Some risks come with great reward. Others come with great challenges. Commercial real estate development is filled with both.
Starting from the deal-making stage all the way down, the commercial development process is filled with a variety of risks. But there may be no phase riskier than construction. Each construction project is unique and comes with its challenges and opportunities.
Unfortunately, there’s no way to predict or avoid ALL of the risks that are associated with commercial construction. But we can break down the list into five of the biggest, most common risk areas in construction and how you can minimize that risk.
1) Project Approvals & Permits
In the development process, you run the risk that no usable planning permit is received or that this process takes much, much longer than expected. This risk also applies to other municipal approvals/permits, such as commercial licenses. Whether or not grants are obtained is also included in this risk.
With a Preferred Developer: A preferred developer handles the necessary work with municipalities saving you time, resources, and avoiding the headaches of complicated approval and permit issues.
2) Design/Technical Issues
Developments are often exposed to the risk of design defect losses, or deficiencies. This can result from the uncertainty of resources and availability of materials, inadequate site investigation, or incomplete design. These risks can commonly occur when there are changes in project scope/requirements, and if there are design errors or omissions.
With a Preferred Developer: An experienced developer works with its network of architects, consultants, and planners to ensure design issues are not overlooked and/or handles the workload of correcting any issues.
3) Budget/Cost Overruns
From conditions unknown to the contractor to meeting client requests that are beyond the original scope of work, commercial developments face a variety of factors that can impact your budget. Change orders, delays, fluctuating material and labor costs, and design issues can all result in cost overruns.
With a Preferred Developer: Using a preferred developer means as the tenant, you agree to a certain rent and you know your expenses. The developer takes all the risk of cost overruns.
4) Safety Concerns
Construction sites are filled with many different types of physical hazards which need to be identified, assessed and planned for. While work safety responsibilities fall on contractors, the responsibility still remains with the developer (who hires the contractors) to ensure all legislative responsibilities are correctly delegated.
Site management is a requirement before starting any development project and this includes managing the proper implementation of accident prevention measures.
With a Preferred Developer: As the party responsible for hiring the contractors, a preferred developer will manage and handle any safety issues which can ultimately be challenging and even costly.
5) Site Conditions
Differing site conditions can increase construction costs, and can also delay the project's schedule. Conditions that often cause issues include:
Soils with inadequate bearing capacity
Large amounts of unanticipated rock
Groundwater at levels higher than anticipated
These conditions may also trigger clauses in contracts which then shift risk from the contractor to the property owner/developer.
With a Preferred Developer: These are issues that the property owner/developer will be responsible for. They’ll have to take measures and incur costs to mitigate those site conditions.
Construction will undoubtedly always be filled with its share of risks. It’s how you reduce those risks that lead to great rewards. And effective risk reduction starts with collaboration. In a preferred developer, you get a partner that’s willing to take on the risks that come with the real estate development process. So, as a tenant, you spend less time worrying about the intricacies and risks and more time worrying about running your business.