Construction Cost Curveballs Haven't Stunted Confidence In Atlanta's Development Pipeline
Spikes in the price of building materials and construction labor are causing headaches for developers across the country, but they aren't stopping projects located in the hottest markets from breaking ground. Developers who spoke at Bisnow's Atlanta State of the Market event last week said it requires them to be more nimble than ever.
“Each week there is a new conversation of something you would never imagine you would hear. 'Oh, that piece of the door? They're out of those for the first time. They'll be available a year-and-a-half from now,'” Selig Enterprises Senior Vice President Malloy Peterson said during the April 26 event. “We're not yet at that point where we're freaking. We're just dealing with it as it comes.”
The Turner Building Cost Index, a measure of costs in the U.S. commercial construction market, was up 2% from the fourth quarter of 2021 and a 7% jump from the first quarter of last year, according to the firm's latest report. The index is determined by labor rates and productivity, material prices and market competition, according to Turner.
“Overall Supply Chain stability and the ‘return-to-normal’ state has not yet been established. Some key materials continue to be in short supply due to supply chain disruptions in manufacturing and computer chip shortages,” Turner Vice President Attilio Rivetti wrote in the report.
Panelists echoed Rivetti's observations, adding that which materials jump in price on any given week feels random and hard to predict.
“You don't need another contractor to come crying about construction costs and supply chain and all this stuff. It's still rising," Juneau Construction Co. President Les Juneau said, adding that some industry experts predict that material costs may level out by the end of the year.
“The problem we have today is we have the increases that are driven by things like diesel fuel cost,” he said. "So it's coming out of left field and the curveballs are coming to all different places differently than they have in the past."
Selig has faced sporadic material cost increases while it was developing the block-swallowing 1105 West Peachtree mixed-use project, home to Google and the foodie-themed Epicurean Hotel Atlanta, Peterson said. Selig is now preparing to go vertical on Midtown Exchange, a project involving a mix of apartments, a 26-story office tower, retail and a parking deck for 1,600 vehicles just across the street from 1105 West Peachtree.
“This week it's sheetrock. Their prices went up … 20% from three weeks ago,” Peterson said. “The way I would say it is every week brings something new.”
Jim Irwin, president of Atlanta developer New City Properties, said some developers are stockpiling materials when their prices dip, drafting flexible timelines in their contracts and forming stronger relationships with contractors and subcontractors. New City is under construction on a third office building at its Old Fourth Ward project across from Ponce City Market.
“Not that long ago, if there was a greater than 5% gap between our initial budget and the desired budget ... people were tense. Today, it's like 20%,” Juneau said. "If we can be within 20%, we can make this work by being creative. And that's like unprecedented."
Panelists say that there are enough businesses growing in Atlanta needing office space, and enough new employees needing places to live, to offset the cost of adding new supply, so long as those projects are in the right submarkets and in a mixed-use setting with lots of amenities. Construction cost increases and higher rents, though, are complicating how some companies are structuring their office leases, especially as they grapple with how much they need in a hybrid work model, Cushman & Wakefield Executive Managing Director Aileen Almassy said.
“The ability to grow, the ability to shrink, the ability to terminate is coming up on every conversation. But I think nobody really knows exactly what it's going to look like in a year or two and what their policies are going to be,” Almassy said. “The fact that construction costs are at an all-time high and they need to do a long-term lease to justify their investment is really kind of where the rubber meets the road.”
Despite construction costs, inflation and the looming threat of a possible recession, Peterson said most developers are not shying away from new projects in Metro Atlanta.
“That does not mean we're bullish forever. That just means we're talking about a 10- to 15-year period we feel very strongly about,” Peterson said. “Those of us who have been in Atlanta for a long time, we know that this run is going to go for a while. We see these companies coming into our state and specifically into our city, into specific submarkets, and we keep hearing about another one looking, another one looking. It's not just something you feel, it's something you're actually experiencing every day. We're very, very bullish.”