Rising Costs Pose Challenges for Real Estate, Construction Companies

As South Florida’s residential and commercial real estate markets continue to rebound, real estate and construction executives are seeing rising input costs, a trend which is expected to continue to pose challenges for the industry over the next several quarters.

Construction expenses went up almost 15% in the last six months of 2013, according to a Miami Today article. Higher costs mean lower profit margins and an increased need to tightly manage cash flow and expenses.

Real estate developers weighed in on this and other industry trends during the Greater Miami Chamber of Commerce’s recent roundtable on “The Evolving Miami Real Estate Market.” The event featured panelists from Mckafka Development Group, Alliance Residential, Terra Group, The Allen Morris Group and Housing Trust Group.

Stephan Gietl, CFO, COO and managing partner of Mckafka Development Group, said he has seen a dramatic increase in construction costs over the last 18 months.  Several developers also voiced concerns about quality and meeting construction deadlines as the current building boom has stretched many subcontractors thin.

The panelists echoed some of the thoughts shared by construction executives in Kaufman Rossin’s construction industry power lunch that was moderated by Tom Hudson of WLRN earlier this year. At the lunch, Traci Miller of Miller Construction said material costs are skyrocketing, in part because of increasing demand from China. Insurance rates are also trending higher, said Lorin Montgomery of Corporate Insurance Advisors.

Rapidly changing costs make it more difficult for developers to prepare accurate pro forma projections, which are critical for developers to properly evaluate their investments.  Failing to adjust pricing formulas to take into account rising costs could wreak havoc on project returns.

So what can you do to manage your bottom line as expenses continue to increase? As margin compression continues in the industry because of increasing costs of land, labor, building materials, insurance and other costs, it’s more important than ever to have a financial professional evaluate your company’s financials to make sure your projects are structured appropriately.

Our accounting and consulting professionals can assist with minimizing your tax burden and advise you on strategies to improve cash flow and operating efficiencies.  Contact me or another member of our real estate and construction industry group to learn more.