Grounded: Rising land, construction costs threaten building boom

If Charlotte’s development climate – and blistering apartment-construction rate – are currently a day at the beach, beware storm clouds on the horizon.

That was the message of a Bisnow panel of developers from across the residential, commercial and industrial sectors at the Duke Mansion on Thursday. A crowd of about 50 gathered to hear the six-person panel address the overall health of the Charlotte real estate market and construction industry in general.

All six speakers said they were still enjoying the growth that Charlotte’s favorable job market engendered, but agreed that rising construction and land costs are starting to put a drag on the high-flying path for buildings in the Queen City.

“There is a lot of demand, but for us – to throw sort of a wet blanket on things – there are starting to be choke points on the cost side,” said Grey Poole, a partner with Selwyn Property Group. “The cost of land is limiting us and the cost of construction is increasing. So while the opportunity is still there, you are starting to see difficulties.”

Eric Rothrock, senior director at Crescent Communities, agreed and pointed to construction costs in particular as affecting his current projects. But for Rothrock it had nothing to do with raw materials – the pain was coming from labor costs.

“Glass contractors, electricians – those are the type of contractors out there doing really well and hyper-installing right now,” Rothrock said. “The price of glass is up a bit like it is usually at this time of year but concrete is flat, others are flat. It’s the labor. I am of the opinion construction costs will correct this market.”

Moderator Jeff Brown of the Moore and Van Allen law firm addresses a question to six panelists at the Bisnow 2016 Charlotte Development and Construction Forum on Thursday. Panelists included Steve Smith of Levine Properties; Grey Poole of Selwyn Property Group; John Barker of Red Rock Developments; Phil Payne of Ginkgo Residential; Landon Wyatt of Childress Klein; and Eric Rothrock of Crescent Communities. Photo by Scott Baughman

The other panelists agreed about commodities not being an issue. They said finding specialized labor, or sometimes even general labor, was becoming more difficult. When moderator Jeff Brown of the law firm Moore and Van Allen asked about other construction-related difficulties, several panelists spoke about struggling to keep contractors on the job after construction had begun because the workers were being offered higher rates elsewhere.

“We have done three projects in the same area about the same size over the last year and a half,” said Landon Wyatt, a partner with Childress Klein, who focused more on industrial projects. “If you say the first project was at a baseline 100 percent cost, the second about six months later rose to 105 percent and then the third, about eight months later, was at 110 percent of the first. So, it is almost nickel and diming you from all sides, no certain cost increase from one specific area but labor.”

Rothrock agreed and gave an example of how contractors were poaching subcontractors from the midst of other building sites around Mecklenburg County and the surrounding area.

“If contractor A comes and offers 10 cents a foot then contractor B comes and offers 15 cents a foot, the subcontractors are going with contractor B,” Rothrock said.

The other elephant in the room for industry insiders was the rising cost of land.

“The industrial business feels like 2007 again,” Wyatt said. “Cost of land and construction costs and the upward pressure that puts on rents is being met for the most part, but not always. We might see another recession in 2017 – but we hope it is a soft landing this time, maybe a business recession instead of a total economic recession.”

Other panelists also said they were feeling the sting of land costs going up for multi-family projects.

“From the workforce housing standpoint there is really no new supply being built because of costs,” said Phil Payne, chief executive of Ginkgo Residential who specializes in workforce housing. “We can’t build workforce housing but then turn around and charge $800 or more each month for rent.”

For Steve Smith, chief operating officer of Levine Properties who focuses on multifamily projects that aren’t necessarily workforce housing, the cost of land was foremost on his mind.

“Land prices are a huge issue,” Smith said. “Our capital has been deployed throughout Uptown. In terms of land value there once was a $25,000 limit for multifamily units and we’ve seen that blown through. Now we see $30,000 and $35,000 prices for each multi-family unit.”

Poole said the real driver of land prices is not only the number of deals being made, but the frequency at which larger deals are seen in center city and elsewhere.

Steve Smith of Levine Properties considers his answer to a question during the Bisnow forum Thursday as Grey Pool of Selwyn Property Group and John Barker of Red Rock Developments look on. Photo by Scott Baughman

“Landowners see the price paid for the Walgreen’s lot on the corner and then they see their land that can hold 15 townhomes and feel it should trade for the same amount,” he said.

But after the discussion on real estate, most panelists came back around to construction cost concerns.

“Labor is so mobile now,” Smith said. He said workers stay in one location for just a few months before leaving for other markets.

Several panelists discussed various methods of attracting contractors to steadily work on their projects, but Payne took a different tack when it came to the shifting winds of the construction market labor force.

“As a workforce housing specialist, I don’t know how you get those baseline construction workers to be here when you don’t have a place to house them,” Payne said. “Workforce housing for us is focusing on people with 80 percent of the median income. If we can’t build a project and keep those rents at $800 or $850, we can’t get them – or the school teachers or police officers – to have a place to live.”

And Poole had a word of warning about the forecast for construction work and projects in general.

“What it will take to turn this around is a few deals will have to start falling through,” Poole said. “We don’t want to hear that because these are deals that have taken time and due diligence money. But as long as we keep finding ways to make deals happen contractors will keep working and going up on their rates.”