Why construction costs are so high

Was at a panel discussion on development recently and rising construction costs came up.

Everyone wants to know why it costs like 30% more to build a building than it did two years ago.

There are lots of theories, including:

  • All the sub-contractors retired in 2008
  • Lots of laborers went back to their home countries (often in Latin America) as a result of our insane immigration policies
  • The tariffs are pushing up materials costs
  • Workers comp insurance is too expensive
  • Millennials don’t want to get their hands dirty in physical jobs

And lots more.

One of the panelists at our discussion was a contractor, and he had a different perspective. He said something like: “For a while there, in 2008, 2009, 2010, 2011 and 2012, you guys were sticking it to us. Now the shoe’s on the other foot.”

In other words, part of what’s going on is that contractors know there’s a ton of demand for construction services and not a lot of supply, so they’re taking the opportunity to increase their margins. And it’s a free country, so who can blame them?

That said, while we certainly aren’t immune from rising costs, we have suffered less than most, and here’s why: Our contractor relationships are LONG term. We kept those guys working in 2009, 2010, 2011, etc., when no one else was doing anything. And they know we’ll be buying lots of buildings when things get bad again. So they don’t feel like they have to kill us on price now… in a long term relationship, everyone knows what goes around comes around, eventually.

SROs: A new, old idea

I read a TON about business, in general, and real estate, in particular. So it’s fairly rare for me to come across an idea that’s genuinely new to me. But I came across one last night, during a conversation with a much more experienced owner-operator, that I’d like to share.

We were discussing the housing affordability crisis currently affecting cities across the country, and particularly on the West Coast.

The usual suspects came up: Zoning, construction pricing, stricter building codes, etc.

But he had another take: That cities ought to be allowing the construction of SROs (single-resident occupancy hotels).

SROs are cheap to build, because the residents share communal kitchens and bathrooms, and generally don’t get parking. Because they cram a lot of people into a relatively cheap structure, they can generate a good yield, even with very low rents.

SROs flourished in LA and other cities during most of the 19th and early 20th Centuries. Young, unmarried men, in particular, used to congregate in SROs while they worked to find their footings in adult life.

However, during the 20th Century, cities adopted more stringent zoning codes aimed at increasing property values and banned construction of SROs, either explicitly or through things like minimum dwelling size restrictions, parking requirements, etc.

In doing so, city governments wiped out a whole stratum of cheap housing that was ideal for single people, thereby forcing those people to double- and triple-up in conventional apartments, pushing the price of those units up as well. From a housing affordability perspective, this wasn’t so smart.

Now, you could argue that the birth and growth of the co-living model is sort of a rebirth of SROs. However, it seems to me that the co-living companies target the more affluent end of the single-renter demographic, by bundling in expensive services and space (like group dinners, communal living rooms, etc.), which drive up the monthly rent.

Perhaps what is needed, as my fellow owner / operator pointed out, are new SROs, or co-living facilities stripped way down to allow for the lowest possible monthly rent.

The other LA tech story

Everyone interested in LA’s tech sector has been talking up Silicon Beach for years.

SB is the constellation of tech companies, including SnapChat, Google, Facebook and others which are located on the Westside, mostly in Santa Monica and Playa Vista.

But I think all the attention paid to SB has obscured the most interesting story about employment growth in LA: The expansion of Netflix in Hollywood.

In case you have not been following, over the past few years, Netflix has gone from something like 80 employees in Beverly Hills to renting ~750k sq ft in Hollywood, enough for 3-4k employees.

The largest tech employer in LA is SpaceX at 5k employees. But Netflix is catching up quickly and should surpass SpaceX in the coming years.

All those highly-paid workers need somewhere to live. This is very good news for Hollywood-area landlords.

Going into lease-up on a big project

We’re in lease-up on a wonderful complex in East Hollywood.

Have posted some pics below.

If you’re interested in a beautiful 2 bedroom apartment walking distance to Sunset Junction and the Red Line with parking and private outdoor space, reach out to Krystal [at] adaptiverealty [dot] com.

A little thought experiment

Thought experiment regarding American population dispersion: Imagine you picked up all of the people who live in the United States, then allowed them to pick where you put them down, with no regard to where they lived before.

How many would choose to be set back down in the Northeast and Upper Midwest?

How many would choose the West Coast, and, particularly, Southern California?

Note: Sorry to BB and SS, whom I used this line on at breakfast this morning!