jaydoherty's blog

On "value-engineering": Value engineering is the process of trying to produce construction with design that is more cost efficient. Its goal is NOT to reduce quality, but to produce the same quality at lesser cost or with a better result. For example, there are three approaches to building garages: cast-in-place concrete (the garage is fully cast at the site); a pre-cast garage where the major components are concrete cast off-site then trucked to the site and erected; and, "hybrid" garages which use combinations of steel and concrete. Different garage sizes and designs lend themselves to different costs. All sorts of factors affect the "best" garage design: the intended use (retail, office or residential parking); the size of the garage; tenant requirements; and, site and soil conditions. It may sound a little silly, but getting garages "right" is very important in many respects. Think about your own experience when you go somewhere and the garages can be confusing, scary and of poor quality construction. Lighting, signage, elevators, stairs, sight lines, and construction quality all need to be well thought out.

Pre-cast garages are often favored because of the more reliable quality control when you have the garage spans cast in a factory but there are only a few precast plants in the northeast (and a few in Canada). If several of these are busy, the cost of precast garages climbs quickly. On the other hand, cast-in-place garages depend on carpenters creating wooden forms on site to cast the garage members. If the carpenters are busy, then cast-in-place garages can escalate in cost. Cast-in-place and hybrid garages are also more demanding on general contractors, so you have to evaluate quality controls in the field closely.

As the economy changes, costs and availability changes. A year ago, concrete was rising in cost at a frightening clip, particularly as demand in China drove up cement and concrete costs. Earlier this year, gas costs made the shipping of large precast spans in the northeast much more expensive.

Therefore, you really have to stop and evaluate what will be the best product at the best price when you actually lock-in a contract. To get the right answer, you often have to engage the architect and structural engineers to test new designs so that the construction and price can be properly evaluated.

I wanted to provide some background on one of the recent developments in the Westwood Station project. Before doing so, it's important to note that the economic climate surrounding the project has changed dramatically in the last few months. For us at CC&F, the debate between economists as to whether or not we have entered a recession, is an academic discussion. The financing markets have turned downward dramatically and lending conditions are very challenging. We are very fortunate in that our joint venture partner, Commonfund, is very strong financially and able to provide the project with substantial equity investment. We are also fortunate that our retail partner, Steve Karp of New England Development, have recruited many strong, high quality national retailers to the project. Nothwithstanding those strengths, the project still requires a considerable amount of construction financing and construction lenders have uniformly become more conservative, tightening both lending conditions and financing terms. The harsh markets have already caused the indefinite delay of several major projects in the region including North Point (Cambridge), Southfield (the redevelopment of Weymouth Naval Station), Columbus Center (Boston), and much of Fan Pier (only the office portion is proceeding).

Westwood Station's commitment to condominium development and sales of the residences remains unchanged. Otis & Ahearn is the broker/marketing agent and plans are underway for construction of an on-site marketing and sales office. All units are still to be designed and constructed to facilitate sale as condominiums. Condominium sales generate greater profits for the development than rentals (and so, of course, we strongly prefer to sell all units) but, given current market conditions, lenders will not provide financing on units that are exclusively restricted to condominium sale. The prior terms of the draft Development Agreement provided constraints on rental terms that lenders now will simply not accept in their financing. For example, one prior condition provided that no resident could renew any lease after two years (thereby forcing eviction of that individual). The intent was to provide us, the developer, with a further incentive to convert rentals to condos as rapidly as possible by making it more challenging to keep the units rented.

We are optimistic that Westwood Station will carve out a unique position in the greater Boston residential development market. It's worth noting, however, that virtually all major project financing now involves several national or international lenders, few of whom are based in Boston. A decade or so ago, a strong Boston project might be able to make a special appeal to Bank of Boston, or Bank of New England. Now, the major lending institutions are spread out around the globe and have little special affinity for a particular region. Our optimisim is appreciated, but not bankable, thus the change in rental conditions. Again, this does not change our business objectives. Condo sales remain easily the most preferrable way financially to bring residences to market. It's my belief that the unique mixed-use character and Westwood location of the project will very much do its part to help make this happen. What is less certain is what will happen to the national and regional economy and what impact that will have on condominium sales.

I hope this background is helpful and I am prepared to provide similar information on other aspects of the project or to answer specific questions if that is useful.

Jay Doherty
Cabot, Cabot & Forbes