The Real Deal Miami

Rising construction costs challenge multifamily developers: panel

Higher costs for labor and materials, including new tariffs on steel and aluminum, will lead to increased rent
By Mike Seemuth | March 15, 2018 11:30AM

Lisa Neumayer, Jean Francois Roy, Anthony Graziano, Patrick Campbell, Jay Jacobson

Rising construction costs are challenging the feasibility and affordability of some multifamily developments in South Florida, a panel of real estate professionals said Wednesday.

“Even on jobs where we bought the land 10 years ago – which is almost free compared to what prices are now – we are having a hard time getting the numbers to work,” said Patrick Campbell, a vice president of Miami-based Related Group, citing a scarcity of labor.

The cost of construction materials has been stable over the last four years, but President Trump’s new tariffs on imported steel and aluminum “is only going to change that,” Campbell said.

Other developers have said that Miami’s hurricane regulations, which require concrete and rebar (which is usually domestically sourced) rather than steel beams for construction, will buffer the higher costs of imported steel.

“Even though we’re building in the best neighborhoods, and we get the best rents and have the best prices, there is only so much [cost] pressure that the market can sustain,” he said during a panel discussion on rental housing development at the W Fort Lauderdale, sponsored by Bisnow.

“The number one issue that all subcontractors have is labor. You can’t hire anyone,” said panelist Jay Jacobson, president and CEO of Coconut Grove-based Eden Multifamily. Construction subcontractors “have got more work than they can handle.”

The scarcity of construction talent includes such professionals as architects, mechanical engineers and electrical engineers, Jacobson said. For the rental housing market, scarce labor means “rents are going to have to increase, because the [price of] the whole delivery supply chain is going up,” he said.

Jacobson said higher tariffs will raise the cost of aluminum windows that Eden Multifamily imports from Colombia. He said his company also is bracing for higher construction prices due to limited supplies of gypsum, a key ingredient in sheet rock: “Between now and the end of the year, sheet rock pricing is going up 30 percent.”

Jacobson dismissed as outdated an old rule of thumb that people should pay no more than 30 percent of their income on housing: “People will be paying 40 to 45 percent of their income for a place to live.”

Newly built rental housing usually is priced “at the higher end of the rent spectrum,” said panel member Anthony Graziano, senior managing director of Integra Realty Resources. “Construction costs dictate those rents, so developers reach for the top of the market.”

Facing high construction costs, some developers are counting on future rent growth to make rental housing developments profitable, Graziano said, calling this approach risky.

“The difficulty we see developers bumping up against now is: the deal doesn’t work now, so they forecast and see if it works two or three years from now,” he said. “That’s when you get into dangerous territory.”