A 7-Part Series on What Experts Predict for Real Estate in 2021
Part 5 - Construction Innovation and Implications on Cost and Regulations
To understand what the real estate industry experts crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.
This article is the 5th in a series of 7, broken into bite-size topics, related to the all-important question of given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines.
Construction costs for real estate development are generally comprised of labor, materials and general contractor profit. However, COVID-19 and other economic, immigration and trade implications have affected construction costs in many ways. Labor has been constrained because of immigration restrictions, lockdowns and other mandates affecting the free flow of labor. Tariffs, duties, impositions, and restrictions all have an impact on cost, surety and timing of materials that are sourced off-shore. And other economic factors relative to commodity pricing or supply and demand impacts of materials such as lumber, steel, concrete, etc. all contribute to either an increase or decrease in material costs. In short, all these factors are outside the control of the general contractor.
As a result of these factors, Houston-based Hwami Builders, a long-standing client of McVey & Associates, chose to look to process innovation, efficiencies and other controllable items in an effort to reduce costs for their customers. For example, one of the large construction cost line items is that of wood stud framing. Historically, most framers would take the architectural designs, and have labor on site to assemble and custom fit each component. Unfortunately, this results in significant waste in both labor and materials. So, Hwami created a subsidiary which takes the architectural designs into its computer system, and by using sheet roll, 70-gauge steel, they can punch out the individual metal frames, which have been pre-punched for plumbing, electrical and other assembly requirements, the wall frames are assembled off site, and then shipped on a “just in time” basis to the site.
Based on their experience, Hwami Builders is able to use this innovation to reduce the labor by over 20% and the construction materials by roughly 35%. These costs savings can be passed along to the client, but equally, the development timeline can be reduced by two months because of the innovative construction and delivery methods. And in the construction industry, time savings results in real costs savings to all concerned. Due to the ability to get the project completed sooner, the developer sees a reduction in interest and other general condition expenses, as well as generating revenue sooner as the product can be placed into service quicker.
Regulatory Implications on New Development
It is a given that law makers will always make more not less regulations. After all, you never hear of a politician running for office to do nothing! Some run to reduce regulations, and others run to enhance and increase regulations. In short, change and regulations are inevitable. The goal is to understand the regulations and seek out those opportunities.
For example, the regulations for development permitting in the city of Houston, is a relatively painless process. Of course, anything can be improved, but when you compare the regulatory process in Houston to New York City, Los Angeles, Seattle, etc., the regulatory process can be cut by a factor of 3. So, instead of taking 18-months in New York City, you can start construction in Houston by month 6.
In the development community there is a misconception that the development services department of a city is there to get in the way of development. However, when you look at the big picture, the city is in need of property tax revenues to fund its general fund obligations. Therefore, the faster a city can get a development started, completed and into service, the faster they can increase revenues.
MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.
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