How are you dealing with increased costs to build?

34 Replies

Hey!

So how is everyone handling the increased development costs, particularly the dramatic increase in lumber prices?

I have started to see people put projects on hold hoping that material costs come down, but will they? And if so, will it be enough to make a dent?

Personally, I believe lumber costs will continue to rise especially once inflation begins to set in.

I am slated to begin a new construction multi family project and the lumber costs are about $200k more than they would’ve been a year ago. The way I see it is since everything is already lined up and ready to go there’s no sense in pausing with the hope I can build for cheaper in a year.

What are your thoughts?

My crystal ball is a bit cloudly but if I were a betting man I would say there is almost zero chance of lumber or other materials/labor being cheaper in a year... unless... virus, war, etc... As far as handling costs. I pass it all on. Don't know of any other way to do it. This is with a huge bias from the Denver Market... no idea about other places... That being said... most of my clients are build and sell... I do have relationships with some bigger developers who are still very keen on the denver market even with increasing costs and are breaking ground on new construction 60 and 90 unit build to rent developments. 

@Emilio Ramirez

Those developers that are building those multi family projects are definitely having to change up their proforma due to material costs. My project is a 28 unit, 27k SF and just the increased lumber cost added $200k to the project. Numbers are getting tighter

Originally posted by @Mayer M. :

@Emilio Ramirez

Those developers that are building those multi family projects are definitely having to change up their proforma due to material costs. My project is a 28 unit, 27k SF and just the increased lumber cost added $200k to the project. Numbers are getting tighter

I hear ya unless rents rise accordingly I can see some multi new construction postponed I have heard that.. for us the build toi sell retail to homeowners in our market here on the left coast we simply raised prices and then raised them a bit more with zero push back.. the buyers read the news.. our costs are up 15 to 25k per door we raised prices 30 to 75k per door and have sold out. 

@Jay Hinrichs

That’s awesome!!! Been following your posts about your development, congrats!

Do you really think holding off is wise? I can’t imagine costs retreating anytime soon. For me everything is ready, bank is ready to close, etc. pausing for a year just seems to add even more uncertainty. My uncle who’s a Wall Street veteran says I can always hedge, but I don’t think that’s for me. He said maybe I should hedge lumber by buying WOOD eft. I also do not see rents increasing enough to absorb the added costs easily.

What are your thoughts on Philly? That’s we’re my projects are and have seen you mention you’ve dabbled in the Philly market

Originally posted by @Mayer M. :

@Jay Hinrichs

That’s awesome!!! Been following your posts about your development, congrats!

Do you really think holding off is wise? I can’t imagine costs retreating anytime soon. For me everything is ready, bank is ready to close, etc. pausing for a year just seems to add even more uncertainty. My uncle who’s a Wall Street veteran says I can always hedge, but I don’t think that’s for me. He said maybe I should hedge lumber by buying WOOD eft. I also do not see rents increasing enough to absorb the added costs easily.

What are your thoughts on Philly? That’s we’re my projects are and have seen you mention you’ve dabbled in the Philly market

for us since we easily passed it on  NO full steam ahead.. I dont know philly well enough on rental new construction to comment. 

my banker was telling me that there are projects here in Oregon that have been put on hold.. thats the extent of my knowledge on those deals.  owner occ new construction is simply full speed ahead .. 

 

Does anyone know why lumber costs are increasing so dramatically? Is it just due to the demand for new development? Maybe there’s a bottleneck somewhere in the supply chain that will get freed up in the near future and prices will drop?

@Nathaniel J Mott

It started due to the pandemic and the fact that suppliers aren’t running at full capacity coupled with the high demand. Now we are going to deal with inflation as well. I do not believe we’ll see a decrease in cost as I’m sure suppliers/brokers are making more now than before

I just do homeowner construction , the demand has been so hige since the pandemic its crazy . With rates so low and people staying home , they are paying the higher prices . What I have had to do is give the customer a price good for 5 days , they sign the contract and I order the materials and have them delivered to the job 3 to 6 months in advance . The customer pays in advance .  I dont see prices dropping any time soon . 

For the "Investors " who want to a fix and flip or rehab a house for a rental . The numbers you run today and not going to be the numbers you pay tomorrow . Licensed contractors are slammed , dont expect any inexpensive work for some time .

@Matthew Paul

It’s my understanding also that due to the volatility in lumber prices suppliers aren’t locking in the bid until seven days prior to delivery.

GCs are having to have clients sign lumber addendums with a gmp contract

Originally posted by @Mayer M. :

Hey!

So how is everyone handling the increased development costs, particularly the dramatic increase in lumber prices?

I have started to see people put projects on hold hoping that material costs come down, but will they? And if so, will it be enough to make a dent?

Personally, I believe lumber costs will continue to rise especially once inflation begins to set in.

I am slated to begin a new construction multi family project and the lumber costs are about $200k more than they would’ve been a year ago. The way I see it is since everything is already lined up and ready to go there’s no sense in pausing with the hope I can build for cheaper in a year.

What are your thoughts?

Lumber prices will come down when demand eases as interest rates rise. Many builders and developers are tabling projects due to cost. The decision to move forward is all about the numbers. Rates are still low so it may be a wash compared to lower prices when rates were higher. If you are in a position to wait that may be the best bet for you. If the deal still works then go for it. 

@Greg Dickerson

I think putting a project on hold is adding risk such as the continuing rise of material costs due to inflation, supply, demand, etc. additionally you can bet that the construction interest rates will also continue to rise from this point.

Personally I see everything continuing to rise including materials and interest rates. The risk/reward pausing a project doesn’t seem to lien in favor of putting a project on hold. Am I missing something?

@Mayer M.   I have been considering a new build to rent as well.  I spoke with material suppliers today to get pricing.  

My non-expert opinion on material cost projections is that they will come down significantly by next year for the following reasons:

Costs have quadrupled on some materials as a result of one thing: The pandemic (not interest rates which haven't changed significantly since pre-pandemic) Supply is down in everything (furniture, bicycles, appliances, etc) and demand for materials is up because people have been doing home improvements instead of going on vacations. Demand for housing is up because people want more indoor and outdoor space (not interest rates).

As soon as manufacturing resumes 100% and people return to spending money on travel, dining out, and entertainment the material costs will drop.

As you know, there are many considerations beyond material costs.  Please post back with what you decide to do.  

@William Coet

I am proceeding as I do not feel the risk/reward is there to pause the site.

I personally do not see material costs declining and if they do it won’t be a large decline

@Mayer M.   As others have said, each situation is unique and whats best for one person may not be for another. Forgive me if you've posted elsewhere, but what type of building(s) is it?  Townhomes, multiple buildings, a single building?  All the same units or a mix?

Originally posted by @Greg Dickerson :
Originally posted by @Mayer M.:

Hey!

So how is everyone handling the increased development costs, particularly the dramatic increase in lumber prices?

I have started to see people put projects on hold hoping that material costs come down, but will they? And if so, will it be enough to make a dent?

Personally, I believe lumber costs will continue to rise especially once inflation begins to set in.

I am slated to begin a new construction multi family project and the lumber costs are about $200k more than they would’ve been a year ago. The way I see it is since everything is already lined up and ready to go there’s no sense in pausing with the hope I can build for cheaper in a year.

What are your thoughts?

Lumber prices will come down when demand eases as interest rates rise. Many builders and developers are tabling projects due to cost. The decision to move forward is all about the numbers. Rates are still low so it may be a wash compared to lower prices when rates were higher. If you are in a position to wait that may be the best bet for you. If the deal still works then go for it.

I had a sit down with our appliance provider ( ferguson) last week.. refrigeration is very tough we can no longer order ANY as a builder.. he said the big MF projects are scrambling he had a container of apartment refers go missing cant rent with no refer.. LOL.. also for high end Wolf sub zero is 6 to 9 months out right now.. so i have two high ends going on for me and one to sell and I have to order my wolf and sub zero now.. or go shopping on craigslist :) seems like in our little world of SFR so far the pass through has worked but when you have a project of 250 units new build started 3 years ago at one budget number and the lumber was going to be X and its now triple of X but the rents have not gone up or in some A class at least on the East side of PDX it has gone down.. proforma's are going to suffer.

 

Originally posted by @Jay Hinrichs :
Originally posted by @Greg Dickerson:
Originally posted by @Mayer M.:

Hey!

So how is everyone handling the increased development costs, particularly the dramatic increase in lumber prices?

I have started to see people put projects on hold hoping that material costs come down, but will they? And if so, will it be enough to make a dent?

Personally, I believe lumber costs will continue to rise especially once inflation begins to set in.

I am slated to begin a new construction multi family project and the lumber costs are about $200k more than they would’ve been a year ago. The way I see it is since everything is already lined up and ready to go there’s no sense in pausing with the hope I can build for cheaper in a year.

What are your thoughts?

Lumber prices will come down when demand eases as interest rates rise. Many builders and developers are tabling projects due to cost. The decision to move forward is all about the numbers. Rates are still low so it may be a wash compared to lower prices when rates were higher. If you are in a position to wait that may be the best bet for you. If the deal still works then go for it.

I had a sit down with our appliance provider ( ferguson) last week.. refrigeration is very tough we can no longer order ANY as a builder.. he said the big MF projects are scrambling he had a container of apartment refers go missing cant rent with no refer.. LOL.. also for high end Wolf sub zero is 6 to 9 months out right now.. so i have two high ends going on for me and one to sell and I have to order my wolf and sub zero now.. or go shopping on craigslist :) seems like in our little world of SFR so far the pass through has worked but when you have a project of 250 units new build started 3 years ago at one budget number and the lumber was going to be X and its now triple of X but the rents have not gone up or in some A class at least on the East side of PDX it has gone down.. proforma's are going to suffer.

Thanks Jay for the specific insight.  Any idea if material prices will return to pre-pandemic levels?  

 

Originally posted by @William Coet :
Originally posted by @Jay Hinrichs:
Originally posted by @Greg Dickerson:
Originally posted by @Mayer M.:

Hey!

So how is everyone handling the increased development costs, particularly the dramatic increase in lumber prices?

I have started to see people put projects on hold hoping that material costs come down, but will they? And if so, will it be enough to make a dent?

Personally, I believe lumber costs will continue to rise especially once inflation begins to set in.

I am slated to begin a new construction multi family project and the lumber costs are about $200k more than they would’ve been a year ago. The way I see it is since everything is already lined up and ready to go there’s no sense in pausing with the hope I can build for cheaper in a year.

What are your thoughts?

Lumber prices will come down when demand eases as interest rates rise. Many builders and developers are tabling projects due to cost. The decision to move forward is all about the numbers. Rates are still low so it may be a wash compared to lower prices when rates were higher. If you are in a position to wait that may be the best bet for you. If the deal still works then go for it.

I had a sit down with our appliance provider ( ferguson) last week.. refrigeration is very tough we can no longer order ANY as a builder.. he said the big MF projects are scrambling he had a container of apartment refers go missing cant rent with no refer.. LOL.. also for high end Wolf sub zero is 6 to 9 months out right now.. so i have two high ends going on for me and one to sell and I have to order my wolf and sub zero now.. or go shopping on craigslist :) seems like in our little world of SFR so far the pass through has worked but when you have a project of 250 units new build started 3 years ago at one budget number and the lumber was going to be X and its now triple of X but the rents have not gone up or in some A class at least on the East side of PDX it has gone down.. proforma's are going to suffer.

Thanks Jay for the specific insight.  Any idea if material prices will return to pre-pandemic levels? 

 

Our lumber supplier thought there could be some easing come fall..  and I know our HBA here in Oregon is lobbying hard at the federal level.. some of the bigger builders are saving a few dollars by doing their own sorting at the lumber yard and delivering it to the site..  WE are not big enough for that of course.

Also one could buy a lumbers futures contract.  If you have to take possession of a contract thats 144k mbf  of two by fours on a train car delivered to you :)  I suspect some are playing that game as well.

We have not seem a massive price increase in Delivered logs here in the West other than Cedar is very high its used for fencing mainly and its somewhat rare as its not really replanted. It appears to me the MIlls and lumber brokers are making a killing. .. and there are only a few Cedar mills left. Looks like we might start some new builds in the Orlando area and those are done primarily with cement blocks I will be interested to see the final cost of those I know here in Oregon I have seen block in commercial but not residential. 

 

@Jay Hinrichs It will be interesting to see what other options need to come out for construction if lumber prices continue to be an issue. I remember when I was down in Florida scoping out the markets and seeing all the block construction...it’s interesting how different areas have different building practices that are “acceptable” within the eyes of the market. Out here I’d think we’d have to do some major consumer education to overcome what likely would be a perception of lower quality building to make that kind of a shift. Not to mention all the builders who would have a completely different system they’d have to figure out. But rising costs may force the issue.

Originally posted by @Ben Nelson :

@Jay Hinrichs It will be interesting to see what other options need to come out for construction if lumber prices continue to be an issue. I remember when I was down in Florida scoping out the markets and seeing all the block construction...it’s interesting how different areas have different building practices that are “acceptable” within the eyes of the market. Out here I’d think we’d have to do some major consumer education to overcome what likely would be a perception of lower quality building to make that kind of a shift. Not to mention all the builders who would have a completely different system they’d have to figure out. But rising costs may force the issue.

I bet the block houses are more efficient you side them with normal siding so they really dont look different and you sheet rock the interior so the roof is wood and I think the interior to hang the sheet rock could be stud material. As well as I am thinking these are probably on slabs which is not common here from what I see built.

 

@Jay Hinrichs Yes that’s true, most if not all of what I saw out there was slab on grade, we hardly do any of that out here. And I agree, I don’t think it’s a bad option, we just would need to change our current building philosophy to make it happen. I would be curious what costs come in at, though I know everything varies by area. I’m constantly trying to figure out ways to provide more affordable housing options out here...I hope it’s still possible. 

Originally posted by @Ben Nelson :

@Jay Hinrichs Yes that’s true, most if not all of what I saw out there was slab on grade, we hardly do any of that out here. And I agree, I don’t think it’s a bad option, we just would need to change our current building philosophy to make it happen. I would be curious what costs come in at, though I know everything varies by area. I’m constantly trying to figure out ways to provide more affordable housing options out here...I hope it’s still possible. 

my first one is looking like about 80 bucks a foot.. keep in mind permits are next to nothing compared to our area .  and these are not up graded they are builder grade all the way.. starter houses that sell for 210 to 230k a copy.