Why Construction Costs Keep Heading Up

Construction costs increased 30% again this year. A fact that is both astounding and unbelievable to developers. While recent tariffs have put pressure on raw materials costs, a shortage in construction labor is the chief driver of the rapid increase in construction prices. In some cases, workers have left active job sites to follow more lucrative offers. Developers on the Identifying Development & Redevelopment Opportunities in the Middle Market panel at RealShare Apartments this week said that this was one of the biggest challenges. Mike Rovner, president at Mike Rovner Construction moderated the panel, which included Dylan Simon, EVP at Colliers International; Moses Kagan, co-founder and manager at Adaptive Realty; Michael Dowling, senior director at AvalonBay Communities; Kimberly Laten, founder of Color Design Development Group; and James D’Argenio, senior principal of acquisitions at The Bascom Group.

Forming strong construction partnerships, paying quickly—within a couple of days of finishing a milestone—and keeping workers busy were among the top ways that developers are keeping construction workers on sites through a deal. “For us, the key is having an excellent construction management partner,” said D’Argenio. “They have critical relationships up and down the supply chain.” Dowling added that speedy payments have been the incentive that has worked for them. “We have been doing everything that we can to pay them as quickly as possible and keep the workers that are performing well,” he said. Kagan said that the payment strategy works well. “We are paying within a day or two of reaching the milestone for a project,” he said.

Of course, payments within days of completing a project isn’t possible for every developer. Rovner pointed out that smaller developers have the ability to be nimble enough to change alongside the market. A larger firm, like Bascom Group, can’t accommodate payments within days of completion. However, D’Argenio said that there are other incentives. “We probably aren’t as fast as the smaller shops. That is why it is important to have strategic partnerships, not because of quickness of payment but also because of the integrity of the project and the deal,” he said, adding that it is also important to deliver. “It doesn’t do anyone any good to over promise, so communication, swiftness of payment will keep vendors coming back to your project.”

Simon recommended developers also look at construction pipelines to keep workers busy and on job sites. During down time, workers can get picked up for new jobs. He says that this is especially essential in the middle market niche, where there is high competition for labor.

In addition to rising construction costs, changing regulations also pose challenges for investors. This includes everything from rent control legislation, like Prop 10 in California, to tariffs on steel and lumber. “The challenge with development is the world isn’t static,” said Simon. “Speed to market is so important, because people are lining up capital stacks and fighting political risks.” He anticipates rates rising another 50 to 70 basis points in the next year, which will continue to have an impact on construction costs as well. Kagan and Dowling both said that regulations—specifically Prop 10 for Kagan—were their biggest concerns for next year.