Yield PRO TV presents NAHB Power Hitters. Host Linda Hoffman talks with Tom Tomaszewski, President, The Annex Group.
Transcript: NAHB Power Hitters interview. Linda Hoffman with Tom Tomaszewski, recorded July 22, 2021
Linda Hoffman: Residential housing accounts for 38 percent of all construction volume. The great news for the U.S. housing shortage is that construction is projected to boom over the next five years. Driving this is a couple things.
First, multi-billion dollar federal and state government investment in real infrastructure. Second, and this one is significant to today’s guest: increased demand for modular and pre-fab.
What does it all mean? Well, it means rising opportunity in multifamily development and construction for those with pipeline and process. Today’s guest is someone who has both. Tom Thomaszewski has spent a lot of time, getting ready for just this moment. Tom is president of the Annex Group with offices in Indianapolis and Chicago. Annex has developed thousands of apartments spanning affordable, student and workforce.
Here’s what you need to know about Tom. He likes a challenge. I think that’s an inherent requirement of NAHB. I’ll have to check with Dean on that.
Tom, welcome to the show.
Tom Tomaszewski: Thank you so much, Linda. I’m very happy to be here.
Linda Hoffman: Tom, by your background, it would seem you were born to develop. Degrees in Public Affairs and Construction Engineering Management. You follow the engineer’s call through problem solving. What else do we need to know about you and Annex?
Tom Tomaszewski: Well, fortunately I’m backed by a very wonderful team, and you know, we really have a mission to create a positive impact on the people who not only live, but also work, and are involved in the communities that we are developing. And so, you know, we’re not only about building buildings, and building apartments. We really want to create a community and become a catalyst for the communities that we enter that are traditionally underserved for housing and in need of affordable housing.
So, we are very happy to provide that service for communities.
Linda Hoffman: The Annex group works in cost-sensitive sectors of multifamily. How has the run-up in materials prices affected your ability to meet project goals?
Tom Tomaszewski: Well, that’s a great question. And it is been extremely difficult, especially lately, you know, with the pandemic and all that’s been changing, all that’s been changing with different supply-chain issues. The price of everything has literally gone up. And obviously lumber–people have heard about continuously and that’s been one of our bigger challenges. But we’ve had to really continue to be creative and really know our product and actually kind of hone in and get really efficient what we’re building.
We kind of continually build the same thing over and over. Our buildings are always different, but we have a lot of the same unit types and we’re putting the same materials in each of these units that we’re building. In Kansas, or in Indiana or in Montana, we use a lot of the same products. We know our product and we can kind of get ahead of material shortages and any cost increases.
Also, when we’re designing our buildings we really look to make them as efficient as possible, so, we’re looking to get the most rentable space possible versus common space. Then, we also have a few other things that work well in our favor. We do develop, and we also build our own products. So, we’re the general contractor. We have a lot more control versus using a third-party general contracting firm.
And then we also own lumber company, and are fortunate with how things apply lately with the lumber shortages and price rises–we’ve been able to stay ahead of things and buy at opportune times and really control our processes because we own the lumber portion of the lumber company that builds our product. So, we’ve had to really get creative and really work on execution and delivery.
Another big portion that is help us out quite a bit and this is where NAHB is been a great help in their advocacy is, last December we were able to get a 4 percent rate lock on the low-income housing tax credit, which was a boon for our industry. It really has allowed us to continue to move these projects along and give us the capital to be able to do so. So, I really applaud NAHB in their efforts and being able to be advocates for our industry. So, it’s been very difficult, but, also, we certainly welcome the challenge.
Linda Hoffman: You own the lumber. That sounds like Forest City back in the day. That’s how they began. I think it was in the 20s.
Tom Tomaszewski: Yeah, so there you go. Maybe we’re on the right track, hopefully.
Linda Hoffman: Construction labor has tightened since COVID. Are you having a hard time finding workers?
Tom Tomaszewski: Yeah, so that has been a challenge. And it’s really been a challenge since ’08, ’09, since the last recession. We have people that left trades to go to completely different industries. It’s been difficult ever since then. And COVID has just exacerbated that topic. So, we’ve had challenges. We’ve been fortunate enough to work with a lot of the same subcontractors and really stay ahead of it and kind of foster good relationships to make sure that we got our jobs properly staffed.
Another thing that we have found challenging, but also incredibly rewarding, is to work on our internal team. And to build extremely talented individuals that want to work for us, and want to really create lasting effects on the projects that we build. So, by really growing and focusing on our internal staff, and really paying a lot of attention to that. That has kind of helped us on our projects, in general, to allow us to cut off some of the lack of workforce.
Really, we have a lot of creative problem solvers and good people working for us.
Linda Hoffman: You build portions of your projects off-site and bring the modules in for assembly. How key is modular construction to achieving cost goals?
Tom Tomaszewski: It is something that we been very interested in and one of our first student housing projects was built modularly 10 years ago, in Carl Sandburg College in Galesburg, Illinois. So, it’s something that we were successful on in a project and fortunately, with that project we were very near to a modular plant. And partnered up with a company called Homelake Commercial. We were very successful.
Since then, we’ve tried to work it many different ways and are finally, now, coming to a point where we think it’s going to be very positive. We have been recently discussing things with a company called Rise Module out of Minneapolis whose been doing some really neat things in the city of Minneapolis modularly. So, we think it’s going to be successful and where it’s going to work is at an high cost construction areas that are very tight and have tight time frames.
So, it’s something that we have spent a lot of time on. We been successful once at it and are looking forward to implementing it in the future and are working with some individuals to do so. However, in the interim, on our current projects, which are being built, a lot of things are built off site–things like the panelization of wood, of the wood walls are lot of times built in a factory and brought to the site. Sometimes the plumbing assemblies are assembled in the shop and brought out.
So, what we’re seeing is a lot of individual things, as a start, to kind of move to more modular. That’s something that we’re very excited about it and really working hard at. And using something currently that has been a success in the past. We need to work on getting that builder network and those factories where we’re not transporting mods 700 miles to where it’s really difficult because the transportation costs really add up.
But we seeing some people be very successful at it and we are looking at that, in particular, potentially more in urban market settings where the costs are a little higher and we can get the project done in a shorter period of time, plus less disruption.
Linda Hoffman: The rising modular company, Katerra, recently filed bankruptcy. Where did they go wrong, Tom?
Tom Tomaszewski: So, now Katerra’s an interesting case. They got in and were well back financially, and it seemed like they were mostly tech investors and tech industry people, coming into the construction industry. They really wanted to be a disruption and really re-create everything. Well, I think they went in and try to do too much. They kind of went in and wanted to do everything, wanted to go ahead acquire all those companies, and grow rapidly. Basically, create something that was spit out of a factory and it was always going to be consistent.
Let’s say, if you’re building a snow shovel, you’re always going to manufacture the same snow shovel. When you’re building a building, no building is the same. Every jobsite is different, whether it’s just the conditions of your ground, your transportation. So, what they tried to do is create something universal that would fit everywhere. And it just did not work in construction. And I don’t think that they had the right construction people involved. And I think they just over overthrew things and really kind of threw a lot of money at it, though well-capitalized, it fell apart and they were unable to deliver on their promises.
So, I think it’s just a combination of being over, going a little too far and not having the right people to do stuff.
Linda Hoffman: Getting over your skis.
Tom Tomaszewski: Exactly.
Linda Hoffman: You’ve said that 3D printing, speaking of customization, can significantly reduce construction costs. Most 3D printing projects, todays are relatively small. How long before 3D printed structures are used in the construction of multifamily housing?
Tom Tomaszewski: I would love to see it sooner but I do think it’s going to be quite a while. It does seem like on a smaller scale it does better, and it is starting to work.
About 15 years ago, in one of my grad school courses, I had a professor show us a video of a machine. It was just a diagram of a machine going in and basically free printing concrete houses. He said listen, someday, in 20 years, this is how things are going to be built. Well, you know 15 years later is not quite realized, but this has been something that’s been around for a long time. I don’t know, but it seems like it still has a little way to go before it’s used on a larger scale or multifamily level.
But I do think that, ultimately there it will be something that disrupts the industry and makes quite a change. I’m not quite sure if its 3D printing or not. But it could be. It does the potential to. And I’m certainly interested in seeing how things progress.
Linda Hoffman: Well, give us a prediction. What do you think will be the first application?
Tom Tomaszewski: I’ve actually seen, I believe they are doing a 3D printed multifamily building, we’re talking a couple units in the urban core, somewhere overseas. So I do think it’s already happening. But on a large scale, where you can do 50, 60+ units, you’re probably still 10 to 15 years away.
Linda Hoffman: You’ve done a lot of student housing. How did distance-learning affect the sector’s pipeline?
Tom Tomaszewski: So, distance learning and COVID in particular, did affect things. The industry kind of went a little crazy, initially, what just like everyone else did when we didn’t know exactly what was going on. They did anticipate there being a lot of issues in vacancy and they thought that people wouldn’t be paying their rents.
Ultimately, it turned out to be not as bad as anticipated and collections and vacancies were not terrible. They were little higher than they’ve been normally, but not too bad. Coming back this year, it seems that things are kind of normalizing, coming back to somewhat pre-pandemic levels. We are facing a little bit more difficulty in leasing, but we are pretty on par with prior years.
Your hire tier, flagship schools have less of an issue than some of your tertiary, smaller schools have more of an issue. We are seeing things get somewhat back to normal, in general, and we’ve actually gone away, we’ve made the conscious effort about three or four years ago to kind of move away from student housing and focus more on affordable. So, we really are very happy that we did so in this time frame when there are some uncertainties going forward in student housing.
So we are very fortunate to really be focused on multifamily affordable and workforce and really kind of moving away from student housing, unfortunately.
Linda Hoffman: It’s always great to get good news and it sounds like there’s more to come in the years ahead. Thanks for joining us Tom. This has been fascinating.
Tom Tomaszewski: Thank you so much. I really appreciate it.
Linda Hoffman: It’s a new day in development. Technology continues to change the world, including construction. Modular, pre-fab and 3D printing are just some of the automated processes promising to change the speed and cost model on residential assets. And innovators like Tom Tomaszewski are leading the way. I love commercial real estate. That’s where the nation’s brightest innovators have always been, through history and today.
And especially in our great country, genius is a spark that catches and spreads.
Thanks for joining us. I hope you enjoyed our show. I’m Linda Hoffman. See you on our next exciting episode of NAHB power hitters.