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How Do Bay Area Developers Deal With Labor and Construction Costs? Hold the Course, Wait it Out

Oct 4, 2018
by Josh Anderson

SAN FRANCISCO, CA – At CapRE’s Fourth Annual Northern California Apartment Summit, a leading economist recommended regional insiders to hold tight, stay the course, and enjoy the ride, because the economy isn’t about to slow down anytime soon. However, that doesn’t mean that everyone feels comfortable following that advice.

Case in point: A pair of Bay Area insiders on the panel San Francisco, East Bay, South Bay Multifamily 360: Still Strong and Growing in the Face of a Potential Macro Economic Shift, Rising Interest Rates, Proposition 10 and Construction Challenges who revealed that their firms are hunkering down and keeping a low profile until things calm down, even if that means waiting until the next cycle kicks off.

“We have a wonderful panel here with a wide range of experience and specialty,” began Moderator Kevin H. Rose, Partner at Reuben, Junius & Rose LLP. “So what are your strategies in dealing with high land values, high construction costs, and being at the top of this market? How do you continue to invest and develop? I’m going to put John on the spot here and ask him to lead off the discussion. “

“Well, we see a lot of opportunities in the city all of the time,” replied John E. Hyjer, First Vice President Investments, Equity Residential. “Deals where people had land, and had go through the entitlement process, and were looking for joint venture partners last year, are now thinking about selling this year. There are a lot of road blocks in the city for Type I, high-rise construction, and a lot of those cited here are the ones that we’re seeing.”

John Hyjer, First Vice President Investments, Equity Residential

Those include the high cost of labor, the high cost of construction materials, the cost that the city puts on, and Proposition C still lingering out there on the affordability component. “That is over-burdening a lot of projects,” he explained. “The timing that it takes to get through the process [as well]. We have a couple of sites that we have tied up, we have priced, and then we said, you know what, I think I’m going to sit and wait a little bit longer on some of these. There are some podium-type transactions out here that still pencil. It’s easier now on the peninsula than on the South Bay, but the Type I high rise is pretty tough right now.”

Concluded Hyjer, “So our position is kind of, hanging back and watching, and managing what we have in place.”

Stay tuned for an upcoming article featuring the perspective of Hyjer’s co-panelist, Marc Babsin, Principal at Emerald Fund. For more from Hyjer, check out a previous CapRE Insider Report: NorCal Apartment Summit Preview: EQR’s John Hyjer Talks Prop 10 and “Waiting for an Opportunity for a Downturn in the Market”

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