Analysis of Current and Future Development Costs
The Past and Present:
Development costs have skyrocketed over the past two years. Strong demand coupled with supply chain issues resulted in soaring material prices. Materials such as sand, rock, cement, and steel used to manufacture pipes and asphalt have increased substantially. Diesel fuel, a staple at every development site, has more than doubled since 2020. A shortage of power transformers and other electrical components is also affecting developers and builders across the nation.
Despite a cooling housing market, development costs are higher than they were a few years ago because in most markets there is still an undersupply of developed lots as developers continue to play catch-up from a record housing market. Yet there’s another factor likely propping up material prices: government spending.
With the onset of COVID-19, the US economy was on the brink of financial disaster. So Congress acted decisively with three massive federal aid initiatives: The Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020, the American Rescue Plan Act (ARPA) of 2021, and the Infrastructure Investment and Jobs Act (IIJA). These initiatives pumped over a trillion dollars into the economy, shoring up state and local budgets. The bills included spending deadlines so that states would act without delay. However, as time went on and the economy soared to unprecedented heights, spending slowed. With the passage of this year’s IIJA, billions of dollars remained unspent from previous programs. States and local governments that retained their initial appropriations had the added flexibility of using those stimulus funds to support infrastructure and other capital projects. This influx of money to upgrade roads, water, wastewater, and stormwater systems has created an additional demand for materials and manpower.
Considerations before Breaking Ground in Today’s Market:
Developed lots remain undersupplied in most markets. Employment data shows that job gains outpace job losses in a slowing economy. Increased government spending creates competition for materials and jobs. Historically low home listings prop up home prices despite sharply higher interest rates.
Needless to say, there are a lot of factors at play here. Before undertaking any development project, it is imperative to research core market data, understand the nuances of local politics, and monitor the latest legislation out of Washington. It’s also critical to establish a budget, assess risk, and analyze returns for any land development project at an early stage. The ability to recognize an ill-fated project early on minimizes losses and can be just as important for your bottom line as identifying a great project.
At Terramoor we have over twenty years of experience navigating these issues. We regularly work with developers and manage sites for builders to bring your land to its fullest and best use. Contact us for any of your land and development needs.