Construction Costs & Deals Pencilling

After chatting with a bunch of folks, everyone talks about dry powder and people hungry for yields, but I'm also hearing about construction costs/supply chains busting and the obvious timber shortages. 

I spoke with some folks on the west coast and even heard that west coast construction labor prices have gone down, but land prices haven't normalized even with the "lower demand" for development. What's the overall calculus that people have been seeing for recent concrete podium/timber development as of recent? Have land prices gone down in major metros because of slowed development? Are landowners holding out due to waiting for price discovery and waiting for dust to settle? Are GC's/subs actually hungry for work and has that compressed labor costs throughout? Has the sum of labor costs and material costs for construction netted more or less expensive construction throughout? 

Lots to unpack, would love some insight on what's actually going on with demand and pricing these days, as well as how much supply chains have actually busted schedules and existing timelines. 

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Apr 16, 2021 - 12:33pm

West Coast here. Wood and Steel increases over the past 90 days has been very, very real. As noted above, the lumber cost is insane and got there very quick. For reference, at the end of 2019 it was about $600/ft. So you have projects underwritten/going through entitlements then massive hits when it was time to go to construction. Demand is absolutely crazy out there in all asset classes. Home builders are going nuts, industrial (wood decks on west coat) going nuts...really makes you think how much more this can squeeze. 

Apr 16, 2021 - 12:59pm

More anecdotally, specifically PNW residential / light commercial, I've heard that labor bids are getting more competitive due to the number of delayed projects and the need to put crews to work, but as mentioned above, materials costs are still through the roof and largely the cause of these stalled projects.

Our multifamily bids on the east coast have not seen any relief on labor or material costs, nor have potential land sellers reset pricing expectations.

Apr 16, 2021 - 8:06pm

Can't speak to west coast markets, but can add a few data points for the southeast multi-family as well residential development markets. During a conversation with a small/mid size residential developer ~300 homes a year he gave some pretty crazy information regarding material cost and impact on net margins. Lumber packages per home are roughly 3x comparative to start of 2020 and supply chain issues with drywall materials pushing close dates. On some closed sales he has had his profit margins compressed roughly 40-50%. Multi-family new development has been getting squeezed as well with material cost up similar amounts and minimal change in labor cost. MF info is from a good friend that has roughly 1100 units in development.

Apr 30, 2021 - 12:14pm

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