Commercial Real Estate Cost Crunch

Commercial Real Estate Cost Crunch

In a recent University of St. Thomas survey, a panel of commercial real estate leaders expressed concern about increasing costs of land and building materials.

Several commercial real estate leaders are “very concerned” about a projected uptick in the costs of land and building materials over the next couple years.

That’s according to the results of a recent University of St. Thomas survey of 50 commercial real estate leaders.

The change in costs could have a wider impact on values and returns for both developers and investors, university officials wrote in a summary of the survey’s findings.

The biannual survey polls 50 commercial real estate leaders on their expectations over the next two years. For the last 16 surveys, the university has assembled the same group of leaders working in development, finance, and investment.

The university polls the group on six different elements of the commercial real estate market: rents, occupancy, land price, building materials, rate of return, and equity and loan-to-value requirements.

Each element receives an index between 0 and 100; index values greater than 50 suggest a “more optimistic view,” while anything below 50 suggests a pessimistic one, according to the university.

The index for the cost of building supplies remains “strongly negative:” In the most recent survey, the figure came to 32. That marks a slight improvement from 26 in the fall survey, which was conducted in December 2018.

“There is a continued expectation that increases in the price of building materials will continue to increase,” St. Thomas leaders wrote. “The panel believes that commodity prices for lumber, concrete, steel and many of the other materials used in construction will continue to increase due to shortages and newly imposed tariffs.”

Meanwhile, the land price index ventured into more pessimistic territory in the spring survey. That index moved from 46 in December to 40 in spring. The lowest point for the index was recorded at 31 in fall 2013.

Still, a score of 40 “indicates increasing concern about the rapid rise of land prices.”

“Since land prices are a major component of project costs, any increase has a great deal of impact,” St. Thomas officials said. “Higher land prices are a hindrance to new development, making it more difficult to obtain financing and adequate returns for investors.”

While the composite index across all six markers was “slightly pessimistic,” commercial real estate leaders don’t expect any major downturns in the Twin Cities market over the next two years.

“The increase in online shopping, low interest rates, changes in housing trends and the continued redefinition of the office environment will remain major factors in the performance of commercial real estate in the coming two years,” said Herb Tousley, director of real estate programs at St. Thomas.