In the world of commercial real estate, the logistics of buying vs. building have recently become increasingly complex. Many investors, buyers/users, landlords and tenants are now facing the question, is the “juice” of new construction “worth the squeeze”? Forgoing the option to buy land and build from the ground-up and choosing to instead utilize existing inventory seems to be the best option… but will it be the popular choice?
Across the board, base commercial construction costs have risen by nearly 50% pre-customization… let that sink in. Now consider the significant expenses associated with stormwater management, impervious surfaces (parking lots), HVAC, appliances and the FF&E (furniture, fixtures and equipment) needed to “make a house a home.” Turn on the news, read the paper or a trade publication and you will see— the supply chain is flooded with need and the basic principles of traditional supply and demand have come into play causing prices to rise. The reality is that there are less stringent codes and obstacles associated with existing properties which often times makes them the more realistic pursuit.
Is COVID to blame for this shift? Tariffs, normal economic trends, or maybe a combination of the three? Although it’s hard to pinpoint the exact cause, history has shown us a natural tendency for “hiccups” in the economy every 8-12 years. Markets go up and they come down, but one thing is certain amidst the current fluctuation… material costs are on the rise.
The last two years in the construction industry have been some of the best in recent decades, but for some it looks as though the next 6-12 months may reroute this path. According to President Dwight Miller of Gillis Gilkerson, “overall construction costs and schedules are being adversely affected by the negative supply chain issues.”
Now, factor in lenders and the financing process. With low and attractive interest rates, money is cheap… but it is becoming increasingly harder to get ahold of. Hotels, restaurants, shopping centers and other retail businesses present high levels of risk in lenders’ eyes. In many cases, loan-to-value (LTV) ratios are killing projects before they’re even able to truly get started.
With construction costs being hard to swallow and loan money unattainable for many, the existing commercial real estate inventory is all the more sought-after. Certain property types are in high demand—often times, listings are sold before they’ve hit the open market. A positive outcome of this new trend is the revitalization and renovation/fit-out of many of Delmarva’s older buildings. Rather than building new, locals are rediscovering and choosing to show some love to some of our area’s classic and most notable structures.
About the Author
Christian Phillips is a Licensed Commercial Real Estate Advisor with NAI Coastal where he provides his clients with specialized industrial and medical office knowledge. Phillips focuses on tenant representation as well as the sale and leasing of commercial and investment properties. After years of involvement with the Gillis Gilkerson team, Phillips is able to offer his clients unique insight into the process of commercial redevelopment and construction.