Why New Construction Deals Don’t Pencil for Real Estate Investors

Jonathan Wolk (00:00)
You know, sometimes people think of us as deal killers, but I’d rather them spend some money on our fees and the due diligence and the research they’ve got to do than than closing on a two million dollar building that doesn’t work for right? So, it’s really money well spent and that’s really what due diligence is for. And it’s really above and you know, it’s due diligence on steroids, right? It’s it’s above and beyond just sort of the usual stuff. It’s it’s really evaluating what do you want to do and can you do it.

Dylan Silver (01:59)
Hey folks, welcome back to the show. Today we’re joined by Jonathan Wolk, the founder and president of WOLK360, an integrated Raleigh-based real estate architecture and construction firm serving investors, developers, property managers, and homeowners throughout North Carolina’s Triangle region. Jonathan, thanks for taking the time here today.

Jonathan Wolk (02:19)
Yeah. Thank you for having us.

Dylan Silver (02:20)
You’re a licensed architect, contractor, and real estate broker. How did you arrive at the idea of combining all three of these disciplines into one company?

Jonathan Wolk (02:32)
So when I first started out, you know, we as an architect, so it started with architecture, and we would have meetings with contractors and you know, realized there was a lot of decision making by the contractor because they were the ones controlling the construction budget, right? And so even though we were providing the design.

They were making the decisions because they were controlling the, you know, the budget and and material selections and things like that. So I’d always been interested in construction and always kind of in my mind was a design builder. When I where I went to college, we actually built things when I built my sister’s cabin up in Alaska. So I I always was very hands-on. And but then when I saw that really you needed to be the contractor.

To really engage those design decisions because the budget drives a lot of those decisions. And in some cases, they were being driven, you know, incorrectly because the contractor had a preference one way or the other. So I worked for some large general contractors and then I got my GC license and integrated that. And then in very much the same way as I was working on design-build projects, started noticing that.

You know, people would come to us and they go, Hey, I bought this land over here and I want to build a blah blah blah. And you know, we’d sit down and come to find out, well, you can’t do that there. Right. Whether it’s a zoning issue, a site issue, something like that.

I was sitting at the table, people were making acquisitions to properties or buildings or houses that they really didn’t do a thorough due diligence on. You know, they might have done some real estate due diligence, some, you know, you know, typical sort of real estate closing stuff.

But really didn’t dive into what could they do and then what are the ramifications of that. So I became a real estate broker. And that was really twofold. One to to to be able to provide the the full service, but also really to partner with other brokers and and be there and bring the value add even to them and their clients, right? So

we pay referral fees. We, you know, somebody might have a client that wants to buy a house or buy a building, and the opportunity is better to build a house or build a building. And so I don’t want the real estate broker to feel like they’re missing out on a commission because, well, I’m gonna buy a million dollar tract of land instead of a eight million dollar building, right? Like there, there, there’s, you know, there’s you gotta

There’s a loss of motivation there when you’re commission based, right? Even though you’re supposed to serve the client the best. But so by getting there early, we’re able to help make these decisions. And so we’re we do that with owners, we do that with, you know, we do that with investors. We’re sometimes the investors. We have we have investor partners. So I’ve got to represent them, you know, and and and be able to say, hey, this deal’s gonna work.

You know, before we spend a lot of money on it. We’ve done these apartment hotel to apartment conversions and gone in and pointed out a lot of issues. They’re they’re they’re they’re a lot more complicated than people think. There’s a lot of different codes, both federal and, you know, local and state and the fire marshal and all that. And

You know, sometimes people think of us as deal killers, but I’d rather them spend some money on our fees and the due diligence and the research they’ve got to do than than closing on a two million dollar building that doesn’t work for right? So, it’s really money well spent and that’s really what due diligence is for. And it’s really above and you know, it’s due diligence on steroids, right? It’s it’s above and beyond just sort of the usual stuff. It’s it’s really evaluating what do you want to do and can you do it.

And and and maybe you can’t do everything you want to do, but let’s look at what some options are and how close can you get to what you want to do. In some cases, you can do more, or maybe it’s something different, you know. So every project is different, every property is different, every building is different. And so really getting in there and understanding it early on is the benefit because just because you did it over here, literally next door, doesn’t mean you can do it, you know.

There or you know across the street or around the corner or whatever the case may be. So it really makes sense to to dive in there and and do the homework.

Dylan Silver (07:53)
Let’s talk about architects and and how architects typically intersect with contractors. How common is it, first off, for for architects themselves to be contractors?

Jonathan Wolk (08:04)
It’s becoming more common. You know, back in the day, the architect was the contractor. You know, the the the Great Pyramids are, you know, the architect and builder, the the Greeks, the architect was the builder. And if you go, you know, outside of this country, Europe and Asia, it’s predominantly the big construction firms are also architectural firms, you know, architecture and engineering firms. They’re they’re typically in-house.

I always equate it to, you know, the car companies. The car companies don’t, even though they’ve tried it a few times, they don’t work very well. You know, Toyota designs and builds its Toyotas. Apple, I think that’s why Apple is a premium product versus, you know, the the PC, because their software and hardware is integrated. And so you by integrating the design process with the construction process.

You’re you’re really able to make better decisions both design-wise and cost-wise. Architects get a bad rap, somewhat deservedly so, because they’re designers, they’re dreamers, which is great because that’s what I love about it. But they don’t necessarily know how to hammer a nail. They don’t necessarily know, you know, how things stand up. They don’t know the cost of materials or why steel in this case is better than concrete.

And so, you know, I think it’s for particular architects to do it. I don’t think it’s every architect, but I also prefer architect-led design build than trad you know, than contractor-led design build because I think that’s truly build design. You’re you’re the contractor is bringing a a methodology or a formula to the table and trying to fit you into his formula.

And you’re not really getting what you want in that case. And that formula may be budget driven. It might be okay, you want a five million dollar building? Hey, this is the five million dollar building that I do. Da da da da da. We we we’re doing a church project and they liked us because we proposed something completely different to them. And you know, we didn’t just bring them the hey

Here’s the A, B, or C church package, pick one. No, we worked with them. We we worked with them with their budget, their design, their needs, and we developed a whole package for them. And and now we’re in the phase of of you know starting construction on it. And so working through things like that, rather than just sort of saying, Hey, here’s here’s what you get, you know, and that’s the difference of a car, right? You can customize a car to a certain degree, but in architecture.

You can really build what you want and and work with the budget that you’ve got to make it so. And that’s what’s really cool about it is everything’s unique.

Dylan Silver (11:32)
Now execution from design plans to implementation. There can be a lot lost in translation there. And people see this even without complex design, but of course with complexity, there are additional obstacles to to overcome. For architects who are, you know, themselves contractors and managing subcontractors, that’s a unique skill in and of itself, right? To be able to execute on a given design.

Jonathan Wolk (12:01)
Yeah. And I mean, we already work in teams, right? We have we have engineers, structural engineer, plumbing, mechanical, electrical engineer, fire alarm and sprinkler engineers. You know, you know, you might depending on the project, you might have a the the the structural engineer and the foundation engineer, you know. So you there we’re already managing teams and what we do that I think is unique is we bring those teams together. So we bring

the the mechanical contractor and sit them down with the mechanical engineer so we can work through some of those issues ahead of time and and the engineer doesn’t just design it in a in a vacuum and then spit it out and and then the contractor says, Hey, I could have saved you some money if you did this or did that instead. Right. Like we try to have that conversation ongoing. So for example, a project we’re doing right now, we

The the engineer was going with a Trane system, great system. And the it’s an addition. And the contract said, Well, you know, the existing is Rheem. If we go with a Rheem system, one, we save a little bit of money, and two, it’ll integrate with the other system because the the units will communicate with each other. If we put a Trane unit here, now they’re not really integrated, they’re not really communicating with each other. And so

You know, mentioned that to the engineer and he was like, that’s a great idea. Yeah, that’s an easy change. Let’s do it. So that wouldn’t have come out until the the construction documents were complete. That would have been an RFI, that would have been a change order, that would have been, you know, having to verify it, extra fees, extra costs, you know, this and that. And then, but we we cut all that out because we had that conversation months in advance rather than after the construction documents were complete. So

I think good architect-led design build teams that are already are that think that way and integrating that way, I think you save a lot of time, you save a lot of money, you get a lot of that coordination worked out up front.

Dylan Silver (14:07)
Pivoting here as someone who’s also a real estate broker, finding the right sites, not just from investment in numerical acquisitions, you know, dollar cost perspective, but also a buildable lot, right? That’s that’s properly

zoned is critical. And how often do we see and hear of stories where someone buys you know an isolated parcel of land with no access to it? And then what can they do with that? And so many other issues that come up, you know, things that people wouldn’t think about unless they have this type of background, like, hey, is the the the ground compacted enough? Right. And so

When you’re working with investors who are looking for the ideal opportunity, what’s some of the biggest mistakes that you see people make when it comes to site selection?

Jonathan Wolk (15:37)
I mean, it’s really, I mean, some of the mistakes are things that are just so basic. I mean, zoning number one, you know, they think they’re gonna do a 400 unit apartment complex and you can’t do over 300 without going through a protracted process, right? You can you can rezone it, you can get variances, whatever, but you’ve got to plug that into your timeline. That you know, around here, that that that could be a year or two, you know, to to to try to get that. And then you don’t know that you’ve got it at the end of the day.

Another big issue here now, especially with the you know, the floods that we’ve just had recently, all the flood maps are changed. You know, it it may not have been a flood zone two years ago, but guess what? You’re smack dabbing a flood zone now. And and that’s not to say again, you’d not that you can’t build in a flood zone, but you’ve got some requirements and some restrictions that you’ve got to do, which add cost and protract the time to to build there.

Impervious area, which also is sort of tied to to flood zone, is, you know, you might think you’ve got this buildable area on your lot, but you’re only allowed 20, 30% impervious, which means, you know, it is your is your solid area on the on the site. Well, so it looks like you got this great, you know, two acre lot, but you only have, you know, 20,000 feet of buildable area.

And and that includes your parking lot and stuff. So now all of a sudden are you looking at, you know, parking structures and things of that nature, you know, streams, setbacks, you know, all these, all these things that again, people tend to hit the highlights in due diligence. People tend to hit them once they’ve kind of learned a lesson. You know, we all we all we all take our lessons from the last project to the next project, right? You know, lesson learned.

And and that’s a big part of it, but it it’s really just, you know, and the the trickiest part is every site is different. You might not have an impervious issue on this site and you’ve got one on that site. You might not have a height issue or a density issue on this site, but you’ve got one on this site, you know. So that’s really, I think, the biggest mistake people make is because they did it somewhere else, they think they can do it there. They think they’ve got the formula and

real estate is really hard to make a formula work.

Dylan Silver (18:01)
You know, when you mentioned it working in one area and it not working in another, what immediately came to mind, we’ve seen so much of this in the last couple of years, is flippers who become developers and ground up new construction. That’s a big jump. It’s a big jump. I’m sure you see it, right? But when you start getting into, you know, all the things that go into

Jonathan Wolk (18:18)
Yeah.

Dylan Silver (18:30)
pre planning. We’re not even talking about laying a foundation. That’s where people can, you know, lose their shirt for lack of a better word, right?

Jonathan Wolk (18:38)
And and the big thing there is understanding the timing, the development process, the the you know, again, this is where it comes down to to closing and like give yourself time for for the plans, give yourself time for permitting and approvals, and make sure you can do what you want to do and get done. We we see this a lot on commercial tenant upfit work. And and you know, there’s always a pressure from the landlord on timing, and but you know, does your

You know, you want to put a restaurant in a retail space. You know, some municipalities want you to have more parking because now you’re a restaurant. Well, now you’re getting into zoning. You think you’re just going into this little retail fit-up. Well, now you’re getting into zoning. You’re getting into fresh air requirements, especially now with these mixed-use buildings, you got apartments above you. You know, the square footage.

Might look great. It’s 2,000 square feet, 4,000 square feet, whatever you want. You know, it’s got a back door, which is great for service, dah dah dah, dah, dah. It’s got a grease trap on site. But if that space is a mercantile space and not a restaurant assembly space, you know, you might have some issues. And and you know, next thing you know, well, my rent starts in 90 days. Well we’re not even gonna have permits in 90. You know how much this thing costs in 90 days, you know.

Dylan Silver (19:50)
And you’ve got to start, yeah, making those payments on it. You you’re gonna have an interesting perspective because you have so much diverse experience to to pull from. There’s a lot of folks that I’ve come across hosting the show who have said new construction doesn’t pencil, it’s very hard to find these deals. We’ve been sitting on the sidelines for years, even though we have a large portfolio. What’s your perspective on new construction these days?

Jonathan Wolk (20:14)
The the biggest

thing I tell my clients, because it is, and and that’s exactly right. It is hard to pencil. Because the factor, if you’re looking at new construction, let’s just say you’re looking at a small apartment product, let’s just call it like a 10 unit apartment or townhouse project, right? The variable, so let’s say you’re looking at a downtown location versus a rural location, right? Your rent or your sale price is the variable.

Right. What you pay for that land is the variable. You’re going to pay more downtown than you are rural. You’re going to get more rent downtown than you are rural. But your vertical cost is almost really the same from that downtown location to the rural location. You might do a little bit higher end finishes or whatever, because you’re more premium market, but that’s not a lot. And so really the hard part is getting that.

Vertical cost of construction to work within what you’re gonna, you know, sell them for or get your rent for and and pencil. And then really, where that then crosses over, where we see the success is if you’re doing an all-cash investment, if you’ve got an investor that’s in it for cash, those are what I see working. When you’re dealing with a hard money lender or nine, 10%.

You know, interest or you’ve got a balloon payment on such and such a date. Man, that and and and it takes longer than you expected, it takes longer to sell or rent up. That’s what eats your profits. That’s what eats your profits. And so it’s really our our vertical cost and and even to some degree the the site development costs really don’t change much. It’s it’s really where you’re located, what can you sell or rent it for?

And that’s the hard part.

Dylan Silver (22:05)
In markets where there’s actually a surplus of housing, this is something that not everyone is aware of, but in certain markets like Austin, Texas, there’s actually a surplus. There’s apartments that are vacant, right? In in those markets, would you steer clear of developing or or are there opportunities even in markets where there may be lots of housing, but a lack of truly workforce or affordable housing?

Jonathan Wolk (22:30)
Yeah, well I think that that’s something we’ve really been working on for the last couple of years is is truly the affordable housing piece. But that’s you know, that’s the hard part, right? ‘Cause that that the the the difference between a you know class A housing and affordable housing is really just the finishes, right? Maybe maybe a couple this is and that’s and square footage, but

Your cost to build doesn’t change very much, but yet, you know, you’re trying to do, you know, you’re trying to do rental rates or sale prices at a third, you know, the cost. And so it’s it’s tough. It’s real. I mean, we’ve looked at we’ve looked at prefab, we’ve looked at modular, we’ve looked at, you know, shipping containers, we’ve looked at all kinds of of different scenarios to try to make it work, but it still comes down to, you know, the land cost. And then with affordable housing, true affordable housing.

You know, you need to kind of be urban because you need, you know, bus lines or transportation. So now you’re talking about more at least in this area, right? You’re talking about more expensive land, more expensive development cost, more restrictive development opportunities, you know. So it’s it’s a fo whether it’s affordability in terms of being affordable or whether it’s

affordability in terms of doing something for an owner or doing something for an investor, that it’s it’s really hard right now.

Dylan Silver (24:00)
You know, there’s a lot of folks who are looking at different opportunities and you mentioned a couple of them. You mentioned modular, right? Specifically. I think there’s a lot of investors that are interested in modular and tiny homes, but I was thinking as an architect, you know, what do architects think about modular homes and tiny homes? Does it look at it like competition?

Jonathan Wolk (24:21)
No, I I think there’s good and bad, you know, like like anything. I think there’s some really awesome you know modular and prefab opportunities out there and a lot of them designed by architects. I think there’s real opportunity there. What happens is so we we’ve done some, you know, tiny homes ADUs and and people’s they they

look online, they see one for you know thirty thousand dollars and they’re like, look, this thing’s awesome for thirty thousand dollars. And it’s like, okay, well, then you’ve got to that’s just the package, right? Then you got to get it there. You got to get a foundation there. You got to get plumbing mechanic, you got to get plumbing and and electrical there, utilities. You’ve got to assemble it or, you know, or or if it’s a true, you know

package, you got to make sure that there’s a way logistics to get it there. A crane, whatever the case may be, right? So there’s all these extra costs. And that $30,000 unit now all of a sudden’s $100,000, right? And and then that’s not even getting into everybody wants to tweak it a little bit, right? Well, what if we just made the bathroom a little bigger or or we want to add this deck on the back or whatever. Okay. Well now you’re talking about, you know, site built stuff. And and so it’s really hard

even on those, which I think are great opportunities, but I think again, it’s the it’s it’s gotta be the right place, the right site, you know, that that works. And then is it a sale thing? Is it a rental? You know, so if you’re if you’re renting these out, you know, by the week or the weekend or whatever, do do you, you know, do they do do they pencil? You know, you’re gonna spend a hundred grand on this unit, you know, how many, how many

rental nights at two, three hundred bucks d you know, does it take to to to make it work?

Dylan Silver (26:11)
We are actually coming up on time here, Jonathan. Any new projects that you’re working on? And then also anything you’d like to mention directly to our audience?

Jonathan Wolk (26:19)
Yeah, I think the the big question we get is we we work in North Carolina primarily for architecture. We we we have looked at some other projects out of state. Recently I’ve done projects out of state you know, all over the world throughout my career. But right now, you know, the Triangle is hot and so it’s kinda like why why go anywhere else? But you know, we’re we love to

do interesting projects. So even just like you said, the tiny homes and stuff like that. I think there’s huge opportunity there. But yeah, we, we, we love to consult. We love to collaborate. We love to build. We like to get our hands, you know, I like to say we we we get our hands dirty with with ink and we get our boots dirty with mud. And you know, we we and we love kind of brainstorming and spitballing with people on, you know, opportunities.

Dylan Silver (27:06)
Jonathan, thank you so much for joining us today. Thank you for your time.

Jonathan Wolk (27:09)
Thank you.