Category: Development

Construction Materials Costs Are Expected to Rise

In spite of the fallout from trade wars, construction materials prices remained stable in 2019. That’s likely to change.

The prices of many construction materials may rise again in 2020.

“I think the lull in materials cost increases is close to ending,” says Ken Simonson, chief economist for the Associated General Contractors of America (AGC).

Despite trade tensions between the U.S. and nearly all of its major trading partners, the cost of many materials used to build apartments has remained relatively stable in 2019 (though subcontractors have been raising their bids in anticipation of materials prices rising). Even the cost of labor has been relatively stable, despite an extreme shortage of construction workers.

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Lenders Won’t Cover Rising Construction Costs on Multifamily Projects

To make up for rising materials costs, apartment developers are being forced to put more equity into their projects.

Low interest rates are not enough to make up for the rising cost of construction on new apartment building projects.

“The drop in interest rates will not make a bad project look good,” says Matthew Swerdlow, director of capital services for Ariel Property Advisors, a real estate and advisory services firm based in New York City. “If it didn’t work with higher interest rates, it might not work with low.”

Apartment developers across the U.S. are struggling to pay for the rising cost of construction. Banks and debt funds are still eager to make construction loans at low interest rates, but these loans are not typically large enough to cover the higher cost of development. Many developers are now being forced to accept lower profits to make their deals work.

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Tackling Affordability Challenges

Here are five strategies for cities to bring more affordable apartments to market.

For many cities, the housing storyline remains unchanged: Demand for multifamily housing is far outpacing our industry’s ability to create supply.

The number of renter households grew from 35.7 million in 2000 to 43.8 million in 2016. During that period, the number of affordable apartments for low- and middle-income renters fell short of meeting demand by 1.2 million units. It will get worse if we can’t work with cities to do something about it. Research from Hoyt Advisory Services found the U.S. needs an average of 328,000 new apartment units annually to meet rising multifamily demand.

While affordability challenges are complex, local, regional, and state policymakers have alternatives to what we know are ineffective policies. Here are five things our industry needs to encourage cities to do to bring more affordable multifamily inventory to market.

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Volatility in Construction Materials Pricing Is Putting Strain on Multifamily Developers

Multifamily developers don’t know what to expect when it comes to budgeting for materials prices.

Apartment developers continue to be stressed by the unpredictable cost of construction materials.

Overall, materials prices keep rising faster than inflation. But what’s worse is that prices for individual construction materials are unpredictable from month to month. The price of lumber and diesel fuel has fallen sharply, for now. But new policies from the U.S. government continue to jolt the markets, from possible sanctions on oil producing countries like Venezuela to government tariffs on imported steel.

Developers and contractors are struggling to adapt. “It’s likely that contractors will try to protect themselves from unexpected price jumps by putting contingencies into their bids or asking owners to share price risks,” says Ken Simonson, chief economist for the Associated General Contractors of America.

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High Level of New Construction Will Continue to Strain Apartment Demand in 2019

Developers plan to deliver 337,000 new apartment units this year, up from 320,000 in 2018, according to RealPage.

Developers will keep adding pressure on the apartment sector in 2019, with plans to open hundreds of thousands of new luxury units in 2019.

New renters filled most of the new apartments delivered to the market in 2018, but not all of them. The percentage of apartments that will be occupied in 2019 is likely to keep falling.

“Occupancy should backtrack slightly, but still prove healthy as the current occupancy performance is so strong,” says Greg Willett, chief economist for RealPage, a provider of property management data and services. Like most industry insiders, he predicts that multifamily occupancy in 2019 will hover around 95 percent, with almost no available apartments in class-B and class-C categories.

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Do Developers Ignore Mid-Tier Renters?

Why the potential over-development of luxury rental units adds to the shortage of affordable housing and what can be done about it.

Lately, every city skyline is laden with cranes and every boulevard crowded with billboards advertising new luxury apartments for rent. These complexes have flooded markets across every metropolitan area―large or small―around the country. Renting, it seems, is no longer the cheap alternative to home ownership it once was.

With demand as high as it is, multifamily construction continues to boom and that trend is expected to extend into 2019, when construction of this type will reach its peak.

Developers have been so focused on catering to a wealthy market with high-end finishes and over-the-top amenities that most have continued to overbuild in this category. This will soon lead to a flattening or a market correction. They’ve also ignored the needs of average citizens and contributed to a nationwide shortage of affordable housing that has reached a crisis level.

For the time being, demand for luxury housing remains high. Millennials and baby boomers are among the two fastest-growing groups of renters, and an increasing number of empty nesters, high-net-worth households and double-income-no-kids households are choosing to rent. Both generations are seeking mobility, convenience and community. And since most of these renters are discretionary, meaning that they don’t need to rent for monetary reasons, their tastes skew towards luxury, amenity-rich accommodations. Package storage, pools, high-end fitness centers, room service, concierge services and even full-service pet spas have become the norm rather than the exception.

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Apartment Permits in U.S. Hit Two-Year Low on Glut, Rising Costs

(Bloomberg)—It looks like U.S. apartment and condominium builders are reacting to rising costs and a supply glut the same way: slowing down.

Multifamily housing permits — – those for buildings with two or more units — dropped last month to the lowest level since March 2016, government figures showed Wednesday. That follows signs of an oversupply of apartments in some U.S. markets, but higher costs are also having an impact.

“The biggest issue is construction cost and within that, labor costs. Because of that, some deals just don’t pencil out,” Jeanette Rice, Americas head of multifamily research at brokerage CBRE Group Inc., said by phone.

There’s also an overbuilding of units in urban cores that’s suppressing rent growth, she said. Builders in previous years were able to secure easier financing from banks and the labor market wasn’t as tight, creating incentives to build, she said.

“Developers are working through all this, but it takes time,” Rice said.

The slowdown in multifamily permits was driven by declines in the Northeast and Midwest. The South saw a slight drop, while permits rose in the West.

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Rising Construction Materials Prices, Labor Shortages Tax Multifamily Developers

Many multifamily developers and contractors are fighting off price increases for construction materials.

“Lately we have seen a few knee-jerk reactions from manufacturers claiming upcoming price increases or possible increases due to tariffs,” says Marc Padgett, president of Summit Contracting, a multifamily general contractor based in Jacksonville, Fla. “Often, they can’t substantiate the claim because there isn’t an actual tariff, just the mention that there could be one.”

The administration of President Donald Trump has threatened to impose tariffs on a long list of construction materials imported from foreign countries, including lumber from Canada and steel from China. Many manufacturers have already responded by hiking up prices.

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Real Estate Trends: Developers Search for Business Efficiency & Profit Maximization

Whether you are an international real estate firm, a developer working on a joint venture or working on a particular development deal, building out your operations and infrastructure can be quite challenging. Hiring talent, managing office space and operations, technology and other management factors can be a significant burden on business and a drain on resources.

One trend that is gaining momentum, especially in the real estate industry, is outsourced accounting. The complexity of accounting and tax issues, technology needs, reporting and planning opportunities all factor into the equation. Tax planning and analytical financial reporting are essential to maximizing the success for real estate developers, so the outsourced model often provides significant value for owners and stakeholders.

“We continue to see significant activity here in New York, both by international and domestic developers and investors,” said Robert Gilman, Partner & Co-Leader of the Real Estate Group at Anchin. “New York is not just the financial capital of the world but the center of the real estate market as well. As developers get creative and look to maximize the limited space available—in the busiest city in the world—real estate companies are looking to drive efficiency and profit maximization, rewarding investors and stakeholders alike.”

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