Look out, developers. The construction labor shortage may be getting worse. Recent natural disasters, including the severe hurricanes in Houston and Florida and the rampant wildfires in Northern California, are going to increase demand and competition for qualified construction labor. Developers have been challenged by the construction labor and rising costs for years, and experts at RealShare Apartments are bracing for the problem to intensify. Experts—moderator Mike Rovner, president of Mike Rovner Construction; Patrick Crandall, managing director of Construction Real Estate at CapitalSource; Matt Levy, VP of Investments at the Laramar Group; Jamie Fleming, CEO & Co-Founder of Studio 216; and Kitty Wallace, EVP of Los Angeles at Colliers International—discussed the issue on the Rising Above the Competition with Redevelopment, Repositioning and Renovations panel at RealShare Apartments last week.

Fleming said that the problem is getting so bad that contractors are driving by work sites and offering to pay workers double. “Since the hurricane, people are walking off the job. That can kill your budget and timeline.” He said the solution is to vet general contractors to make sure that they have deep relationships, and, if you can, to keep moving people to new job sites to keep their work flow consistent.

The construction shortage is among the most challenging problems for developers, and it isn't only the recent natural disasters that are aggravating the problem. Development legislation like Measure JJJ in Los Angeles is also increasing construction costs. Wallace says that measure has increase construction costs by 30% to 40%. “It is a burden,” she said. Even without these challenges, construction labor is limited and expensive. “We want to deliver the best product that we can, and when you find labor, you are paying a premium for it,” said Levy. “Soft costs and labor costs are significant, and mitigating the cost of labor is a challenge.”

Construction lending is also tightening, and many players are turning to equity sources rather than debt. “You just have to figure out how much you want to pay for your debt,” said Wallace. Levy, however, said that competition is so high for land sites and redevelopment opportunities that closing with financing is nearly impossible. “Identifying and finding financing is not the challenge. Closing with credit is gone,” he said. “The traditional fixed rate term lending is talking longer and it is tougher to get to the NOI. We have the ability to stay competitive because we have a line of credit that we can tap into.”

Despite the challenges, developers are still managing to get projects done. One trend has been a proclivity toward value-add development. Redevelopment projects can secure entitlements and permits in three to four months—versus two years for a new development. Levy, whose company in active in the value-add space, said that if you play in the value-add space, you must understand rent control. “In Los Angeles, 86% of the existing stock is value-add,” he said. “You have to create the type of turnover you need to capture rents.”

Instant Insights /

Natural Disasters Will Increase Construction Costs

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