The time is now, and it was a long time coming.
You finally found that perfect plot of land and hired the market’s best architect to render your vision, and it looks beautiful.
Record-setting rents are projected in your market for the next five years, each year better than the last.
You finally scored construction debt, and while it wasn’t the high-leverage nonrecourse variety of six years ago, the rate was pretty great. And you found equity a little more easily than you thought you would.
The time is definitely now.
Except for two things: labor and materials. The lifeblood and flesh of new construction are more costly than you counted on when you started the project. And each month you delay breaking ground, the costs only go higher.
In the past, labor was plentiful and wood was relatively affordable, so you took them for granted. But, then, you start to crunch today’s numbers, and you get that sinking feeling in your stomach: The time might not be now after all.
Even though banks are finally loosening up, and equity investors grow hungrier to place capital, and that most migratory of all birds, the construction crane, is flocking above every major metro … well, it’s always something. Which is why in real estate, as in show business, timing is everything, as you’ll see in our cover story.
This squeeze on labor and materials flies in the face of all those industry trade groups that say we should be building 300,000 to 400,000 units per year. I think those numbers are somewhat divorced from reality, that they exist as a political lobbying tool. Where would rent growth be today if we’d been building 400,000 units annually for the past five years?
So, in the big picture, maybe having another brake pedal on supply is a good thing. In supply–demand trends, as in showbiz, you always want to leave them wanting more.
In fact, the rules of showbiz map well onto the real estate business—never work with animals or children, though you probably have some colleagues and competitors that could fit into either category. Seriously, though, I had different rules in mind.
In the season three finale of the TV show Louie, celebrated director David Lynch played a grizzled showbiz vet who offered three rules for navigating the cut-throat world of television.
The first was, always look the audience in the eye and speak from the heart. Any property manager would tell you the same (even if they’re explaining why the community needs to test your dog’s DNA).
The second was, if anyone ever tells you to keep a secret, it’s a lie. In an industry with so many “frenemies,” it’s a good lesson to keep in mind the next time a competitor whispers insider info in your ear.
And the last was, you have to go away to come back. The construction pipeline did indeed go away, and it has now come back.
But how many projected starts will actually get started? Between 2006 and 2011, the construction industry shed about 1.5 million workers, not to mention a litany of materials suppliers. For the first time in history, the price of wood has surpassed the price of steel.
Will the labor force come back, and will materials prices come back down to earth? Sure they will; it’s all cyclical.
The real question developers have to ask themselves is, to what degree are you willing to bet on today’s opportunity against a backdrop of ever-slimming margins? If you’re waiting for the perfect time, you’re never going to stop waiting.
So, if not now, when?
