Development Dilemmas
Multifamily builders have been busy in recent years, but they haven’t been constructing apartments. Between skyrocketing costs in land, labor, and building materials, making the numbers work on a new rental development has been just about impossible, even for big public companies with access to capital. “Last year, we were getting outbid by two or three times what we could bid for land for apartments in the Los Angeles basin,” Archstone-Smith’s Sellers says. “There was no hope of building apartments.”
Even in markets where apartment builders could find land, costs for building materials made it difficult to pencil out deals. It got so bad that Todd E. Sears, director of finance for Herman & Kittle in Indianapolis, hated even talking to his construction colleagues over the past year. “Every time you talked to someone in the construction department, it was about a price increase they were getting from another subcontractor,” he says.
The good news for both Sears and Sellers is that the for-sale housing slowdown will help them in 2007. Some executives say they’re already seeing lower prices for lumber, shingles, and insulation. “Those materials related to single-family production are tailing off,” Fitch says. “Lumber products are declining in costs.”
Steve Fifield, CEO of Fifield Cos., a high-end condo and apartment developer based in Chicago, hasn’t seen drywall prices fall yet, but he expects that will happen soon. “The one material that has been the most resilient [as far as pricing] the last six months is drywall,” Fifield says. “I think that will quickly correct itself. With the public home builders cutting back, demand for drywall will go down.”
So will the demand for–and cost of–workers. “As business slows, I think you will find labor that will need work,” Fitch predicts. “The past few years … everyone has been busy. It wasn’t just carpenters, plumbers, or electricians. Engineers and architects were hard to find. When people are busy, everything costs more. With professional services, there will be less business, and prices will go down.”
Multifamily executives also expect the for-sale housing slowdown to reduce the cost of land. “Land prices were generated by land grab for condo development,” Fitch says. “That will bring land values a little more into balance than in the past, from our standpoint.”
Finally, even oil prices have been dropping, easing the burden on multifamily builders and developers. “With petroleum costs coming down, the materials that have petroleum, like asphalt, will come down,” Fifield says.
Future pricing for other building products remain uncertain, though, especially if there is overseas demand for those materials. “We’re competing with Korea and China,” says Hammer of Kushner Cos. “The competition is in hot economies like Asia, where everything is high-rise. If everything is high-rise, they’re going to need the steel. A lot of steel and concrete are going to those places where they are booming.”
Others say the impact of the China factor is overblown. “Commercial construction in China has shrunk,” Fifield says. “Though we read about projects, the magnitude of construction is down. China has ramped up its steel production capacity and has seen the amount of construction done there gone down. It’s taking the pressure off the demand for cement.” Still, don’t expect any bargains on cement soon. “With cement, the largest producers are in the catbird seat because there has been so much consolidation,” Fifield says.
But top executives say they’re optimistic about the climate for new construction in 2007. “I don’t think [prices will] increase anymore,” believes Terwilliger, who plans to start 12,000 to 14,000 apartments and 1,000 to 2,000 condos in 2007. “In fact, there’s a higher probability that they go down than up.”
Executive Predictions For 2007
Technology. Consolidation. Insurance. The list of challenges that multifamily leaders expect to encounter in 2007 covers everything from operational issues to land opportunities, as you’ll read below.
–Margot Carmichael Lester
