Connect Apartments 2017 Development: Product Demand, Cost & Drivers
Connect Apartments brought together more than 350 real estate professionals in Los Angeles for a full day of CRE conversations and networking. Six deep-dive panel discussions featured some of the U.S.’s top CRE leaders, who shared insights into the still-hot multifamily market.
Today, we take a look at development from a demand perspective, and uncover some of the cost factors and drivers.
Bank of the Ozarks’ Jason Choulochas cited the fact that construction cost inflation (labor and materials) now averages 1% per month versus in the past when it traditionally rose 1% on an annual basis. This “unusual increase in construction costs” is playing a significant role in the construction market, now, he notes.
Carmel Partners’ Neils Cotter agreed that construction costs are soaring, and “it is a huge issue now,” he says. The pipeline slowed a bit at the end of last year and people paused a bit to think about it, but now they’ve gotten aggressive, and contractors have been so busy. In some cases, there may be as much as a 50% increase in construction costs from when a project was originally conceived. Though developers may not yet realize just how much the increases are until the lender requires a larger equity commitment to do a project.
AECOM’s Ted Fentin says, the impact of the recent hurricanes may further tighten the construction sector, as the rebuilding effort gets underway. He believes since it is a lagging indicator, it is not likely to come down, but the pace of construction costs and inflation will continue going up. Fentin also notes it is difficult to get land loans now, except for an institutional company, and he can’t imagine development continuing at the same pace it has been.
One new development wrinkle emerging today is smaller unit sizes. Though Cotter believes “small units are less defensible in a down market.” A point Choulochas agrees with since when a market resets in a downturn, those smaller units will be competing against larger sized places.
From a design and amenity perspective, developers are looking at both external and indoor amenity spaces to create an experience residents demand, while also meeting regulatory requirements, says MVE + Partners’ Luis Arambula. That often means rooftop areas, club rooms, lounges, gyms or meeting rooms.
Cotter says, residents “crave quality spaces” and “yearn for big energy spaces” similar to the feel one finds in a hotel lobby bar, where people can be “connected” but somewhat “isolated” too.
Previous recaps of the conference included the overall takeaways from all panels here, the institutional capital panel here and a look inside the capital stack here.
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