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Not Penciling Out — Now What?
Supply chain interruptions, labor shortages, and certain raw materials setting record high prices, have caused a unique situation where multi-family deals are not “penciling”. This presents many challenges when trying to make deals worth the effort. Even with the ground valued at zero, the rent per square foot will not cover the construction cost and, for those looking to make a make a profit (who isn’t?), this is causing a real problem.
The variables of construction cost, rent per square foot, and ROI must be in balance for deals to move forward. In most markets the rent price that residents are willing to pay per square foot is capped, and the construction costs cannot be predicted as the availability of construction materials, appliances, and fixtures, are extremely volatile.
Most developers are taking a “wait and see” approach – monitoring pricing for commodities and waiting for stabilization prior to pulling the trigger on new projects. But what about projects that are approved, shovel-ready, and funded? How can those be made to work in today’s climate of uncertainty?
Let’s look at an example of what does work, and wood-framed framed walkups are a good place to start. Even with lumber prices and labor shortages, the rent covers the cost with sufficient profit. With panelized wood and light gauge steel, as well as modular factory produced units available, the costs can be easily contained and predicted safely into the short-term future. Demand, however, is far outpacing supply which impacts deadlines.
Anything with podium or structured parking needs higher rent to justify the extra cost of materials, systems, elevators, and more complicated construction requiring sub-contractors who are very busy right now. Through the Value Engineering (VE) process, about 5%-8% of the cost can be removed – typically “behind the walls” and not visible to residents. This method gets building product closer to profitability, yet it’s still not quite there.
Another alternative is to try new construction systems. There is no shortage of panelized, modular, component set assembly, and even 3D printed options. Challenge is, these methods are relatively foreign to most sub-contractors and there is learning curve required to experiment with new systems. To help with adoption of new technologies and building systems, the developer must be an advocate for continued learning and flexibility. And much like any change, helping the team understand the long-term benefits of implementing a new process will be key to success.
It’s critically important to achieve optimal production to cost ratios, without loosing the aesthetic, quality, and functional requirements of the program. We are constantly exploring these systems to monitor impact and effectiveness at reducing waste, cost, and construction cycle time. We also use a unique process to capture feedback from clients, and then eliminate technologies that do not meet expectations.
Flexibility is the mantra of our time – where alternatives and options are explored without prejudice. This enables each building to be refined to a point where all mechanical systems are worked out, energy and resource consumption is minimal, and everything is integrated to achieve the highest quality and speed possible.
The dedicated housing team at Progressive AE has developed and refined multi-family building systems to include completely engineered, expandable options which accommodate a variety of site configurations. We’ve also addressed the density needed to be achieved by our land planners and urban designers. These concepts can be quickly deployed to evaluate the proforma and test-out the probable entitlement success of perspective development opportunities.
“We’ve creatively designed many building configurations that have stood the test of time and demonstrate practical measurable parameters – ultimately helping projects pencil out.” – Mike Rosen, AIA, LEED AP ND