How to manage risk in real estate developments

Prac­tices for min­i­miz­ing risk and deliv­er­ing high-qual­i­ty insti­tu­tion­al structures 

The arti­cle rep­re­sents sub­jec­tive opin­ions of Hines Inter­ests Lim­it­ed Part­ner­ship (“Hines”)1, the spon­sor of invest­ment vehi­cles offered by Hines Secu­ri­ties, Inc. (“Hines Secu­ri­ties”). Oth­er mar­ket par­tic­i­pants may rea­son­ably have dif­fer­ing opinions. 

It can be chal­leng­ing to build insti­tu­tion­al-qual­i­ty struc­tures, but Hines believes tak­ing a risk-man­aged approach helps to cre­ate a process that aids the devel­op­ment in remain­ing effi­cient and prof­itable. Hines’ Con­cep­tu­al Con­struc­tion Group has been solv­ing devel­op­ment chal­lenges for years. Hines believes this expe­ri­ence has pro­vid­ed the abil­i­ty to con­sis­tent­ly deliv­er build­ings that set new stan­dards for qual­i­ty, inno­va­tion, sus­tain­abil­i­ty, and long-term value.

When tak­ing on a new devel­op­ment with loads of risk ahead, Hines believes these best-in-class prac­tices are worth consideration.

Benchmark the competition

Hines believes bench­mark­ing the com­pe­ti­tion is vital to ensure long-term val­ue and com­pet­i­tive posi­tion in a sub­mar­ket. It is nec­es­sary to con­duct mar­ket research and uti­lize local teams for boots-on-the-ground intel­li­gence. Iden­ti­fy­ing key prop­er­ties of com­peti­tors and find­ing qual­i­ty advan­tages is impor­tant to dif­fer­en­ti­ate from com­pe­ti­tion and avoid cost­ly overde­sign. Estab­lish­ing com­pet­i­tive mar­ket­ing and leas­ing sell­ing points can help secure the com­pa­ny’s posi­tion in the market.

Select the right design team

Select­ing the right design team and sim­pli­fy­ing com­plex rela­tion­ships in the design process can sig­nif­i­cant­ly ben­e­fit the con­struc­tion process. Man­ag­ing cre­ative con­flicts between archi­tects, engi­neers, and con­sul­tants can result in imag­i­na­tive, yet build­able and afford­able projects. Dis­ci­plined man­age­ment and a tiered con­tract struc­ture pro­vide a sin­gle point of respon­si­bil­i­ty and stream­line coor­di­na­tion. And in Hines’ expe­ri­ence, using con­tracts that address poten­tial prob­lems can mit­i­gate own­er­ship risks and pro­vide builders with greater con­fi­dence in the design process.

Analyze fundamental building systems 

Ana­lyz­ing fun­da­men­tal build­ing sys­tems dur­ing the devel­op­ment phase is anoth­er strat­e­gy that Hines views as pro­vid­ing ben­e­fits to a con­struc­tion project. Align with the client’s needs by eval­u­at­ing pro­posed sys­tems against client-estab­lished cri­te­ria, inte­grat­ing oper­a­tional input from prop­er­ty and facil­i­ty man­age­ment per­son­nel, lever­ag­ing oper­a­tions feed­back and lessons learned from pri­or projects, and incor­po­rat­ing an owner’s per­spec­tive into the design. This can help ensure that projects stay on bud­get and meet clients’ needs.

Provide precise budgets and schedules 

Pro­vid­ing pre­cise bud­gets and sched­ules is vital to deliv­er projects on time and on bud­get. Uti­liz­ing bud­get experts that work close­ly with the project team to esti­mate the cost of mate­ri­als, labor, and oth­er expens­es, and account for poten­tial risks that may affect the bud­get or sched­ule can save time and mon­ey by reduc­ing the need for time-con­sum­ing val­ue-engi­neer­ing process­es2.

Coordinate design and construction details 

Hines believes work­ing close­ly with the project design and con­struc­tion teams to coor­di­nate and test every draw­ing and design detail against the estab­lished cri­te­ria and bud­get is nec­es­sary to max­i­mize effi­cien­cy and min­i­mize errors pri­or to pur­chase. Low­er­ing con­struc­tion costs by using high­ly coor­di­nat­ed plans and spec­i­fi­ca­tions and avoid­ing con­struc­tion sur­pris­es with detailed advance clash” coor­di­na­tion can reduce change orders, help­ing to min­i­mize the risk of inno­va­tion pri­or to purchase.

Secure cost-efficient contracts 

A con­tract­ing strat­e­gy that aims to min­i­mize costs by shift­ing a rea­son­able amount of risk onto the gen­er­al con­trac­tor (“GC”), in Hines’ expe­ri­ence, has helped obtain cost-effi­cient con­tracts. Seek com­pet­i­tive bids from var­i­ous GCs to secure the most favor­able pric­ing for fees, over­head, as well as struc­tur­al and site work. Part­ner­ing with GCs to select sub­con­trac­tors, incen­tiviz­ing GC account­abil­i­ty, min­i­miz­ing pay­ment dupli­ca­tion and gaps, solic­it­ing cost-sav­ing ideas, secur­ing fixed-rate con­tracts, and giv­ing own­ers the right to audit GC’s books are oth­er strate­gies Hines has deployed to secure cost-effi­cient contracts.

Expedite transition to construction 

Hines believes estab­lish­ing a local point of con­ti­nu­ity (typ­i­cal­ly the local con­struc­tion man­ag­er) is essen­tial to ensur­ing a smooth tran­si­tion from design to hands-on con­struc­tion exe­cu­tion. This local man­ag­er acts as a liai­son between the project teams, see­ing that project goals are met from design through deliv­ery and close­out. Dai­ly site vis­its help antic­i­pate prob­lems and resolve any issues quick­ly, reduc­ing delays and ensur­ing that the project stays on track.

Strive to implement best-in-class practices 

After decades of expe­ri­ence, Hines believes imple­ment­ing best-in-class prac­tices has helped min­i­mize risk and deliv­er build­ings that set new stan­dards of qual­i­ty, inno­va­tion, sus­tain­abil­i­ty, and long-term val­ue. Bench­mark­ing the com­pe­ti­tion, select­ing the right design team, ana­lyz­ing fun­da­men­tal build­ing sys­tems, pro­vid­ing pre­cise bud­gets and sched­ules, coor­di­nat­ing design and con­struc­tion details, secur­ing cost-effi­cient con­tracts, and expe­dit­ing the tran­si­tion to con­struc­tion are essen­tial steps in the suc­cess of a con­struc­tion project.