The Cost of a New Cycle. Pricing is Shifting  Another heated development cycle  Construction went from non existent to explosive  Impacts of this shift.

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Presentation transcript:

The Cost of a New Cycle

Pricing is Shifting  Another heated development cycle  Construction went from non existent to explosive  Impacts of this shift are reaching into all aspects of construction and driving up cost

Pricing is Shifting  Commodity prices are seeing upward pressure as demand increases  (Copper, Steel, Lumber & Oil Based Products)  Far reaching impacts…

Pricing is Shifting Skin/Structure Finishes

Pricing is Shifting  Lender/Owner requirements have tightened  Increase in the number of consultants and Inspectors driving up costs

Pricing is Shifting  Deals are more complicated now and take more time due to tightening of credit markets which has created more documentation & process for GC & Subs  Green building efforts come with a cost

Types of Construction Contracts  GMP (Guaranteed Maximum Price)  Cost Plus

Types of Construction Contracts  We generally utilize GMP  Meaningful buyout savings on 2011 starts  Buyout is getting more challenging

Cost Impact April 2011 Start April 2012 Start 18% Hard Cost Increase

Impact + 18% + 1%

Cost Impact  Labor has tightened both on the Subcontractor and GC side  Market is adjusting for the increased demand on construction payroll & hiring is more complicated

How do you hedge?  Have local presence in each major market you are in (Development and Construction)

How do you hedge?  Treat subcontractors right  Important that subs know your future pipeline  Have a good pay cycle for subs

How do you hedge?  Subcontractors need assurance that project will go forward (Not another bid exercise)  Lock in pricing as early as possible for the length of the project

How do you hedge?  Maintain discipline of consistent design decisions throughout project  Minimizing potential change orders (brick colors, unit Finishes, etc.)  Further plans are along = Less chances for surprises

How do you hedge?  Use and understand historical data on material pricing  When possible, use same construction teams across similar asset class projects

How do you hedge?  Important that Developer, Construction Company & Partners have same expectations on final product up front  Limit allowances when possible

How do you hedge?

 Fund deals and do business with Developers/Construction Companies with a proven track record

Questions?