{"id":3122,"date":"2021-09-29T16:37:23","date_gmt":"2021-09-29T16:37:23","guid":{"rendered":"https:\/\/www.angmarrealty.com\/?p=3122"},"modified":"2021-09-29T16:37:23","modified_gmt":"2021-09-29T16:37:23","slug":"north-texas-commercial-real-estate-is-in-hyper-growth-mode","status":"publish","type":"post","link":"https:\/\/www.angmarrealty.com\/north-texas-commercial-real-estate-is-in-hyper-growth-mode\/","title":{"rendered":"North Texas\u2019 Commercial Real Estate is in Hyper-Growth Mode"},"content":{"rendered":"

Thanks to the influx of people moving to the area and pent-up demand from last year\u2019s pause in multifamily construction, Dallas\u2019s commercial real estate is in a hyper-growth mode with many construction projects underway. Despite this generally positive state of affairs, it\u2019s evident that our industry as a whole is experiencing macroeconomic influences on construction costs.<\/p>\n

While I personally thought there may have been a temporary pause or even a reduction in construction costs due to COVID-19, and the resulting delay in construction starts in Q2 of 2020, this has not happened.<\/p>\n

Volatile Costs Rattle Developers <\/strong><\/p>\n

While I personally thought there may have been a temporary pause or even a reduction in construction costs due to COVID-19, and the resulting delay in construction starts in Q2 of 2020, this has not happened.<\/p>\n

The main headline throughout 2021 has been the parabolic rise and subsequent fall in the price of lumber, with prices escalating to a high of\u00a0more than 300 percent\u00a0of what they were in April 2020.<\/p>\n

Then in mid-July, we saw lumber prices crash so much so that it started to give hope to developers and builders. Although lumber certainly is consuming the headlines, it is not the only area of concern. Collectively, the cost of building supplies has increased by close to 13 percent over the past year, according to\u00a0Bisnow<\/a>.<\/p>\n

The\u00a0U.S. Bureau of Labor Statistics\u2019 producer price index\u00a0has reported staggering increases in other essential building materials, such as steel mill products escalating by 87 percent and aluminum by 33 percent. And, while we\u2019re on the topic, there have also been supply chain issues, labor shortages, and production bottlenecks that have only added fuel to the fire.<\/p>\n

Fluctuating prices in the building industry have been so frequent \u2014 often changing dramatically by the day \u2014 that accurately estimating building materials costs and pricing out projects has become a significant hurdle for multifamily developers. Not to mention, the extended lead times we\u2019re experiencing have resulted in us having to shift our focus from fast and efficient completions to more careful planning and coordination. This is why I believe that pre-construction is the essential phase in any significant project now more than ever.<\/p>\n

We must be both proactive and reactive, being flexible and adjusting to the latest industry insights. Without a solid plan (and backup plan) in place, things will slip through the cracks that could have been mitigated otherwise. Now more than ever, developers need to stay in close contact with construction trades to track the fluctuations of various materials and labor inputs.<\/p>\n

The fluctuation of building material prices could catch one off guard if they\u2019re unaccustomed to the market\u2019s volatility, specifically as it relates to multifamily development.<\/p>\n

For industry veterans, the challenges of rising construction costs are both frequent and inevitable, though perhaps not quite to the severity we\u2019ve been experiencing throughout this year. We\u2019ve experienced temporary demand spikes in the past, like when China was buying an abundance of steel or following Hurricane Katrina when high volumes of lumber were needed to rebuild an entire region. Now, we are in a prolonged and complicated hypermarket because it wasn\u2019t due to a temporary macroeconomic event, but rather one that has been unprecedented in over a century.<\/p>\n

While I\u2019m unsure when the extreme highs and lows will settle, some of these issues are likely to be transitory, and I do expect prices to stabilize sooner than we think. But they are likely to stabilize at or near today\u2019s elevated levels.<\/p>\n

Rising Rents and Values Save the Day (for now)<\/strong><\/p>\n

Fortunately for developers, the rising costs have now been offset by rising rents and rising sale values for completed projects. This escalation didn\u2019t happen in concert \u2013 there was a period lasting several months where costs rose before rents and values also inflated. But, just as things were getting more untenable on the cost side, rents began to take off in the last six months.<\/p>\n

By July 2021, Dallas-Fort Worth\u2019s average apartment rents were up 9.3 percent year-over-year, with many submarkets notching double-digit rent increases. Vacancies also shrunk dramatically, and move-in concessions tapered as well. With this furious increase in the top line income for apartments, projected NOI for new developments justified construction again, even with higher costs.<\/p>\n

After rents began their climb, sales prices for completed projects also rose nicely over this year, with price increases also well into the double-digits. Suburban Class A buildings new routinely cross the $200,000 per unit mark with more infill projects selling for well into the $200,000s per door and beyond \u2013 sometimes far beyond.<\/p>\n

This pricing spike mirrors single-family pricing, which is also up 16 percent year-over-year in Dallas, which directly contributes to demand for apartments. The net result of escalating rents, coupled with cheap financing for newly built assets, was a frenzy of bidding for quality Class A multifamily product. And this rise proved to be the ultimate validation that it can still be worth it to build multifamily projects, despite the increased costs.<\/p>\n

Risks Remain for Developers<\/strong><\/p>\n

While the escalation in rents and terminal values for projects have for now balanced out rising costs, this is not an \u201call clear\u201d moment where it makes sense to build anything anywhere regardless of costs.<\/p>\n

In some ways, this remains a fraught time for developers, as we take on the bulk of predevelopment expenses in getting a property to a groundbreaking before debt and equity are sourced. It\u2019s relatively common for a developer to spend $1 million in predevelopment costs and deposits before a shovel hits the ground on a suburban project \u2013 and those costs are sunk if a project never gets off the ground.<\/p>\n

With rents and exit values again justifying the construction of new multifamily in North Texas, it once again makes sense to build quality projects in robust submarkets. However, should costs continue to run further, there is always a risk that the balance once again tips the wrong way. Now more than ever, developers need to keep their fingers on the pulse of ever-changing data.<\/p>\n

D MAGAZINE. (2021, September 20). North Texas’ Commercial Real Estate is in Hyper-Growth Mode [News post]. Retrieved from https:\/\/www.dmagazine.com\/commercial-real-estate\/2021\/09\/north-texas-commercial-real-estate-is-in-hyper-growth-mode\/<\/span><\/p>\n

If you enjoyed this post, follow AngMar Realty on\u00a0Facebook<\/p>\n","protected":false},"excerpt":{"rendered":"

Thanks to the influx of people moving to the area and pent-up demand from last year\u2019s pause in multifamily construction, Dallas\u2019s commercial real estate is in a hyper-growth mode with many construction projects underway. Despite this generally positive state of affairs, it\u2019s evident that our industry as a whole is experiencing macroeconomic influences on construction … <\/p>\n

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