CRE investors planning to purchase a new building — or renovate an existing structure — should conduct due diligence during all stages of the project
Developers and building owners regularly prioritize time and budget, but cutting corners on design and construction can have disastrous consequences. It’s not just about aesthetics, either. Poorly designed buildings have the potential to trigger a domino effect, impacting the bottom line of investors and the safety and well-being of tenants, visitors, and the community at large.
The high cost of cutting corners
Imagine this scenario: To save on construction costs, a developer opts for cheaper materials or bypasses crucial safety protocols. While this strategy might translate to short-term financial gain, the long-term ramifications can be devastating. Deficient design and construction can lead to structural failures, electrical malfunctions, and inadequate fire safety measures.
The human cost of faulty foundations
The risk to human life is the most chilling cost of poorly designed or constructed buildings. Building collapses, like the horrific tragedy of the Champlain Towers South, the 12-story beachfront condo building that collapsed in Florida in 2021, remind us how important it is to prioritize safety and pay meticulous attention to details during construction.
Other well-known tragic collapses have included the 2012 collapse of Rana Plaza in Bangladesh and London’s 2017 Grenfell Tower collapse. Sometimes, a building’s internal planning and structure can be a problem. Faulty staircases, inadequate lighting, or exposure to hazardous materials can lead to injuries.
Structural failure defined
Buildings fail or collapse for five main reasons.
Exceeding weight capacity.
The building’s inherent strength can’t handle the weight it’s subjected to for several reasons. It may be unable to distribute weight efficiently, creating excessive stress on specific points. Imagine a building with a narrow base and an expansive upper floor. This shape creates a top-heavy situation a foundation could struggle to support. Cutting corners and using cheaper, less durable materials can significantly reduce a building’s load-bearing capacity.
When a building exceeds its weight capacity, walls can crack, and floors can buckle. In extreme cases, the entire structure collapses, putting lives at risk and resulting in significant property damage and financial losses.
Manufacturing errors.
Human error during the manufacturing process of building materials can introduce hidden weaknesses. For example, using the wrong type of steel or concrete for the intended purpose can affect structural integrity. Improper sizing, heat treatment, or workmanship can also introduce easily missed weak points in materials.
Because they’re often unpredictable, manufacturing errors can introduce significant danger. A seemingly minor flaw in a critical structural component can have devastating consequences, highlighting the importance of using reputable building material suppliers and conducting thorough inspections throughout construction.
Defective or damaged materials.
Using expired, improperly stored, or otherwise compromised building materials is a recipe for trouble. For example, concrete that hasn’t been mixed or stored correctly can lose its strength, jeopardizing the entire structure’s stability.
Similar to manufacturing errors, using defective materials creates unpredictable risks. An innocuous issue with one building component can escalate into a significant structural concern.
Lost revenue and investment woes
The consequences of bad design are equally severe for CRE investors and building owners. Buildings plagued by structural issues or constant maintenance needs become liabilities. Vacancy rates soar as tenants seek safe, functional workspaces, and rental income and property values decline. Negative publicity associated with unsafe or badly designed buildings can damage the owner’s or developer’s reputation, impacting their ability to attract future tenants or investors.
A ripple effect in the community
The impact of poor construction and design extends beyond immediate stakeholders. These blighted buildings can become an eyesore in the community, hindering economic development and discouraging potential residents and businesses. Structural failures and environmental hazards can have a cascading effect on surrounding infrastructure, leading to additional costs and disruptions for the entire community.
Building a future of safety and sustainability
The good news is that these consequences are avoidable. By prioritizing quality design, using qualified construction teams, and complying with all regulations, CRE professionals can mitigate the risks associated with poorly designed (and constructed) buildings. Investing in sustainable building practices benefits the environment and creates more energy-efficient and cost-effective properties in the long run.
Due diligence for sound CRE investments
Whether you’re investing in new construction or renovating a building you own, it’s important to verify the quality of construction materials and the expertise of the construction team. Whether you conduct the due diligence or ask a trusted partner to do so, here’s a detailed roadmap to follow before you finalize a purchase, renovation, or lease agreement.
- Scrutinize the paper trail.
Begin by obtaining copies of all relevant building permits and architectural plans. These documents outline the building’s intended use, materials, and design specs. Look for a reputable architectural firm and hire them to check the plans’ compliance with current building codes and zoning regulations.
Verify the construction company holds a valid contractor’s license in the project’s state. Check for a history of complaints or disciplinary actions. Check that they carry adequate general liability and workers’ compensation insurance.
Request detailed materials specs from the contractor. The list should include brands, types, and grades of materials planned for use. Obtain copies of manufacturer warranties for all major building components (e.g., roofing materials, HVAC systems, plumbing fixtures).
- Engage qualified professionals.
Don’t rely solely on the contractor’s inspection reports. Hire a reputable independent inspector, preferably a certified building inspector or architect experienced in commercial construction. Schedule inspections at key project stages, such as foundation completion, framing, and final build-out. These inspectors will identify deviations from the plans or potential quality issues with materials or workmanship.
Consider commissioning independent material testing for critical building components like concrete, steel, or fireproofing materials. This step involves taking samples and sending them to a certified laboratory for analysis, ensuring materials meet the specified quality standards the plans outline.
- See for yourself.
Make regular visits to the construction site. Pay attention to the overall organization, cleanliness, and safety protocols. Observe the workers themselves. Do they appear well-trained and follow proper procedures? Look for red flags like haphazard material storage, disregard for safety regulations, or a lack of supervision.
Don’t hesitate to ask the construction manager and crew questions. Inquire about their experience with similar projects and their qualifications. A well-trained and qualified team will be transparent and comfortable answering your questions.
- Seek references and read online reviews.
Request a list of references from the construction company and contact those references directly. Ask about their experiences, the quality of the work delivered, and any issues (and their resolutions) during the project.
Look for the contractor’s online presence and read reviews from past clients. While you should take online reviews with a grain of salt, they do offer valuable insights into the company’s reputation and customer service approach.
- Consider third-party verification services.
Consider using an escrow service to hold funds for high-value projects until specific construction milestones are met. This strategy can provide an additional layer of security and ensure the contractor uses funds appropriately for material procurement and labor costs.
Due diligence is an ongoing process. Maintain open communication with the construction team and address any concerns promptly. Building trust with the contractor and fostering a collaborative environment goes a long way in achieving a successful outcome.
Don’t have the bandwidth to handle all due diligence yourself? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more. Our professionals are committed to looking out for your best interests and dedicated to helping you find the suitable building for your needs.
