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

Miami /
Mar.March 15, 2018 11:30 AM

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Jacobson dismissed as outdated an old rule of thumb that people should pay no more than 30 percent of their income on housing: “People will be paying 40 to 45 percent of their income for a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


Related Articles

arrow_forward_ios
Shoma Group president Masoud Shojaee and renderings of the project (Shoma Group)Shoma Group president Masoud Shojaee and renderings of the project (Shoma Group)
Shoma pays $16M for North Bay Village site, plans Publix-anchored apartment project
Shoma pays $16M for North Bay Village site, plans Publix-anchored apartment project
Don Peebles, Jorge Perez and Barry Sternlicht with the Clevelander hotel (Getty, iStock)
Alcohol rollback on Ocean Drive pits developers against business owners
Alcohol rollback on Ocean Drive pits developers against business owners
(Photos courtesy of Miami Historic Preservation, Smith Aerials, Colliers)
Development site near MiamiCentral hits the market
Development site near MiamiCentral hits the market
Alliance Residential Company CEO Bruce Ward and 6595 Morikami Park Road (Google Maps)
Alliance Residential buys site, scores $46M construction loan for senior apartments in Delray Beach
Alliance Residential buys site, scores $46M construction loan for senior apartments in Delray Beach
Arbor Management Acquisition Company heads Ivan Kaufman and Maurice Kaufman with a rendering of Aventura Park (Anillo Toledo Lopez, iStock)
Arbor Management buys multifamily dev site near Aventura for $10M
Arbor Management buys multifamily dev site near Aventura for $10M
Bell Partner's Jon Bell and Greystar's Bob Faith with the Satori Apartments. (Greystar, Bell Partners)
Bell Partners buys Fort Lauderdale apartments for $100M
Bell Partners buys Fort Lauderdale apartments for $100M
Related Group’s Jorge Pérez and his Apogee Beach penthouse. (Related, Douglas Elliman)
Jorge Pérez sells Hollywood penthouse for $6M
Jorge Pérez sells Hollywood penthouse for $6M
(iStock)
South Florida resi construction starts soar in March
South Florida resi construction starts soar in March
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...