A common sentiment we seem to keep hearing is, “We’re holding on any new development until construction costs come down.” And while we know it will be fantastic when that day comes, the question of when that will be hangs heavy. Recent data tells us… something, right?
Unfortunately, we’re not seeing much relief anywhere right now. Things don’t seem to be getting worse, but they’re not getting better either. It seems that we are all still waiting for that “bottom falls out” moment, which hasn’t happened yet and some construction economists are backing off on predicting when it will. Predictions have shifted a possibility of the “Soft Landing”, which doesn’t really help prices. Recently The Douglas Company attended National Construction Financial Management Association (CFMA) Conference where their spoke, with the sentiment “It’s going to get worse before it gets better,” and “Recessionary conditions will prevail at some point over the next 12 months.” Ouch.
There’s quite a few others that support what we’re seeing, including the following:
- Turner Q2 Cost Index
- Mortenson Q2 Cost Index
- Gilbane Q2 Market Conditions
- Article: “Flat Material Prices for Second Half of Year”
- Article: “Inflation Cools, but Material Prices Remain High”
While this is a lot of data to make sense of, we think the general sentiment is this:
- Construction costs may have leveled off, but there’s no sign of relief on the horizon. If anyone tells you otherwise, it’s likely that they’re on the wrong side of the issue.
- When costs do come down, which will likely be after economic conditions get even worse, it will be under recessionary conditions that will offset the decrease in costs by different financial issues. These conditions will see a continuing difficulty to close deals.
The demand for new, quality multifamily, senior living, and active adult products is not going away, and if anything is increasing. The latest NIC data shows increases in occupancy and overall absorption, fueled mainly by lack of new inventory, available to see here.
This may mean rethinking your product in a new and aggressive way, giving up some of the amenities you thought you could never part with. But if your competition is thin due to a lack of development, how important are those amenities when you’re the only new product in town? Now is the time to lower the ceiling heights, reduce extra unit square footage, and be more economical in finish materials. Consider adding that pool, pickle ball court, dog park, or clubhouse addition down the line, but don’t let it stop you from starting.
Find an architect and general contractor that are getting projects started right now and have them help you figure out how to do it — as you might have guessed, we are! Now is definitely not the time for a competitive design-bid-build project delivery.
Bruce Douglas
President
The Douglas Company
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