Writer: Max Crampton-Thomas
2 min read May 2021 — Michael Ging spoke to Invest: about the challenges facing the construction industry. He commented on how the supply chain disruptions have affected development across the board but in South Florida there is an added limitation: the paucity of viable land.
What have been the biggest takeaways from the last year?
Last year, as COVID descended on the country, it was really a black swan event that nobody saw coming. The economy was firing on all cylinders going into COVID, and everybody I talked to couldn’t see anything on the horizon that looked to be of any concern. Overnight, that all changed. From a corporate-wide standpoint, in our company, everybody decided to hit pause for a while and wait and see how it played out. The early months of the pandemic were fraught with uncertainty. Our company has billions of dollars under construction coast to coast, plus a lot of projects in the pipeline that we are pursuing. All of this caused us to pause. We all adapted reasonably well, not just our company but our competitors across the industry. Fortunately, for the multifamily industry, we came through it by the latter half of 2020. The demand in this space proved very resilient. Obviously, hotels, restaurants and retail suffered. Capital availability — whether equity investment capital or construction financing debt — was very difficult for a period of time but, toward the latter half of the year, we started seeing that improve. Cap rates for commercial real estate really started getting stronger. This year, they continue to grow stronger — go lower — and we’re seeing record home prices around the country. In real estate in general, I’d say industrial and multifamily are clearly leading the way. A lot of the capital that would be going to the other asset classes is being overweighted toward industrial and multifamily. The other recent phenomenon in the last several months is what is happening in the for-sale housing industry, with home prices rising so significantly. Demand is outstripping supply. There are bidding wars with all-cash buyers and houses are going in a couple of days.
Is the positive trajectory for multifamily sustainable in the long term?
In South Florida especially, we’re land-constrained, so there is a physical limitation on supply in this market. That in itself will keep supply and demand mostly in balance. Given the growth we’re seeing with in-migration, I think demand will be closely matched with supply if not slightly better. There have been some markets that saw a lot of high-density construction going on where you then started to see some softness for a period of time but that shouldn’t be taken as the rule. Looking ahead, when I look at the lack of land limiting our ability to build, that will continue to keep prices firm.
What are the biggest challenges for the industry right now?
Our biggest challenge right now is cost escalation. Not just land prices but all construction material costs have gone up dramatically. Lumber, of course, is the headline that has gone up about 400%. It’s had a huge impact, not so much in South Florida, where we build everything in concrete, but pretty much everywhere else throughout the nation. With all the costs ticking up significantly, this could limit some of the supply and projects may have to be put on hold for a while until some of that normalizes. A lot of that was due to disruptions in the supply chains during the early months of COVID, and now people are trying to catch up. Suppliers just haven’t been able to keep pace with development.
What is your company’s approach to workforce housing?
It’s a challenge for us to deliver workforce housing here in South Florida with land prices being where they are, and with impact fees and construction cost increases. The rents you need to achieve to generate an acceptable return are hard to get with the cost of developing even a more stripped-down version of workforce housing product. We do this without any tax credits or bond financing. It’s purpose-built workforce housing where we very carefully try to design a very cost-efficient product and building that is really suited for the part of the workforce who can’t afford that class-A product. We are bullish on that area and have a billion-dollar platform on that nationally. We have a lot of deals going forward in this area, especially around Orlando and Tampa.
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