'Let's Sit On The Sidelines': Baltimore County Developers See Slowing Activity As Costs Soar
Baltimore County developers remain concerned about the impact of increased construction costs on their industry and expect a slowdown in the number of projects entering the pipeline.
But there is some optimism about the potential of new real estate investment in the county, particularly in redeveloping assets in older communities, developers said at Bisnow's The Future of Baltimore County event, held earlier this month at the Sheraton Baltimore North.
"It's a very difficult situation, and it's certainly going to affect the pipeline. Projects will not take off, they'll be put on hold and ... I think the Baltimore County staffs need to be understanding of our situation and help us get through this difficult period," said David Tufaro, founder of development firm Terra Nova Ventures.
CBRE's most recent Construction Cost Index predicts construction prices will increase by more than 14% year-over-year by the end of 2022. Analysts expect the increases to come from rising prices in materials and labor.
"Labor shortages are expected to persist for the near term, increasing wage pressure. Because construction wage growth has lagged the national average through the pandemic, construction labor escalation is likely to be higher in 2022," according to CBRE's index report.
On the other hand, the index expects the escalation of prices to slow during the next two years and eventually stabilize between 2% and 4% annually, which is in line with historical averages.
Developers agreed that the increased labor cost is the primary reason construction costs have exploded. Greenberg Gibbons CEO Brian Gibbons said that commodities ranging from lumber to energy had moderated recently, but labor costs haven’t slackened.
Gibbons said he recently spoke to the head of a top local general contractor who blamed the uptick in prices on the cost of subcontractors and said the only way to slow the surge in construction costs is for developers to stop building. That is advice he intends to heed.
"I'm talking to our capital partners saying 'Construction costs have got to come down. So, let's sit on the sidelines for the next six months or a year and see what happens,'" Gibbons said.
Yet Gibbons said he is skeptical that construction prices will ever return to pre-pandemic levels. That's because, the 61-year-old developer said, he has never experienced construction prices declining during his time in the industry.
"Frankly, that's what the Fed is trying to do with all the interest rates going up is trying to slow down construction with the hopes of bringing costs down," he said.
Mid-Atlantic Properties, he said, recently acquired a former bank office in Towson. Given the 95% occupancy rates of apartments in the community, redeveloping the building as apartments initially made sense.
However, rising construction costs made deciding whether to convert what he described as a 90K SF big-cube office building into apartments, or rehab the property as office, challenging.
Gioioso’s "back of the envelope" calculations estimate it will cost $20M to convert the building into a multifamily asset. On the other hand, it would cost about $6M to overhaul the property into a revitalized office space.
"But with those costs, rising interest rates, etc., apartments may not be what they used to be," Gioioso said.
CBRE’s analysts expect construction costs to continue growing at above-normal rates for at least the next year due to an imbalance between the demand for workers and the available supply of potential employees.
The age of the nation’s workforce, according to CBRE, is one major obstacle to finding enough construction workers. Analysts found that about 20% of the nation’s workforce is older than 55.
Another contributing factor to wage increases in the construction industry, according to CBRE, is competition for workers from other sectors, such as the logistics field.
Despite worries about the cost of construction, Gibbons said there's no shortage of redevelopment opportunities in Baltimore County. That is a type of project Greenberg Gibbons has substantial expertise in delivering. Its county redevelopment portfolio includes the Hunt Valley Towne Centre, Foundry Row and the Shops at Kenilworth.
"We haven't done a single ground-up development in Baltimore County," Gibbons said.
That is in line with the development goals of Baltimore County Executive John Olszewski Jr.
During his remarks at the event, Olszewski touted the county's coordinated strategic planning that emphasizes investment in the county's older neighborhoods. The county, he said, is already targeting areas like Pikesville's commercial corridor for revitalization and continues to steer funding to those areas for improvements.
"We are really trying to go all-in, and we want to work with you to do redevelopment and thoughtful revitalization across all our aging communities," Olszewski said.