Seniors Housing Business

AUG-SEP 2018

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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Question of the Month 20 www.seniorshousingbusiness.com Seniors Housing Business n August-September 2018 To what extent have increased materials costs and new tariffs changed your approach to development? A healthy challenge By Jesse Marinko CEO and Founder Phoenix Senior Living As a developer, we have had to adjust our expectations regarding financial returns and building costs, tighten our scope and place projects through more sensitivity analysis. Basically, the wiggle room evapo- rates much more quickly and fewer projects will get developed. It also places heavy constraints on the high-end developer that historically differentiated itself through upgrades and amenities. These constraints present a chal- lenge when analyzing which dif- ferentiators truly create the great- est impact on projects. This process is healthy for devel- opers to go through as it chal- lenges our norms and pushes us to grow and adapt to the ever- changing landscape. Mitigate with careful planning By James A. Taylor, Jr. Chief Investment Officer Omega Communities The cost increases rel- ative to materials and tariffs are exacerbated by the scar- city of vendors, service providers and actual labor. This is due to the recent development explosion, as well as immigration issues affect- ing the labor supply. We have approached the increases in overall construction costs holistically. Very simply, there is a number, for most proj- ects, beyond which the commu- nity is unlikely to be successful financially. Adjustments must be made during the pre-construction and development process to unit mixes, amenities offered, level of finishes and market rates with- out affecting quality of care. This requires additional time and anal- ysis during the pre-construction phase but is time most well spent. Timing is key to any process By Frank R. Muraca President ARCH Consultants While our perspec- tive on process has not altered given the increases in material costs, ownership's project teams are assessing opportunities to contain inflation. Our consult- ing approach starts with establish- ing schedule assumptions. Whether the sales duration, regulatory environment, or ease of securing construction prices for financing, all relate to the timing of milestone dates. An abrupt shift of any factor of the schedule creates challenges to overcome. The recent tariffs are one example. If there are dramatic shifts of any development discipline you'd bet- ter have a dedicated team to con- tinually monitor and react in real time. Demand exists; rents must align By Dana Wollschlager Practice Leader, Senior Living Plante Moran Living Forward The overall tariff situation and consequent material pricing impact is something we are watch- ing fairly closely, as well as rising interest rates, labor rates and sub- contractor margins. The bottom line is seniors hous- ing is a pro forma-driven prod- uct type based upon need and affordability; thus if we assume the demand is there, then it is extremely critical to make sure the project's rents are obtainable. Ideas to consider include involv- ing contractors early, more strin- gent site selection, increased unit density, leveraging subcontrac- tor and vendor relationships, and locking in pricing by awarding bids early. Eyes turn to acquisitions By Blanding Beatty Chief Investment Officer Traditions Senior Living The increase to development costs from labor, material costs and tar- iffs, specifically to steel and met- als, has impacted the bottom line of construction budgets in the last 12 months. Because these cost increases do not translate to any added value to residents, coupled with the softness of operating fun- damentals, there is limited ability to preserve yield through raising rents. With the resulting tightening of the spread between stabilized yields on cost and cap rates, the risk profile of new development has increased. This result tilts our appetite toward acquiring existing assets. Labor struggles trickle down By Bill Pettit President R.D. Merrill Co. Interest rates are on the rise, along with material costs and the looming threat of tariffs on lumber, alumi- num and steel. We are starting to see costs that make it more dif- ficult for projects to pencil than at any other time over the last decade. As challenging as materials costs have been, the larger cost concern remains the labor markets. The shortage in critical skills at the subcontractor level has introduced concerns about the quality of work and timely project completion. On a project-by-project basis, when a development no longer makes financial sense, we are more likely to hold onto the site and wait for more rational markets. Value-add is more enticing By Josh Rosen Principal McFarlin Group Rising material costs have sharply impacted our company's development costs in numerous ways over the bet- ter part of the last decade. During that time, our construction costs per square foot have increased nearly 40 percent. Most problem- atic among these rising costs have been the prices of lumber and labor, as our developments are entirely wood-frame projects. Given such rising costs, our focus has shifted to the acquisition of value-add communities. These communities can be acquired for much less than replacement cost. They simply require new capital for renovations, which is becom- ing much more attractive under the circumstances of the current market. Long-term effects raise concern By Allan R. Brown Jr. Owner Prevarian Cos. Construction cost increases are normal in a growing economy; it's supply and demand, not a surprise. Cur- rent costs are already challenging, but the band plays on. Now — surprise! Tariffs and tweets and trade, oh my! The first cost of tariffs is bad, but the longer-term concern is the tendency for cost increases to arti- ficially sustain themselves after the storm passes. Our current devel- opment deals are fine, but our pro forma cost assumptions for future projects are less certain. While we will continue to pursue develop- ment, construction cost risk will be one of the first tests for viability.

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