Construction Costs Bite into Apartment Investment Returns

By Bendix Anderson

The cost of construction will probably keep rising—cutting into the yield of investments in apartment developments—even though a few materials, such as lumber and concrete, have become less expensive in the last few months.

The bids contractors submit to build new apartments keep including higher and higher prices. That’s in part because material prices are likely to keep rising overall. And with the national unemployment rate below four percent, the cost of labor is growing as fast as ever. Also, many contractors already absorbed high prices for materials earlier in the pandemic recovery without passing them on to developers. Today construction contractors are in demand and seem to have the power to ask for higher prices when bidding out projects.

That deepens the hole many developers already have in their construction budgets because of rising interest rates. “Developers have been getting hit on two sides—the financing side and the bid side,” says Ken Simonson, chief economist for the Associated General Contractors of America.

The producer price index (PPI) for nonresidential construction—a measure of the price contractors say they would bid to build a fixed set of buildings—grew 23.9 percent over the 12 months that ended in July 2022, according to data from the U.S. Bureau of Labor Statistics.

The cost of construction materials is also still rising—but not as quickly. The PPI for inputs to multifamily construction grew just 8.4 percent over the 12 months that ended in July 2022…

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