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January 27, 2017

What keeps multifamily developers up at night? Rising construction costs that have begun to hit the sector. At the National Multifamily Housing Council’s (NMHC) 2017 Annual Meeting, a panel of high-profile developers discussed the rising costs of completing a building, and what they see as the future of amenities.

What’s driving pricing?

Developers are wary of labor and construction costs at this point in the cycle as underwriting becomes tougher and the market sees large deliveries of product.

“Our biggest issue right now is cost growth, which we have seen increasing 5 to 10 percent across markets,” said Jay Hiemenz, President and COO of Alliance Residential Company.

On the other hand, Executive Vice President and Chief Development Officer of Forest City Realty Trust Ron Ratner notes his firm has seen costs go down as a result of large institutional projects being completed.

“We are seeing cost inflation in the 3-5 percent range in the areas where this is happening,” he said. “We are definitely feeling a little better than last year with our cost equation.”

Amenities: Less could be more

While opulent resident lounges and state-of-the-art fitness centers have become staples in Class A urban product, developers are rethinking apartment essentials.

“We have contributed to the amenities arms race,” said Ratner. “But now we are paying attention to the small stuff, like where you can hang your towel and the essentials.”

Added Brandt Bowden, Principal and CIO of The Hanover Company, “We are looking to avoid what we did last cycle and get out in front of our skis with amenities to tack on another nickel for rent.”

Some key amenities developers are looking at: rooftop space for urban in-fill product, fitness centers, and building technology.

“We are trying to build flexibility into our spaces and include technology into our building systems so they can adapt to the future,” said Hiemenz.

Building for the future includes making all buildings sustainable, having ports for electric car chargers, and convertible space, according to Ratner. But in the end, the panel noted, amenities in the surrounding neighborhood still play a huge role in a building’s success.

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