Impact of Construction Costs on Multifamily Development Projects

One of the most common questions we get these days is about when will construction prices decrease. The fluctuating costs of construction materials, labor, and associated expenses can significantly impact the feasibility, profitability, and overall success of multifamily development projects.

Understanding the Importance of Construction Price Tracking

Budget Accuracy: Accurate and up-to-date tracking of construction prices ensures that the budgeting for a project is realistic. This accuracy is crucial for securing financing, determining ROI, and setting appropriate rental rates.
Project Viability: Fluctuations in construction costs can make or break the economic viability of a project. Developers need to be keenly aware of current trends to make informed decisions about project launches, pauses, or alterations.
Risk Management: By tracking construction prices, developers can anticipate and mitigate risks associated with cost overruns, thereby protecting their investment and investor interests.

The Impact of Construction Prices on Multifamily Development

Material Costs

Volatility in Material Prices: The cost of key materials like steel, lumber, and concrete can fluctuate due to various factors, including trade policies, global supply chain issues, and market demand. For instance, a surge in lumber prices can significantly inflate the total cost of a wood-framed multifamily development.
Alternative Material Consideration: Developers might need to explore alternative materials or construction methods to control costs, which can also affect the project’s timeline and quality.

Labor Costs

Skilled Labor Shortage: The construction industry often faces a shortage of skilled labor, which can drive up labor costs. This scenario is exacerbated by large-scale development booms or post-disaster reconstruction efforts.
Efficiency and Productivity: Higher labor costs may necessitate a focus on efficiency and productivity, possibly through the adoption of new technologies or construction methodologies.

External Factors

Economic and Political Climate: Factors like economic policies, interest rates, and local regulations can indirectly impact construction costs. For example, changes in zoning laws or building codes can lead to additional costs.
Environmental Considerations: Sustainable building practices, while environmentally beneficial, can add to construction costs. However, they may also lead to long-term savings and attract eco-conscious tenants.

Leading Indicators, Indices, And Government Data

Commodity futures prices: the most common futures prices we track are those of steel, concrete and lumber, all of which form the structural systems of rental units. We also track copper, the most used commodity in electrical systems.

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Oil prices: The price of oil (we track WTI, or West Texas Intermediate) is core to the construction market. Many petroleum–based products are used in our buildings, including insulation, sealants and paint products. And oil is a key input in transportation costs to get goods and equipment to the project site and fuel the equipment used to construct our projects.

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Import price index: The Import/Export Price Index (MXP–Selected Building Materials) measures prices paid for building materials that are imported to the United States. The majority of the light fixtures, cabinets and other finished elements in our projects are manufactured overseas.

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AIA/Deltek Architecture Billings Index (ABI): This leading indicator projects future demand of construction services by tracking the demand for architectural services, a key part of any development project. How it works: Any reading above 50 means more billings than the prior period, and anything below 50 means fewer billings than the prior period.

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U.S. Census Bureau Construction Spending Data: This data breaks down all domestic construction between type of construction and private versus public spending. This is lagging economic data, but it’s a powerful tool to see where construction demand is flowing. While new multifamily and single-family construction makes up 25% to 35% of all construction spending in the United States, most of our subcontractors can find work in other forms of new construction.

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Source: NYSE American Steel Index, Federal Reserve Bank of St. Louis, Nasdaq, MarketWatch, U.S. Bureau of Labor Statistics, American Institute of Architects

Strategies for Managing Construction Costs

Comprehensive Planning: Meticulous upfront planning, including contingency budgets, can provide a buffer against cost fluctuations.
Contract Structuring: Fixed-price contracts can offer protection against price volatility, while cost-plus contracts might be more suitable when material costs are expected to decrease.
Timely Procurement: Locking in prices for materials and labor contracts early in the project can hedge against future price increases.
Technology Adoption: Utilizing construction management software for better resource planning and cost tracking can improve efficiency and control costs.

Conclusion

For multifamily developers, the ability to effectively track and manage construction prices is not just a tactical skill – it's a strategic necessity that can significantly influence the success of a project. In an industry where margins can be tightly squeezed by fluctuating costs, staying informed and agile is essential. Developers who master the art of navigating these fluctuations are better positioned to deliver successful projects.

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