Rising construction costs were respondents’ top real estate and development concern in ULI’s Emerging Trends in Real Estate 2019 survey.
Construction costs have steadily risen due to rising material costs and labor shortages. These costs have a significant impact on the value of existing buildings as well as new construction.
Property value influencing factors
Because of changing commercial real estate, getting the best deal necessitates a thorough understanding of the factors contributing to fluctuations. This understanding is essential for those looking to buy or invest in commercial real estate and those selling or leasing their properties.
It encompasses all property types, including retail, medical buildings, offices, and warehouses. It is critical to become acquainted with the nuances of your market to obtain the best deal. Consider the following factors:
- Location: Location is everything. It is true in commercial real estate. At different times, different locations will be more desirable in the market. You must consider the accessibility of the location not only to the target market but also to potential employees. It is critical to ensure that the desired space is zoned for your type of business.
- Demographics: When it comes to the value of your commercial real estate property, demographics and location go hand in hand. Age, race, gender, average income level, and projected growth of an area and its population will help determine what properties are in demand. It has an impact on how a property is priced.
- Economy: The current state of the economy directly impacts the demand for commercial real estate property. It creates a higher demand for the properties where those products or services are offered, depending on where consumers spend most of their money. It contributes to the price increase.
To a lesser extent, the value of a commercial real estate property can be influenced by the owner’s motivation – or lack thereof; comparable properties; or the physical condition of the property.
Construction costs have an impact.
While numerous factors influence commercial property values, one of the most notable in recent years is the rise in construction costs. Replacement costs rise as the cost of construction rises. It increases the value of existing buildings in the trade area. Based on this information, existing buildings can raise rents because new buildings require more rent to pencil.
According to an Associated General Contractors of America analysis, the cost of many construction products has risen 7.4% in the last year due to double-digit increases in commonly used construction materials (AGCA). These price increases come when many construction firms are already dealing with skilled labor shortages and have limited ability to raise prices for their services.
According to AGCA research, diesel fuel and construction materials such as steel pipe and tube, asphalt paving mixtures, and aluminum products were among the diverse products that contributed to the large year-over-year cost increases. Furthermore, the current administration imposed tariffs on Chinese imports, including goods critical to the construction industry.
So, what happens next?
Where will property values be in the next 12 to 16 months if construction costs continue to rise? While cost increases are seen as sector headwinds, are they sufficient to slow development?
This potential problem can be summed up as jobs and volume. From 2011 to 2018, the construction industry experienced record spending and job growth. For every additional $1 billion in construction volume, approximately 5,000 workers are required. In 2018, a 6.6% increase in spending translated into an increase in construction spending of $83 billion.
You can bank the money.
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