If you had a 2007 construction number in your proforma and started in 2009, you were in for a pleasant surprise and likely to receive construction costs lower than budgeted. Then, the exact opposite happened between 2020 and 2022. Price increases were coming at developers from every direction: Materials, labor, profits—everything was going up! At one point, we were factoring 2% monthly price increases, 24% for a year. The saving grace was that rent was accelerating as well and for some asset classes, like self storage, the rates were going up faster than the cost of construction.
In 2023, construction prices stabilized and we were back to a 3-4% increase per year. For the last six months, we haven't factored in price increases for construction starts under 12 months.
Last week, something exciting happened. We saw our first construction bid that was well below what we know the average construction costs are today. 12% below. The back story was the general contractor priced their bid very aggressively in order to keep their crews busy because new construction has slowed. Is this the beginning of a trend?
DXD receives construction pricing feedback every day. We see all the deals that other developers could not complete and therefore had to sell. We know that very few new self storage or multifamily construction projects are moving forward. There are three main components of construction, labor, materials, and profit. The first to drop is profit as contractors see their backlog decrease and projects drag out. No one knows how long this lasts, but our feeling is that until there is a significant decrease in interest rates, it is going to be hard to get deals done, which could equate to a slowdown for general contractors.