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The Cost of a New Cycle

The Cost of a New Cycle. Pricing is Shifting. Another heated development cycle Construction went from non existent to explosive Impacts of this shift are reaching into all aspects of construction and driving up cost. Pricing is Shifting.

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The Cost of a New Cycle

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  1. The Cost of a New Cycle

  2. Pricing is Shifting • Another heated development cycle • Construction went from non existent to explosive • Impacts of this shift are reaching into all aspects of construction and driving up cost

  3. Pricing is Shifting • Commodity prices are seeing upward pressure as demand increases • (Copper, Steel, Lumber & Oil Based Products) • Far reaching impacts…

  4. Pricing is Shifting Finishes Skin/Structure

  5. Pricing is Shifting • Lender/Owner requirements have tightened • Increase in the number of consultants and Inspectors driving up costs

  6. Pricing is Shifting • Deals are more complicated now and take more time due to tightening of credit markets which has created more documentation & process for GC & Subs • Green building efforts come with a cost

  7. Types of Construction Contracts • GMP (Guaranteed Maximum Price) • Cost Plus

  8. Types of Construction Contracts • We generally utilize GMP • Meaningful buyout savings on 2011 starts • Buyout is getting more challenging

  9. Cost Impact 18% Hard Cost Increase April 2012 Start April 2011 Start

  10. Impact + 18% + 1%

  11. Cost Impact • Labor has tightened both on the Subcontractor and GC side • Market is adjusting for the increased demand on construction payroll & hiring is more complicated

  12. How do you hedge? • Have local presence in each major market you are in (Development and Construction)

  13. How do you hedge? • Treat subcontractors right • Important that subs know your future pipeline • Have a good pay cycle for subs

  14. How do you hedge? • Subcontractors need assurance that project will go forward (Not another bid exercise) • Lock in pricing as early as possible for the length of the project

  15. How do you hedge? • Maintain discipline of consistent design decisions throughout project • Minimizing potential change orders (brick colors, unit Finishes, etc.) • Further plans are along = Less chances for surprises

  16. How do you hedge? • Use and understand historical data on material pricing • When possible, use same construction teams across similar asset class projects

  17. How do you hedge? • Important that Developer, Construction Company & Partners have same expectations on final product up front • Limit allowances when possible

  18. How do you hedge?

  19. How do you hedge? • Fund deals and do business with Developers/Construction Companies with a proven track record

  20. Questions?

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