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No, we haven't. Bumping to see if anyone else has
seen the cost of lumber come down, but not labor costs
Are you getting deals to pencil?
Not so much. Some of our partners are happy to see lower hard costs, but they're not warm enough given the way interest rates are trending. Your second question about the overall outlook is the same question I have. My best guess is that the interest rate hikes will continue to help cool the market, but i could still see prices rising next year but at a much slower rate. I could be totally wrong on this, but honestly who knows? We'll just have to wait and see!
Just had a call with a GC and they were saying costs are “flat” which is a big improvements from last year when costs were going up 1% per month basically
Can second this.
Spoke with a GC in the SE recently and they said they are still seeing rising costs across the board and it’s unlikely they will alleviate in the coming months. Wood has stabilized some.
One of our JV partners said their GMP goes up 5% every time they reprice a woodframe multi deal they’re building.
We have a project we’re in now where we can’t even get sheetrock. The GC is starting to cut costs aggressively now that it’s eating into the contingency
As others above said, lumber is flat to a slight decline, but labor is still up heavily. Its actually even more difficult to make it pencil now because financing costs are through the roof.
Definitely starting to see a slow down or flatline in terms of increases, but certainly not going down on any of our deals.
Still seeing small increases every few months, but at least it's not 10%. That said, nothing works in my market anymore. Makes no sense to develop to a high 5% / 6% ROC if my debt is going to be in the mid-6%'s. Some people are still going on projects, but I just can't make sense of it anymore.
Nope the GCs haven't gotten the message that their pipeline is going to be 100% empty in 6 months let alone the subs.
Work for a developer with an in-house GC. Met with our pre-construction guys last week. As others have commented, they have seen prices flattening. They believe by end of summer 2023 prices will be 5% maybe 10% best case lower. They are seeing subs not as jammed anymore because of the slowdown in construction starts over the past year in our market. They also believe subs will be hungrier for business because 2023 is likely going to be a bad year (recession). Subs were really driving the price increases over the past couple years.
I will add one thing to my comment above. Every single deal (save for extraordinary circumstances- crazy tax abatement structure etc) that is currently in pre-dev does not pencil. I don’t care where you are or what product type. If your deal is pencilling you are lying to yourself about the assumptions.
Ran an analysis last week on Florida ground up wood frame suburban apartment development. Perhaps the most profitable strategy in the world post COVID. Land prices need to fall by 40%-50% and hard costs need to decrease by 20% before numbers start working again. Can’t imagine how fucked you have to be in low growth markets with type 1 costs.
So what are you doing right now? Lol. Waiting?
Nothing you can do. Why put pursuit costs out on deals that aren't going to get capitalized? Might try to pick off some good sites with long-term capital that end up in distressed situations because they can't get capitalized and then sit on them for a couple years.
The development business right now is totally fucked whether people want to admit it or not. Buyer Y1 tax adjusted cap rates net of reserves have gone from 3.50% late last year to 4.70%-4.90% in my market. I suspect that is more like 5.00% to 5.25% with what has happened over the last several days.
On new development, you need a 6.00%-6.25% untrended RoC. Pulling up a random model, I'm looking at a 5.25% tax and reserve adjusted untrended RoC. That's at least 75 bps (probably more like 100 bps) under what you need to build today. And that's on a deal with a GOOD land basis. Not some BS $65K/door + impact fee deal in the Orlando burbs or other such nonsense.
What are you underwriting for exit cap expansion over the hold period (and how long is the hold period) and what about for rent growth?
Exit cap expansion - another 25-50 bps depending on market. Even if you underwrite compression it doesn't matter.
For rent growth, 0% for remainder 2022 (rents actually declining but that's a different story), 2.0% in 2023, and 3-4% terminal from 2024 onward.
This x1000. I am talking to other developers/investors, etc. Literally we looked at deals where even if the land was given to us for free, the numbers wouldnt still pencil. I then see shops buy that. A buddy of mine bought one of these deals and his firm paid top dollar for the land. It was a good location, but they were projecting further cap rate compression plus 20% YOY growth for the first 3 years, no payroll growth, in order to make their deal pencil. Which at that point your basically lying to yourself to make a deal happen.
That value growth is insane. This reckoning has been a long time coming, too many projects being bought with bullshit value assumptions to make it pencil.
True, but so what? There's no reason to slow down. Investors that don't know shit about the underlying assumptions are a dime a dozen. You can still finance deals using what developers know to be optimistic assumptions. Then you put in just 10% of the equity, make all your money back and a profit on the development fee alone, and get a promote. FULL STEAM AHEAD!
So from a financial standpoint, it still makes sense to develop. But it's harder to get deals to pencil and to get financing, that is true. I'd be risk-off if I were an LP or lender.
I say this as someone who works for a developer and wants to keep working. And it would be my mindset if I had a small development shop as well. But if I had enough money coming in from stabilized properties, I'd close my laptop, take a year or two off from developing, and try to bank a nice piece of land to develop once interest rates hopefully start coming down in a couple of years.
I am seeing hard costs start to come down. I am actively chasing many deals and am one of the few groups doing so. Once fears of an economic collapse subside, the lack of supply in key markets will still be prevalent if not worse...and it will turn into another frenzy. We are aiming to be ahead of this frenzy.
That being said, many vendors are expecting yesterdays price which involves putting a bit of fear into their hearts and minds that we are the last pit stop before driving through a desert
Sheetrock is still on allotment. but Our problem is labor... we need 30 HVAC installers and we have 3 show up. Its pushing out the construction schedule.
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