These rising costs may not necessarily drive rent through the roof (at least not in the short term), but they will make the transition from renting to homeownership much more difficult.
Today, I have one really big concern in real estate: the rising cost of construction. As a developer of single- and multifamily residential properties throughout the Southeast, the cost of creating new housing options is of primary concern. In fact, although I am still actively acquiring new land for these types of projects, all of which are, by their very design, intended to be higher-end properties available at affordable prices ranging at present from $199,000 to $299,000, I’m finding the search process is getting tougher all the time.
Today’s developers had better plan to beat the bushes and constantly, dedicatedly network with everyone in the real estate space from their own competitors to realtors and single-family investors if they want to land the kind of pricing necessary to acquire land and then develop it for affordable housing on a budget that makes sense. For example, in order to deliver the type of quality housing today’s first-time homebuyers want (and remember, these buyers are often older than first-time buyers have been traditionally), I need to acquire the land for development for no more than $2,000,000 an acre, and that is on the high end. The cost of the entire project after that initial acquisition of acreage will likely be at least $10,000,000, so the margins are definitely getting thin. You can only make it work if you are buying the right land and the right materials at the right time, then working with the right contractors for the job.
New Construction is Still the Only Answer
As I see it, construction costs are definitely heading upward and are not going to fall again any time soon. Everyone involved in new construction, from the developers to the investors to the renters and buyers, must plan for certain costs to increase and then be passed through. This represents a conundrum for any entity, be it a for-profit business, a nonprofit advocacy group, or a government operating at any level, that values housing affordability. These rising costs may not necessarily drive rent through the roof (at least not in the short term), but they will make the transition from renting to homeownership much more difficult.
For example, in my rental communities, every single person renting a single-family home has the option to buy that asset at any time they are equipped to do so. They do not have to find a new house when they are ready to buy; they can stay right where they have been living, in their own home, attending their own schools, and continuing to enjoy access to all of the things that made them want to live there in the first place. However, fewer households will be able to take advantage of this option if construction costs continue to rise – and that is not because of rising rents (we do not usually raise rents to meet market conditions). The cost of the asset they inhabit, their house, is going to rise as housing becomes scarcer, and that means the cost for them to acquire that asset in the first place is going to rise as well.
The only way to keep those home prices anywhere close to steady is to continue to build new housing options, both single- and multifamily, whenever the numbers work for your investment strategy.
The “Automobile Component”
One way that I find areas of the country ideal for my investing strategy, which includes a non-negotiable philosophy that affordable housing is a necessity to the future of our real estate sector as we know it, is to look for something I call the “automobile component.” This component is present in everything I do. Sometimes, it takes the role of a large factory presence. Other times, the role is more centered around an auto-maker’s headquarters in the area.
Why is the automobile component so important to me? Automotive companies tend to bring several things to an area that are great for my business. When I find it possible to invest in the same area with them, I bring them some great benefits as well in the form of serving their employees with affordable housing options. The automobile component in a market tends to indicate the market is likely to have room for me and my vision to create new opportunities to access housing that meets local affordability standards. This means they bring job growth, tend to locate in areas with good schools, and usually operate in areas with low taxes. Of course, that job growth creates a large supplier as far as potential candidates to rent and buy houses, which is important to every developer!
Looking Forward, Single-Family is a Prime Sector
While I see many developers leaning toward building more multifamily rental buildings and condo buildings, in my business I think we’ll be sticking mainly to single-family in the future. Of course, there is one notable exception: a potential second and possibly third “Solo” condominium development project. Our first condo project, Solo East, created the opportunity for home ownership on a vastly affordable and profitable scale for hundreds of buyers and, furthermore, played a significant role in future community growth in that area. However, outside of that unique project series in Nashville, Tennessee, I believe single-family building offers the most to homeowners, renters, and developers thanks to lower risk in the niche, lots of flexibility in terms of financing, and offering truly affordable housing to households who both want and desperately need it.