3 Reasons Why Labor, Material & Land Prices May Ease In 2023

Most signs point to 2023 being a much slower year than 2022 for apartment starts. In addition to persistent commentary from development and lending executives saying that financing isn’t there for new construction, multifamily permits fell 16.4% in November, according to the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Although they’re still at a robust annualized 561,000 pace, it is the lowest reading since September 2021.

“We think 2023 is going to slow down,” said Brian Oates, executive managing director of development at Atlanta-based apartment developer RangeWater Real Estate. 

But some developers might see a benefit. Fewer starts could stall some of the astronomical pandemic-era price increases they were experiencing by limiting competition for materials, labor, and, eventually, land. Inflation, which has been an issue, is starting to level off.

In fact, construction input prices tumbled 2.7% in December from the previous month, the largest monthly drop since April 2020, according to an Associated Builders and Contractors (ABC) analysis. Despite that monthly drop, overall construction prices remain 7.9% higher than a year ago, according to the report.

But costs should be moderating soon, many experts say. Here are three reasons why building new units may be more affordable in 2023

1. Materials costs should stabilize

Construction costs have risen sharply over the last couple of years. On his company’s third-quarter earnings call, Houston-based Camden Property Trust CEO Ric Campo said his REIT was seeing them increase 1% per month — 12% per year. 

“We think that number is going to slow or go negative when we start seeing starts fall because most merchant builders are telling me today that their starts are going to be down substantially in 2023 and 2024, given [the] cost of capital and the lack of bank financing,” Campo said on the call.

Right now, there still are a lot of apartments — 932,000 — under construction. In fact, it’s been nearly 50 years — December 1973 — since more units were being built. But some of that activity will soon burn off, potentially freeing up contractors. RealPage predicts that 575,591 new apartment units — the highest on record — will hit the market over the course of 2023.

With that many properties being developed, developers aren’t seeing a lot of across-the-board cost declines. “Prices haven’t gone down dramatically,” said Adam David Lynd, president and CEO of Shavano Park, Texas–based The Lynd Group. “That hasn’t happened yet.

But the situation has improved in some areas, especially for commodities affected by supply chain issues over the past couple of years. In mid-December, lumber dropped to $370.40 per thousand board feet — its lowest level since June 2020. 

“It has come way down from the supply-chain-driven peaks of last year and into this year,” said Ryan Davis, CEO of Witten Advisors, a Dallas-based firm that provides apartment companies with advisory services.

In addition to falling prices for some commodities, materials are generally more readily available. “You’re not seeing the supply chain issues that we experienced in 2020. [But] I wouldn’t say It’s smooth sailing by any stretch of the imagination,” said Lissette Calderon, CEO of Miami-based Neology Life Development Group.

Developers and builders of apartments aren’t out of the woods yet, according to Anirban Basu, ABC's chief economist. “Though there is evidence of improving supply chain functioning and moderation in input prices, contractors should not be tempted into complacency,” he said.

Some items, like electrical transformers, can be especially challenging to acquire. “Our electrical equipment — transformers and switch gears — have 12-month lead times in several of our markets,” Oates said.

2. A single-family slowdown will ease some labor concerns

Although there are historically high levels of apartments under construction, there has been a pronounced slowdown on the single-family side, with the pace of construction down 32% since mortgage rates began to rise last February, according to the National Association of Home Builders.

That’s making materials like lumber and labor more available for apartment construction. “Seeing the single-family projections coming to a much slower pace is a big indicator with regard to the availability of the groups we can partner with on our projects,” said J.B. Curry, president of Indianapolis-based TWG Development.

Developers of wood-framed, garden-style projects are seeing a direct benefit, according to Davis. “There’s a considerable overlap with the single-family side in terms of just the knowledge to construct those properties,” Davis said.

But on the more complex projects, like high rises, prices haven’t dropped across the board. Contractors are currently maintaining their longest backlog since 2019, according to ABC’s construction backlog indicator, Basu said.

Oates agreed. “Until that backlog gets eaten up, I don’t think we’re going to see much movement from a labor perspective or from a material cost perspective,” he said.

3. Land costs should eventually fall

If the economy falls into a recession as many predict, land prices probably won’t fall immediately unless a particular seller is under financial stress or is highly leveraged. “Land guys are always the last ones to capitulate,” Davis said. “Right now, they’re holding steady.”

Though there have been a few exceptions, the situation is no different now, according to Davis. “For the most part, they’re going to stick to their prices,” he said. “But it’s going to be more favorable [for developers] in terms of there no longer being these big escalations in prices.”

In a fluid market, it’s hard to peg a price for land, according to Campo. “There is definitely some sort of movement on land sellers in terms of what the price should be in the future,” he said. 

But land sellers will probably get more desperate if developers who committed to buy their properties back out of deals. 

“Most of my merchant builder friends, if they’re not hard on a contract and have significant investments, they’ve dropped their contracts, and they know those land sellers are all getting dropped across the country,” Campo said. “And it will be interesting to see what happens in the first quarter.”

courtesy: Leslie Shaver

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