There has been a constant ‘inflation’ in real estate construction costs over the past few years driven by the usual suspects: high commodity prices and a tight labor/talent market (with high demand for construction labor driving labor costs higher and higher over time).
So recently, I was pleasantly surprised to hear one of our clients (who is involved with redeveloping 2 properties they recently purchased) tell us about their ongoing experience with construction costs. 2 key points to note:
1. The price of development was great i.e., lower than expectations! They had a solid bid to get their work done for about $80 per square foot. Note that the numbers one generally sees for construction costs are in the $150-$250 (or higher) per square foot range. So this is amazing…and the key reason this was possible was due to the really slow labor market right now. People have lost jobs and can’t find work as real estate development has slowed tremendously…so they are taking whatever work they can get, and reducing their rates to “win work”.
2. They actually got a fixed bid on their project! Wow….just a few years ago, no contractor would take on that risk.
I guess in some ways the above should be no surprise. This is how the market works. In a down cycle, things get cheaper…and in some cases much cheaper. However, I don’t think most people realize what a great time it is to construct right now. Good time to buy a fixer-upper (which is already much cheaper than it was a few years ago) and then further add value by improving the property.
PS: I’m talking Los Angeles
