How to Invest in Commercial Real Estate

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Episode #068- The Current State of COMMERCIAL CONSTRUCTION!

by Criterion, Braden Cheek, Brian Duck
July 5th 2022
00:00:00
Description

Today our hosts Braden Cheek & Brian Duck from The Criterion Fund and special guest Tyler Detring from Ascend Construction Services discuss the state of commercial construction in 2022 and what... More

if you're in construction and you're on your own company, you are a just a natural born gambler because that's what we do. We gamble, we're saying that we can complete this project for this amount of money um but also that we're gonna submit, submit a bid that's not going to be too high. We have to be in that sweet spot of, it's not too low to where the project can't be done and it's not too high to where the project doesn't happen and we took out some of the variables like other general contractors. Right? Exactly. And you know what's funny is the general contractors are playing the same game because they're submitting bids based off of what they're doing and we're compiling all that and we're having to use an amount of trust to take what they're giving us and um and submit that into our, our cost structures. Welcome back to how to invest in commercial real estate. And today, as you may notice we have a guest Tyler Dietrich with the send commercial builders and also just as important um podcast. You know, if you're joining us on Youtube if you want, if you're watching us here podcast is a little less handsome and buff today Joel is on vacation.

So we wore our fun shirts today anyway, we're gonna hop right in Tyler, we've had you on before but give us a little background about yourself and ascend and what you do. Yeah. So um I'm the owner of commercial builders. You know, we do Large innovations and new builds anywhere from about 200,000 to about $5 million dollars and and we're just we're loving life and building a lot of stuff and it's just it's a very interesting time in construction as you know and um but man we're just having a good time and um really enjoying what we're building and kind of what we're working on. Yeah, so I think you kind of hit it there in the intro. It's it's a crazy time. So typically when interest rates start to go crazy like this, that I mean the first thing it hits is it puts a lot of downward pressure on construction because most construction loans, I don't even want to say most a lot of construction loans have floating interest rates until the building is done. So me, most people don't want to take the interest rate risk because the Fed is hiking rates up, you know, 75 bits last month, 50 bits the month before that, they'll probably do it another 50 pips next month and and who knows when it's gonna stop, who knows when it's gonna start to come down.

So it puts a lot of anxiety and pressure on your industry excluding the fact of you know everything with you know the shipping delay. I mean just it's crazy world for you, anybody building wants to build as quick as possible, right? So that before the interest rates go up any further for sure. And various other reasons of course, but I just want it done as quickly as possible, as cheap as possible for sure. And I see a trend maybe away from new build and more towards bigger renovations, People taking existing buildings and doing more renovations, more leasing because um we're still seeing heavy demand. That hasn't changed. But I just I I definitely see that there's going to be a slowdown in new construction. What are you guys thoughts on that? Yeah, I mean, that makes sense. Take an existing building and renovated sometimes. I wish I could pause the existing construction. You know, it was just pause, pick it back up. I mean, we kind of joked about it when we started building, but um you know, when we started it was a crazy time. It was right before Covid. I mean, the january of 2000, what was it, 2019, 24,020.

So january 2020 was kind of the first meeting and then, you know, March happened and after that it was like, well, what do we do now? It's either gonna be double or half next year. There's no way to tell. And it's it's way closer to the double side, right? Nothing, nothing lowered. So, you know, dealing with that. That's that's a that's can be an issue. I would imagine. Yeah, I think I think like we kind of talked about earlier. I think disappointment at any point comes whenever expectations are busted. So um but what that means is what someone expected it to be, if it's somewhere else than that? There's gonna be disappointment on all sides, Right? And so that comes from a lot of different areas, you know, just from the front, when are you telling that person that the estimate is gonna be ready? If you say, hey, the estimate is gonna be ready on March 1st and you don't get it there until March 10th. That's an expectation that's been, that's been busted. If you would have initially said, hey, it's gonna be March 12th, we need about four weeks to get this estimate and then you get it in on March, March 10th.

The result didn't change, but the expectation was set in the beginning. Does that make sense? And that's, that's so important just from the start of setting the expectation of how you do business and it's always better to kind of um lower the expectation and then over to, I know that's, that's such a common principle, but it's, it's so rarely, um, it's really executed on, Yeah, I mean we dealt with that in the criterion building, there was people we would engage and they'll be like, hey, I'll get back to you a month, that's fine, Take a month, a month is a long time. You can do a lot of stuff in a month and then there's the person who says, I have it to you friday and friday? Hey, did you get that thing next friday. Hey, did you get that thing, Next friday. Hey, why didn't you just tell me it was gonna be weeks? I mean just busting your own expectation I think is the worst kind an unknown expectation or somebody else's expectation. I mean that sucks. But like your own. Come on, are you, are you building in um a gap right now between uh what you're telling people as far as expectations, do you?

Are you saying? Okay, well do you actually sit down with them and say, okay, this is what we think, but here's what's going on right now. Maybe, you know it, maybe as late as construction may be delayed by this much, anything like that. Are you making a concerted effort right now more than ever just to set expectations. So we just built a schedule on a, an addition. It's um, you know, 16,000 square foot addition and we built in a month and a half of contingency, which is more than you might normally and that's based on several different factors. Hopefully we don't have to use it. But as my project manager says, oh, we'll use every day, but which, you know, if it's there, you're going to use it. That's the problem. That's, and so that's why I'm reluctant to do that because I don't, I don't want my subs and my project managers to think that they have that time, That's the same expectation. Hey, I've got this much time, I'm gonna take every single bit of it plus a couple of days, right. It's almost like you need two different schedules, like an external schedule and an internal schedule. It's so hard to do that for the people that working for you, right? If they know they have this extra month and a half, just in their mind, they're thinking, I don't have to work towards that a little bit of leeway, but you want them focused on that original.

So I think the theme of all this is if you say you're going to do something, you have to, you have to meet the expectation. And especially in the first impression, which maybe not first impression, let's call it, but the estimate right. When you're providing an estimate, hey, it's going to be, do see, I'm already, I'm already, it's already happening. When you say your estimate is gonna be due july 1st, it better be there july 1st because if you can't even meet that expectation, then all of the other important ones, you have less faith in, you know, we don't need to get on this tangent. But I think that is, that's so important because that's the first deliverable, right? Like as a, as a contractor, we have so many deliverables through a project. Like my job is to produce things, which is really tough. Um, but that first thing to produces an estimate and so we've already had the contact, we may have set a good example, But if we don't deliver a product or in this case an estimate when we say we will, that's a problem. And that's the first kind of expectation. That's, that's busted in kind of on that, on that topic. Um, you know, another expectation that we said from the beginning is what is your client expecting the cost to be right?

Like if they're expecting it to be a million and a half dollars and you come in and you say, hey, it's gonna be three million, which happens more often than you think that's, that's a problem. I wouldn't even think that would happen very often. I mean, dude, it happens all the time. All the time because the project we're working on now that we should have a contract on any day. We were told that the budget was a million and a half dollars and The contract amount will be $4 million dollars and they're going to do it and they're gonna do it. That's, that's without any like major scope changes. No scope changes. None. None at all. Where did they get that? I don't want to, I don't want to say, okay, well, you don't have to say that you were not. Maybe people, maybe that's one lesson people need professional. people gave that gave that number, they said $100 a square foot, um, for, um, light industrial edition and it, it was just, it was wrong. Yeah. So I think that's maybe a note, you know, go back and watch the first time we had Tyler on the show and we talk a lot about the relationship between the general contractor, the developer and the architect because those are three very different things with three very different opinions but just to stay on here.

Um I think, I think it's super important, you know, as a criterion, a developer. So the relationship between criterion and ascend is a super important relationship because all of these developments start on paper, it starts on some back of the napkin excel. She it starts on, you know, if it starts on a tenant relationship hey if we could deliver a building like this, would you sign a lease like that for this long and pay this amount of money? That's that's conceptually how it starts. The next important point is people almost think that developers want to build ugly buildings or functionally, you know, not working. It's like as a developer, you want to build the nicest building. You can because you are the developer, you're getting, you know the, hey, I developed this building, this is what I can do, this is what I can make work. Yeah, but it's 100% uh a factor of your ability to find tenants that will pay for the building right? Or your ability to make no money on the building. But at some point the building has to be a reflection of how much money it makes and how much it cost.

Right? And and like I said, it starts on Excel sheet, it starts with that first estimate, right? So how do you as a builder, price of building? Just generally price of building pricing in, you know, not wanting to disappoint them immediately, not wanting to change order the thing to death pricing enough profit pricing in, you know, just general life. How do you do that? Because if if if if you're too high the project doesn't come to fruition. Like you know, if we wanted to build this building, we were thinking a million a half and you come back at five. Like I was surprised when you said they were still going through because I would think they would cancel it, I would think that would kill the deal. So how are you pricing things? Yeah. So first of all, if if you're in construction and you're on your own company, you are a just a natural born gambler because that's what we do, we gamble, we're saying that we can complete this project for this amount of money um but also that we're gonna submit submit a bid that's not gonna be too high. We have to be in that sweet spot of, it's not too low to where the project can't be done and it's not too high to where the project doesn't happen and we took out some of the variables like other general contractors, right.

Exactly. And you know, what's funny is the general contractors are playing the same game because they're submitting bids based off of what they're doing and we're compiling all that and we're having to use an amount of trust to take what they're giving us and um and submit that into our our cost structures um you know, but on another note, um yeah, so it's it's just finding that happy medium of where um where the price needs to be to happen while not being too low and not being too high to where it doesn't happen. So do you, do you think that helps with your initial price expectation when they're saying, hey here here's my budget, but like you said, how do you even have the conversation of you had a million and half expectation and I have a $4 million number and we get that call the time we get the call saying, hey I want a X amount of square foot building? And my question my guys don't like asking this question cause they get weird asking about money, but I have no problem saying, hey what is your budget? Like do you have any kind of idea of what it's gonna cost?

And people get really weird when you ask questions but just being upfront and say it's this is not gonna affect my cost, this is not gonna affect my pricing, but I just need to know like is this a building that's even halfway feasible? Again, it's about managing expectations and every single time people have no idea how much things cost. Like either people come from a home building um aspect where they say, hey, I can build a lot of house for $200,000. Well, you can't buy, you cannot build a lot of commercial building for $200,000. I mean that's just not gonna get you very far. So, um, so that's kind of the first step of seeing where the expected cost is going to be and that will really kind of weed out people in the beginning of just saying, hey, this just, you know, they may just be kicking the rocks, they've got, they feel like they have a lot of money and, and they do have a lot of money, but it may not go very far in commercial, you know what, now that you tell that story. I remember when we were building this podcast room and we had to do an estimate. You know what your first question was, what do you expect it to be? And fortunately the number I had was close to, the number that you guys have given us.

So you, you are a lover of fine things. So you understood lover of fine things that people can't see your house, but you have a really nice house. So you understood the cost of things and even though it's a residential project in a lot of ways this is built in a commercial way other than a certain amount of things. But it's just expensive, it's expensive to build nice things and if you wanted to look nice it's going to cost a lot of money. So that was that was a scenario where it's like yeah you were really close to where it was and quite Honestly I took what I thought it was and then I added 50% you go, there you go. Yeah which is a reasonable reasonable thing to do especially now. So I want to go back just one second because um what you talked about was um um being on time and all that and you know I used to be in the equipment manufacturing business. And one thing I told my people was okay we're gonna tell them what it's going to be. But if we miss that by a day or as soon as it's delayed you need to contact you need to contact the customer and tell them don't wait a week and then say oh yeah you know what was supposed to be ready a week ago.

Well it's not gonna be ready for three weeks. I want you to tell him I want you to call him. Maybe not even the day it's supposed to be ready if you know a week ahead of time and it's not gonna be ready that next week call them as soon as you know and if you don't know the whole story tell them what you do know and keep them informed. And they're gonna they're gonna build some trust with you. And then by the end of the project where they've had a few delays they're gonna they're gonna trust you that you did the best you could and that and they're gonna appreciate the fact that you kept informed. I think that's a great point and It's so important. There's an art to delivering disappointment because um you know you could talk to 100 general contractors and you could have 50 of them that say we don't have mistakes on our projects. Are projects all go really smooth they're all great we do great things. And that's just the biggest lie I've ever heard in my life because every G. C. Has tons and tons of problems because we all use the same subs. So talk to us about subs a little bit uh I'm I'm gonna assume that um you want to stay on them. You want to use subject Use for what's your what's your thoughts? So um like I said earlier anytime there's humans involved there's gonna be disappointment.

There's gonna be problems. Um And so whenever you work with subs if you think about a sub they're hiring people to deliver them a product to use in the building. And that person they're buying it from is buying that product from someone else and that person, that bigger supplier is getting their stuff from the manufacturer. So there's three lines, there's really four different entities that touch it before it hits the job site. And so there's so many different areas for that to be a big disappointment. There's trucking, there's um, materials that haven't gotten there. There's chip shortages. There's metal shortage. I mean there's so many different things. Labor. I mean once you get all this stuff there from four different spires, you have to, they may be in a maybe sitting in a factory, but they don't have anybody to go in the factory and deliver it to the truck to ship it to the, wherever it's going. And so, um, what we do is we asked the sub, hey, what is the lead time on?

Let's say it's an H. VAC unit. Okay. They're gonna say, hey, it's 18 weeks. Okay, give us a receipt. Let us know when you've bought it. We need to see proof that you bought it because that's the first step, like a product can't start being manufactured until it's paid for and ordered. Right. Um, so once that happens then we have an internal clock or we have, we have something set as reminders to check on those things. So we will probably check every two or three weeks and when it gets closer, we'll check every week and when it gets even closer, we'll check every day and the questions from the, the answers from the subs is almost always the same. Hey, I don't have any news on this. Okay, well will you call and check on it? I know that they're going to tell you the same thing, just pound rocks, but that's okay because we're gonna be the squeaky ist wheel and our subs to their vendors, they're going to be the squeaky ist wheels. They're going to be calling them and checking to make sure that they've done their duty because the vendor can drop the ball because they haven't submitted a P. O. To whoever they're buying it from. So there's just so many different areas, but we can do everything we can by following up and following up and following up and being in squeak as well, because I guarantee you, um, if we're not somebody else's, I mean, who do you think that the sub's gonna respond to better the one that's just, you know what?

You know what H Vac guy, I know you're gonna take care of it. You're a great guy. We go to church together. I know you're gonna take care of it. I know you're gonna get it on site. I can, I can really have a lot of respect for you, but also just have a distrust of anybody in the industry. Well, especially now it's, it's not even distrusting the people in the industry. It's distrusting the current supply chain. We're in, its just accepting what it is and saying, hey, we have to be extra judicious and calling these people and, and checking in and I think that's out. It's bigger than just construction, right? It's, it's any sales whatsoever. It's any manufacturing whatsoever. It's, it's almost every single business out there. You've got to be touching base there. There's people that this, this is a good one. So we have to deliver K ones every single year and we have to deliver a lot of K ones, a lot of K ones. The reason most people don't take $5000 investors or small investors or even 20 $25,000 investors is because it's a point of contact. It's K one at the end of the day in the scheme of the building you're buying. It's not a lot of money, even though it is a lot of money, some people don't care about their taxes at all.

They don't care if they're filed, I don't care if they file them in january december the next year. Nothing matters. And then there's some people who, if they don't file their taxes by april 15th, they're going to have a heart attack. I think we've, we've lost investors because we, we didn't get them K ones as fast as january 1st and it's just, it is january 1st. It's january 1st. Hey, or K one is ready. Come on bro, It's january, nothing's ready in january, nothing. I haven't even seen the financials for, for the last quarter, you know, so and and its construction but it's it's everything right. You know, there's there's people who email to invest or email to set up a call or everything every now and then something gets dropped through the cracks or whatever but the squeaky ist wheel or the, you know like like you said, that's how you get it done. You have to be persistent, you have to be consistent. Do your subs, do you ever ask for progress reports? I mean like, okay give me a weekly progress report on the building of this H. V. A. C. Unit or something like that? Do many of them offer that sort of thing?

It's more of what we used to do that in our business. But the problem is they can't get that there's such a high demand that the the suppliers and the manufacturers, they honestly, they don't care, I could see that. They don't care. And so when you, when you have your sub call their vendor, their vendors like man, if we call like they might just put us in the back of the line and you know what, I believe that because the manufacturers there, they're having more strain than all of us. They're they're having huge huge chips shortages, labor issue. I mean it's it's all the same and so um the truth is they just they just don't care like and that's just a fact on all the huge equipment um orders and it just, yeah, so how, you know, taking all that into consideration and, and considering, you know, like we said, estimating is probably the lifeblood of a construction business. How do you, how do you manage all of that? I mean that's, that's a lot. That's a big burden to bear and that's your burden.

Yeah, we, we've got to get shots on goal. I mean if we're not, if we're not getting shots on goal, we're not scoring, we have to get a certain amount of estimates out to actually turn those over into projects. Um, but there's just so many factors at play and we could do a whole podcast on how to estimate because there's just so much to it. But you know, the important thing is knowing the kind of the expected cost, knowing what the timeframe of the project is if the project is a year out and that will definitely change our estimating tactics because we're not, you know, it's more of a kind of shot in the dark and then we're increasing it by a certain amount just because um, but but even that, you know, that becomes difficult because like we talked about if it's too high, it won't even happen. So it's just there's just so many things that play, but um, you know, the way we estimated, its and we take historical data based off of what we've seen most recently, which, you know, is now in the last month. But then we're taking subs information of what they feel comfortable with and we're getting that in writing because it's so important that they say, hey, we feel like this is a good budget number.

Like we're working on one right now. Um and you know the big deal was the metal building because metal building has been um pretty sure metal buildings have been really, really tough to get and really expensive and the number that I had for some reason I just estimated it super, super high. And I called the guy and he told me, hey, I think it's this number. I said, okay, send it to me in an email on a pdf of what you budget number put in and the number whenever you ask them to do stuff like that, either by schedule or by price, it's always going to go up because they're trying to cover their base. But the number that they sent us ended up still being lower than what I had budgeted because I budgeted so astronomically high to just try to cover our bases. Um But you're taking historical data, you're working with subs that you trust that you know are gonna do the best job they can with the information that they have and you're taking all that information, you're putting it together and um and you're really like I said earlier taking a gamble and you're hoping for the best that it's going to turn out good.

We haven't gotten any easier for you. I would have thought here we are at the end of June 2022 and COVID is kind of going away. Maybe prices are coming down and now all of a sudden we've got inflation. So now you don't know what to expect again. Right. Well, so here's another problem that I see with inflation and with um the cost of materials and goods and labor for that. So let's say, let's say joe blow electrician, let's say previously he was charging 100 and 50 bucks for an outlet And now the last year he's been charging $185 now. Okay, so that's, doesn't sound like much, but if you have 100 and 50 ballots in a, in a building, that's a lot of money and that price also goes to lights and all these other things. So let's say that's how he estimates. Do you think now all of a sudden he's just going to lower to lower his number back to 100 and $50? No, because he's not taking the hard number of the actual amount of copper per foot like he's taking, hey, this is how much I know it's gonna take to be profitable on this job. And even if the, the price of copper goes down a little bit, he's not gonna go in and just change his number.

It's just, it's not gonna happen. And so I don't the problem, you know there's several problems. But one of the problems I see is that people have been willing to pay these higher prices and how do we back off of that if the market is still paying for these prices? Because me personally, I don't care what the number is, I just want the job because all we do is we take the numbers from the subs and we put a mark up on that. I don't care if it's 100,000 or 100 50,000 it's that's a small minute change that doesn't make a difference to me in my pricing doesn't change based off of inflation but it does because of what the subs submit to us. And so I'm super concerned that um the market is still paying these inflationary prices and we're gonna have some have to have some type of correction to get it back to normal. And me as a business owner that scares me because if there's a correction that means there's a slowdown in construction there has to be to get it back down. But if there's a slowdown in construction that hurts my business but it could be overall better for the market only way it slows down is or or comes down is if like you said there's oversupply and so all of a sudden people need to drop their prices to get jobs right right now there's just so much demand, they're not going to do it.

But eventually that that that could swing the other way and people aren't working, people have to get back to work. I don't know where all I don't know, I don't know where they are. I think there's a stimulus check on in California, the curb the inflation. Can you believe that to curb inflation? It's true thing. Yeah. So that that I mean that's just the state of the world right now we're giving people money to curb inflation, inflation is going up. Everybody's prices are going up here have some money, here's inflation to help pay for that inflation cost. That makes no sense. But anyway that you know, developers, construction companies alike. There's there's a lot and I mean that's the idea of the fed raising interest rates is to slow growth. I mean ideally it doesn't go negative. Um you know, and still stays to where we're growing as a, as a whole, but just not as fast. And, and generally I've been telling almost everyone I know, you know, now is the time to start a business. I feel like if you can start a business and provide services, there's a line of people waiting to get them.

I mean re a reasonable service but you can think of so many like any in construction if you can actually get a hold of the materials and the labor, you have business waiting out the door. I was telling my friend I was telling nick my estimator saying man if I could start any like I would start a plumbing company and electrical company. If you look at the average age of plumbers it's it's just a bomb. It's just so bad. It's so bad. Oh my gosh! Just look at like at any job site and look at the plumbers or electricians. Electricians is not so bad because it's It doesn't have so much of a stigma but like plumbers the average age is like 56 or something like that and there's no new plumbers coming in. You never see. Oh I like and it's not honestly a dirty job because you're doing a lot of new construction plumbing um And the highest paid plumbers are what they're the ones that are doing the service calls and they're getting paid a ton of money because nobody wants to deal with poop. Nobody does. So you can still make a ton of money doing new construction plumbing where you're dealing with new um PVC pipe, new fixtures, new water, like it's a great job but nobody's doing it.

And so there's got to be, there's got to be a snap back to the trades because we desperately desperately need them. Um Yeah it's it's pretty wild. Well that is interesting. Well I I don't know if I have anything else brian. No I think that's all my questions for Tyler. Yeah I really appreciate you coming on the show real quick. I don't know if anybody does this but I wanna, I just wanna guess you guys up. You guys are incredible. You guys are doing an awesome job, Nobody does that. Come on, I'm here, I'm here. Let's get some clips of this man, like you guys like you created this thing like when you first did it, you weren't sure what you're doing but man, you're just jumping out there, putting yourself out there and you know um the more you put yourself out there, you you open yourself up for criticism and I'm sure you guys have recognized that you're aware of that and you may have gotten some criticism, you may have gotten some people say man what you're doing is stupid, what you're doing is dumb. But like you guys are awesome, you guys are just killing it like this is this is incredible exposure like increase it's a high quality product and it didn't start this way, it's it's come a long ways and gotten better.

But guys just it is awesome. Like I, you know, we've, we've started a podcast and and I can't wait until we get to where it's a high quality product with like what you guys are doing and I can see the path because I've seen that you guys have done it and man you just you guys are awesome. Just keep it up. I appreciate that man. You built the studio so thank you. Absolutely. Alrighty well we will be back next week with another episode of how to invest in commercial real estate. Uh Joel will be with us but brian will be out. My first podcast I've ever missed. Oh my gosh! The dedication of this guy. Anyway, that quality is going to go down that Tyler was talking about Thanks to getting Tyler. The expectations were setting expectations here. All right, we'll see you guys next week. Thanks. That was funny. I'm sorry.

Episode #068- The Current State of COMMERCIAL CONSTRUCTION!
Episode #068- The Current State of COMMERCIAL CONSTRUCTION!
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