housing demand, benefiting multi-family properties. As the report states, “Pending any broader economic event that would impact the labor market, there is no real estate specific headwind on the horizon that could disrupt the favorable outlook for multifamily through the rest of this year and into the next.”
Loans Increase While Absorptions Dip
Multifamily originations–or fees associated with processing a loan–are continuing their upward trend from 2018 through the first two quarters of 2019. Originations have increased by 8% to $336 billion. “The 10-year Treasury reached 1.75%, a decline of 150 bps (basis points) from last November,” the report says. “Rate declines generally drive origination volume higher, and with a drop of this magnitude to very low levels, forecasts must be decisively higher than earlier in the year.”
Absorption rates, by contrast, saw strong gains in 2018 only to stall thus far in 2019. “The first quarter of 2019 saw absorptions wane and high levels of new supply entered the market, but strong gains in the second quarter suggests the trends for multifamily are not yet turning.”
“In our research, we find that strong economic growth and the robust labor market continue to support the strength in the multifamily market.”
– Freddie Mac
Higher Demand and Lower Supply
Multifamily demand is outpacing new supply, as there is a shortage of housing compared to households. Total housing completions over the past three years have averaged 1.1 million housing units each year, while the number of households have increased on average 1.4 million. Per the report, “The continued increase in multifamily construction when the overall housing market continues to remain unbalanced is not necessarily an oversupply concern as the economy struggles to build enough housing.”
Steady Growth Ahead
The multifamily market is bright. Freddie Mac projects overall growth for the remainder of 2019 and into 2020 with high-demand spurring on new construction. “As this supply enters the market, we expect vacancy rates to increase throughout the year, but only marginally, up to 5.2%. We anticipate that rent growth will remain healthy at around 4% in 2019.”
As more multifamily properties make improvements to common areas, one space in particular is receiving quite the makeover: the package room.
Traditional package management is causing headaches for property managers. Boxes from Amazon, groceries, and other deliveries inundate front offices (UPS delivered 800 million packages during the 2018 holiday season, up 50 million from 2017. That’s not including deliveries from the USPS and other shippers.). Staff spend hours logging deliveries, and the additional time and manpower is expensive. Residents are feeling the burden by not being able to claim their packages outside of regular office hours. Additionally, there are the legal liabilities associated with lost or damaged items.
Multifamily property managers are adapting by redesigning package rooms and management systems to accommodate tenants in the following ways:
Dedicated Package Delivery Centers
The traditional mailroom is a dying breed, as apartment and condo buildings have been installing dedicated package delivery centers for the last ten years. “Such facilities have grown in number and sophistication as the flood of packages has risen, and as residents’ reliance on them has gone up exponentially,” according to Building Design + Construction.
Package management system disruptors are playing a major role. Multifamily Executive calls 2018 the “tipping point” of package-management automation. Property managers are taking advantage of the technology to reduce costs and create a more self-sufficient environment. Companies like Package Concierge and Parcel Pending allow deliveries of packages in secure lockers that are accessed using touch-screens. Residents receive text messages with PIN numbers to alert them of package-arrival, and they can retrieve them whenever they’d like. The technology is so popular that the lockers are now being used in retail and grocery locations, corporate campuses, and universities.
Access and Space
Package centers should be highly visible, easily accessible, and available 24/7 so that tenants can retrieve their deliveries on their own time.
“New Package Concierge data shows that 83% of users would prefer 24/7 access to the locker in order to increase utilization of the solution,” according to Multifamily Executive. “Installing automated lockers in common areas or near the mailroom allows residents and carriers alike easy access.”
Renovations to create more physical space for package centers is critical to accommodate self-serving systems. Packages come in all shapes and sizes; therefore, providing enough options for lockers to handle volume is key.
“Don’t limit your potential for using these systems now or in the future – especially since package volume will only continue to rise,” adds Multifamily Executive. “On average, today’s apartment buildings receive up to 50 packages a day, which increases during the holidays, so including plenty of available space to manage this volume is important.”
Creating Community Experience
If tenants are happy, so are property managers and investors. Successful multifamily properties focus on enhancing the resident experience, and designing the right package area helps foster community. Per Building Design + Construction, “Many rental and condominium communities integrate package centers into high-traffic areas. Not only does this make it easier for couriers to find the center and deliver packages, it also makes receiving a package a neighborly event. If planned and designed appropriately, package centers can strengthen community ties among residents. The inclusion of communal tables and recycling bins gives residents the option to open their packages immediately while socializing with their neighbors.”
Renovating package centers and investing in new technology is essential for meeting the demands of today’s delivery volume and tenant needs. The best package-management systems provide secure, 24-hour access, keep package areas neat and clean, and free up time and energy of building staff.
Baby boomers and millennials have their sights set on dynamic, live, work, and play opportunities in the suburbs. In other words, the urbanization of the suburbs is here, and multifamily investors are responding in kind. In a sense, the suburban market is being turned on its head as investors create a practical transfer of urban-style features–including walkability, access to retail and restaurant amenities, and dense housing–beyond the city limits.
These factors outline how multifamily investors are urbanizing the suburbs.
Determine Your Target Tenants If Baby Boomers and Millennials are the largest cohort making the transition to the suburbs, it’s important to focus on demographic subgroups. “Maturing” Millennials, for example, are leaving urban communities to give the suburbs a dry run before raising a family. They expect class A market features but at lower rents. Then there are “gray-collar” renters whose household income and education levels and population-growth exceed national standards.
Investors understand that you can’t fit a square peg in a round hole by trying to replicate city-living in the suburbs. “As these sub-hubs multiply across the country, what’s clear is that no single prototype will work since suburbs vary from tiny communities with a single stoplight to large ones considered small cities,” According to Multifamily Executive. “Yet, the locations most likely to thrive share the common denominator of being hybrids that borrow some parts from their lively urban counterparts and retain their bucolic and other suburban advantages.”
Proximity to Jobs and Transportation
Employment opportunities close to residents can be a strong incentive for investors when selecting one suburban site versus another. There needs to be some form of mass transit or highway network to get residents to them. Chevy Chase Lake, for example, is a mixed-use, transit-oriented community in the Maryland suburb of Chevy Chase close to Washington, D.C. with access to the Metro’s Purple Line. Just to the north in Rockville an 1,100-unit multifamily neighborhood is being developed in a 90-acre industrial park along another Metro line.
However, development is proving to be more challenging in Tysons, Virginia, an “edge city” of DC. “The grid of streets planned for Tysons exposes the challenges of transforming suburbia,” according to Public Square: A CNU Journal. “The grid is mostly internal, with few connections to surrounding subdivisions. Three highways interrupt the network. The plan now underway is a huge improvement, yet ongoing retrofit is needed, perhaps decades from now, that connects the downtown to surrounding cul-de-sacs and loop roads.”
“Placemaking, if applied thoughtfully and well executed, provides the soul for our communities through the design of a contextual urban framework of pedestrian friendly neighborhoods, open spaces and a vibrant urban environment created by the layered realm of architecture, landscaping, signage and lighting.”
Gain Buy-In From the Community
Compared to large cities, elements of multifamily renovation can be more difficult in suburban areas, including zoning and acquiring variances. Building trust with the community is an important step in choosing a community location.
Multifamily Executive emphasizes this point, using the example of a multifamily property in Richmond, Virginia: “Richmond, Va., which experienced a boom in Millennials moving downtown after 2010, is now seeing a swing back to the suburbs. Good infrastructure was already in place in Richmond’s suburban counties like Henrico County. But to attract mixed-use, multifamily living, the suburban counties recognized that traditional policies and approaches to land planning needed to adjust. Rather than create big urban-like downtown cores in various suburbs, the goal was to fashion compact, pedestrian-focused projects along existing corridors to stimulate development and rejuvenation that takes advantage of existing infrastructure.”
Locate Near Office and Retail
Retail, office, and residents need each other. The success of a neighborhood relies on the well-planned intersection of commercial and multifamily renovation. Similar to the proximity of communities to transit, everything should be close by. Tenants want to live five minutes from
from coffee bars, grocery stores, and entertainment. Finding the right balance is key, according to Multifamily Executive: “The answer for both suburbs—as well as cities, even large ones—may lie in seeking retailers that have learned the importance of experiential features that consumers seem to find more relevant rather than stacks of merchandise. Entrepreneurial leaders like Apple are rolling out ideas such as workshops and classes.”
Amenities, Amenities, Amenities
Amenities are significant considerations for multifamily living. We’ve written previously about the importance of amenity upgrades to attracting new tenants. To avoid the risk of trying too hard and unrealistically to mimic vibrant cities, investors are taking advantage of neighborhood natural amenities in their backyards, like parks, lakes, and trails. We recently renovated multiple units and hallways, as well as the package room and pool-area restrooms of a multifamily, student-centered apartment building in Evanston, an edge city of Chicago. Students also have access to the Clark Street beach and trails along Lake Michigan.
There is a shift afoot in which investors are attracting renters from the big cities. We’ll give the last word to Jose Sanchez, retail and mixed-use design leader at DLR Group, who told GlobeSt.com, “Demographic shifts illustrated that we are becoming a society that values main streets more than backyards. Walkability, density, sense of community, mixed uses and a diverse population are bringing new life to the suburbs. Placemaking, if applied thoughtfully and well executed, provides the soul for our communities through the design of a contextual urban framework of pedestrian friendly neighborhoods, open spaces and a vibrant urban environment created by the layered realm of architecture, landscaping, signage and lighting. It is also vital to understand that these new town centers should be developed in a way to attract multiple demographics and economic classes through inclusive design and programming.”
Expanding a Successful Construction Company from the Culture Up – with Ira Singer
Speaker 1: You’ve been searching for the best way to generate passive income in your life, and heard that real estate is a great way to do it. But you’re tired of all the so-called gurus, who are all talk and no substance. Get ready to celebrate because Kevin Bupp has spent 14 years successfully making it happen.
This is the Real Estate Investing for Cash Flow podcast. Now, here’s Kevin Bupp.
Kevin Bupp: Hey, guys. Kevin Bupp here. I want to welcome you to another episode of the Real Estate Investing for Cash Flow podcast. Our mission is to help you build and maintain massive amounts of cash flow through income-producing real estate investments. Now, our guest for this week’s show is real estate investment and construction expert, Ira Singer. Ira has been a principal of Mosaic Construction since 2005 and currently leads new business development, estimating, construction production, project management, and the management of trade partner and vendor relationships for Mosaic Construction.
Kevin Bupp: Guys, now, without further ado, I’d like to welcome our guest for today’s show, Ira Singer. Ira, how are you doing today my friend?
Ira Singer: Kevin, doing great. Thank you. Appreciate time on the phone and the introduction, so I’m looking forward to the conversation.
Kevin Bupp: Yeah. Looking forward to having you here. You bring a breath of knowledge and experience on the construction trade to this call, which is … Your expertise is one that we haven’t necessarily had on the show before. It’s interesting because we’re going to take it from a little bit of a different angle today. We interview many different investors that specialize in different types of asset types. We’ve had, I don’t know, probably 100 multifamily guys on the show over the years. We’ve had retail guys, office guys, student housing guys, senior housing guys on the show, and gals. I shouldn’t just say guys. Guys and gals that are in the investment side of the space.
Kevin Bupp: Well, those folks are basically your clients. They hire your team, your construction firm, which is on a national scale, to help them with their projects. Whether it be rent large scale renovation projects, new builds and probably everything in between. Real excited to take it from this perspective and dive into your business and what it is you guys do over there at Mosaic. But before we do, Ira, maybe if you could take a few minutes. I gave you a very brief introduction. Your background’s much more extensive than that. Take a few minutes and tell our listeners a little bit more about yourself and really how you got started in this business.
Ira Singer: I’d be happy to. All of those different asset class owners are potential clients for Mosaic Construction. We’ve had a breadth of experience that didn’t start that way.
Ira Singer: I was in the window business, straight out of school in 1990. In 1993, I started my first window, siding, roofing company that was catering to homeowners. Was successful at that, had a partner in that. Learned trade by residential work. Going in and picking up clients one at a time. That led to some business introductions of real estate owners. A couple of years into business we were working on multifamily construction doing window replacements on a large scale basis, 300, 500, 600 windows, either vinyl or aluminum.
Ira Singer: That, of course, continued into interior renovation work because while we’re there, a trusted contractor, which is an important component of an investment in real estate, to have a trusted GC. They ask the question. They’re happy with our window work, so we got started on doing all kinds of different makeovers, and all kinds of different multifamily projects. Whether it was senior housing, and it was in units, or whether it was market rate apartments in with amenity spaces, or common area spaces. The senior housing market is all about safety and accessibility. There’s all kinds of different value adds and different projects that we’ve been involved in.