The Cost of a New Cycle

Pricing is Shifting

Another heated development cycle

Construction went from non existent to explosive

Impacts of this shift are reaching into all aspects of construction and driving up cost

Pricing is Shifting

Commodity prices are seeing upward pressure as demand increases (Copper, Steel, Lumber & Oil Based

Products)

Far reaching impacts…

Pricing is Shifting

Skin/Structure

Finishes

Pricing is Shifting

Lender/Owner requirements have tightened Increase in the number of

consultants and Inspectors driving up costs

Pricing is Shifting

Deals are more complicated now and take more time due to tightening of credit markets which has created more documentation & process for GC & Subs

Green building efforts come with a cost

Types of Construction Contracts

GMP (Guaranteed Maximum Price)

Cost Plus

Types of Construction Contracts

We generally utilize GMP Meaningful buyout savings on

2011 starts Buyout is getting more challenging

Cost Impact

April 2011 Start

April 2012 Start

18% Hard Cost Increase

Impact

+ 18% + 1%

Cost Impact

Labor has tightened both on the Subcontractor and GC side

Market is adjusting for the increased demand on construction payroll & hiring is more complicated

How do you hedge?

Have local presence in each major market you are in (Development and Construction)

How do you hedge?

Treat subcontractors right

Important that subs know your future pipeline

Have a good pay cycle for subs

How do you hedge?

Subcontractors need assurance that project will go forward (Not another bid exercise)

Lock in pricing as early as possible for the length of the project

How do you hedge?

Maintain discipline of consistent design decisions throughout project Minimizing potential change orders

(brick colors, unit Finishes, etc.)

Further plans are along = Less chances for surprises

How do you hedge?

Use and understand historical data on material pricing

When possible, use same construction teams across similar asset class projects

How do you hedge?

Important that Developer, Construction Company & Partners have same expectations on final product up front

Limit allowances when possible

How do you hedge?

How do you hedge?

Fund deals and do business with Developers/Construction Companies with a proven track record

Questions?