Wednesday, September 27, 2006

Rising Construction Costs Hitting Home

We all know construction costs have risen over the last couple of years due to the supply being eaten up by China and high fuel prices. These rising costs are affecting projects all over the country, including Sacramento.

The important infill project The East End Gateway project at 16th and O (others two sites are 16th and P and 16th and N), which was under construction and undergoing demo and site prep has been delayed due to construction bids that have put Loftworks 10% over budget.

The two sites are going to consist of 21 loft condo units for sale, 32 apartment, 8 for sale townhomes and about 23K in retail space. This is an excellent, excellent infill project that I have been excited about for years now.

The good news is material prices are expected to come down over with oil prices moving sharply down recently.

Loftworks is taking some time to do some value engineering to see where they can cut some costs. I try and attend the next CADA meeting on Oct 27th when an updated is expected and will report back.

My feeling is this will still happen, but it will just be delayed a bit. If they can get started back up again before the rainy season starts, we could see these two buildings done by very late 2007, early 2008. Originally, the timeline was Oct 2007.


Bob Wills said...


10% over is nothing and if that were the only consideration THIS Developer would not have worried about it. There is a greater contingency built in to the budget than 10%.

"Value Engineering" is a sham term dreamed up by mediocre architects and engineers who do not have a clue. (Probably the same genius' who LEED certification)

Materials costs will not decrease substantially (concrete and steel both are dependent on prices in China, Japan, India and Korea, USA creditors) (wood is dependent on how many trees are still left in Canada and fluctuates wildly), Labor is/will be decreasing in a dramatic fashion because of the Housing Collapse and coming Recession. In case you have not heard, the Condo market has collapsed across the entire country.

Friedman is,

1. Waiting for a collapse in Construction to work it's way through inorder to drive down prices more than a crummy 10% over

2. Because of the collapse the Condos are going to be vitually worthless for a good while "out" (5 years or more)

3. Working some other deal to get more free money from the City/State or he has too many other things going at this time

Uneasy Rhetoric said...

That is too bad. This project will be a wonderful transition point between downtown and midtown - a kind of "welcome to the residential area."

I hope Loftworks can work out the cost without skimping on quality. I'd hate to see them build something with a lot of problems later on; it might sour people on the high-density market.

LivingInUrbanSac said...

I agree, 10% isn't much on most projects, infill projects are tougher to do though. I have to imagine that 10% was above the contingency they already had planned

The return on this project was already pretty low (I think I read below 8%) relative to what a developer will normally shoot for. An extra 10% (~2M-3M) is substantial.

Bob Wills said...

This guy has very deep pockets

He is not like the typical Sacramento Developers (cheap, uneducated with bad taste and no class)

This guy is in not going to skimp on the building

His buildings are usually designed by guys out of SF, LA, Portland, NY or Seattle and they are not cheap, he knows it, that is what he wants

In the past he has not been too worried about renting out space before

This building is heavily subsidized by just about evey public entity

Something has happened, and since the bottom dropped out of the expensive/highrise/lowrise Condo market in NY, SF, LA, San Diego, Portland, Florida, Seattle.....he might be somewhat worried, who would not be?

Something is going on

Call him up and ask him

LivingInUrbanSac said...

Yes, the guys from Loftworks are very different from past Sacramento developers. I have had chances to speak to all of them at one time or another, they get it.

I don't think deep pockets matter all that much in this case. Yeah, they could easily come up with the extra cash, but doing a development that will return the same a money market with a lot more risk probably doesn't sit well with them.

Even though the housing market has slowed big time in the cities you mentioned, I still think this is such a new product here that it will be able to withstand part of the downturn since people want this product that has been lacking for so long here.

Anonymous said...

"wood is dependent on how many trees are still left in Canada and fluctuates wildly"-bob wills

not a very intelligent and/or educated comment. If the price of wood is dependent on how many trees are left in Canada and the price fluctuates wildly, then it must be true that the number of trees in Canada fluctuates wildly... So the number of trees in Canada fluctuates wildly? That's interesting. Please explain.

Also, I don't think it's necessarily true that Friedman has "very deep pockets" What the heck is this comment based on? Have you audited his balance sheet? Just because the guy has been involved in several modest infill projects in a mid-sized market during an incredable bull run in the real estate market doesn't really indicate much regarding the depth of his pockets.

Oh, and I love the "Because of the collapse the Condos are going to be vitually worthless for a good while "out" (5 years or more". Is this true, or is it just a little bit of an exageration?

Get a life dude. Don't you have anything better to do than to spout off a series of ridiculous claims over the internet?

LivingInUrbanSac said...

I know the Mark Freidman's parents are very well off. They own Arden Mall among other things. They donated sometime like 5M to the Crocker expansion a while ago

While I'm sure it doesn’t hurt, I don't think that automatically means Mark is deep pocketed.

Anonymous said...

Very interesting stuff guys. Its to bad that another project is starting to falter. But there is one statment that I completley disagree with.

2. Because of the collapse the Condos are going to be vitually worthless for a good while "out" (5 years or more)

There has been a swell over the last 10 years of condo buyers in many other cities across the country. The buyers have come out of the woodwork in virtually every city that has looked for them. Now just like in any type of business the developers seem to move in packs so they all over acomidate the proven markets and overbuild that type of product. However you would be hard pressed to say that Sacramento is in that position at the present time. There are alot of projects in the pipeline but almost nothing ready to move in that is less than 15 years old. In order for the Condo market to be proven flat you have to first have a condo market to speak of.

So to say that the condo market is dead my be true in some cities but not in Sacramento not yet anyway.

We have sustained steady job growth and although our investor buyers have left the market and even flooded us with their investment properties. Sacramento is not a crashed market and is on its way to absorb the inventory glut in the next 12-18 months.

Anonymous said...

Levi is reasoned and learned. bob wills is hyperbolic and, in addition, ignorant and/or intentially incindiary. Of course, I'm being overly nondugemental. We all know he's trying to make something out of nothing. I was in highschool once too.

LivingInUrbanSac said...

I hate being a blog nazi, and I agree, "Bob" is trying to just push buttons, but lets try to keep the name calling to a minimum.

Levi said exactly what I have been trying to say as well, there has been no Sac urban condo market until recently. There is a lot of pent up demand for this product and it will stay relatively strong to the rest of Sacramento.

Anonymous said...

By most accounts construction costs should stay flat or rise with inflation over the next 6 to 9 months. Predictions from last year were that the soct of construction would continue its climb as it did in 2005 at almost 10%. Materials pricing is a mixed bag right now. Steel is still going up wood has been dropping for most of the year, OSB is less than half the price it was after Katrina as is drywall.

Labor on the other hand is a wierd one. I have personally asked a good number of GC's involved in residential construction in Sac whether they thought the labor market was going to soften substantially and they have not necessarily agreed. I find this perplexing because as noted by "Bob Wills" the slowing housing market should lessen the demand for residential labor. Some will be picked up in the commercial sector, some will move to other markets, but the subcontractors should be a little more hungry than they have been. Good comments guys.