More of a venting post than anything else, but I'm a developer in a market where we've "only" seen rent growth of 10% and not the 25%+ needed to handle these cost increases. Past three months, stuff went from expensive to build to silly town. $300K/unit for stick-built product - I remember when $150K/unit felt rich. TIFs help, but even cities that roll out the red carpet for developers are starting to feel sick about the numbers being discussed.
How are you guys getting stuff built? Primarily talking multi, but industrial is out of control as well.
Creative use of the capital stack.
Yeah, it's a headache to layer in credits or tax abatements or what have you. Most developers avoid it because it's easier to max out assumptions, finance something with a simple debt/equity cap stack, and pass on the risks to investors. But if you're willing to spend the time and energy banging your head against the wall that is regulatory compliance and negotiation with municipalities, it can juice returns a lot.
Certainly on our affordable developments that is the whole game. Upfront loans, grants, and MRO's from the local municipality take some of the sting out. What are some other credits market-rate developers should be pursuing?
Depends where. My guess is every state has it's own set of programs to incentivize development. New Market Tax Credits, Historic Tax Credits... I mean, there are a whole host of them, at both the federal and state level.
So it depends on the project you're doing, and where you're doing it, and in some cases why (e.g. merchant build vs long term ownership). Call your local development agency.
Getting quotes at $370K/door (all-in) now for 3A over 2 levels of podium.. Have been looking at Texas wraps to add density and solve parking.
What MSA is this?
NE
We are all the way down to looking solely at Type 5 garden deals. Super exciting
What is a type 5 garden deal?
The easiest way to describe it is three-story stick-built product.
Do you have insight into how much of the cost increases are from increased GC overhead and profit? We GC our own jobs, which is probably helping us a lot right now. Still have to deal with materials, subs, supply chain issues, etc., but it takes one major variable out of the equation.
None really from what I've seen. We self GC some of our projects and always thought it was a way for us to keep build costs low. Our construction team no longer has that confidence other than saving some on fees and overhead.
Land that we already own or control at a decent basis still pencils, but just barely. Stick built pricing is insane right now and frankly I don’t see how it’s going to come down anytime soon. Curious if anybody has some recent concrete pricing, I figure the market has to have seen less movement on that end.
I don't have recent pricing, other than the lead time for precast concrete is insane at the moment. I spoke to a firm that was building multi with poured concrete instead of stick last year when lumber was at all time highs (quickly approaching again). They said the costs weren't wildly different and given how much nicer a poured concrete building is for them it was a no brainer.
$400-$500 PSF all in for concrete.
Is this just hard cost or including soft? I assume no land.
VE’ing Sheetrock for cardboard
$300k for stick product? Are you looking at high density podium with a lot of parking? What markets are you in? I am in a similar market situation where rent growth isn’t as significant as the SE, but we are seeing pricing for very high quality, amenity rich 4-story wrap parked above a 1.4 under $250k per unit.
I'm talking all-in. Typically elevatored 3-4-5 story product over 1-2 levels of parking. We're in the Midwest so have to be able to offer structured parking. I wish we could surface park like some other markets.
I'm seeing hard costs at $150-160/GSF, which that plus land and soft costs is pretty much $275K/unit all-in at a minimum.
That makes more sense - I am running a few wood-frame deals, also in the Midwest, at $300-$350k per unit all in. Your podium product is going to be more expensive than wrap but what we've been doing to make deals pencil is simply up the scale. 300-400 units is needed to alleviate some of the burden on land/soft costs. It's very difficult to get deals under 250 units to make sense.
Southeast here.
Rents are at all time highs and cap rates are at all time lows. Equity is expecting lower yields and buyers are paying stupid money on exit.
Construction costs are atrocious, but deals still pencil.
Yup
Yep - I'm an investor in a deal in the SE and our expectation for what we can sell for is up more than 50% from when we bought the land 18 months ago. That takes the sting out of 15-20% higher build costs (and then some).
Out of curiousity, where are your Return on Costs landing right now?
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