What Real Estate Developers Can Do about Construction Costs

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One of the challenges of developing real estate, particularly multi-family housing, is that capital costs, while already substantial, can be unpredictable. The early phase of physical construction (clearing out existing structures or debris and preparing the site) can present unexpected complications that developers need to address before construction can begin. On average, almost 5 to 15 percent of total hard costs go to site preparation. But the challenge is these items are rarely estimated accurately beforehand.

There are at least three strategies every developer should study to manage the costs of constructing large-scale projects. Downsizing costs, particularly in site preparation and the construction of parking facilities, is possible. That is, if you prepared the site efficiently, planned the depth and complexity of structural foundations carefully, and negotiated the type of parking amenities with the local authorities.

Costly Site Preparation and Parking Construction

Preparing a site for development frequently entails clearing of the previously existing structure before construction work can begin. Constructing even just a level parking space may mean removing old asphalt or concrete.

There may be instances when previous structures or usage may have caused damage or contamination to the land soil, requiring restoration. In some cases, sloped or tilted land requires adjustments to level it out. Other times, developers might need to make major modifications to drainage, sewage system, or utility connections to adapt to the new structure. This is especially true if there is a considerable size or scope over the old structures.

It is common for jurisdictional zoning laws to mandate a minimum requirement for in-facility parking spaces for housing developments. Many developers decide on building parking structures, either aboveground or underground, to maximize space. However, the construction of such parking structures is significantly more expensive than developing surface parking, more so in particular urban locations. Expectedly, costs rise proportionately with multiple levels of underground or aboveground parking structures.

Developers can be strategic about the type of parking facilities to construct while considering factors such as proximity to commercial or corporate districts, vehicle volume, and accessibility to public transportation. That said, here are the three strategies housing developers can adopt to manage costs:

construction site

Strategy 1: Multi-tasking with Site Preparation

It is common for real estate developers to finish site preparation work before progressing to the succeeding phases of the project. With this, assess if it is possible to work on-site preparation simultaneously with other project phases such as off-site construction, building design, or public bidding processes.

Strategy 2: Adjust Foundation Specifications

The factors that determine the depth and complexity of structural foundation required include the following criteria:

  • Site Conditions: Are there pre-existing structures? Is the land sloped?
  • Soil Conditions: Is there sandy soil or bedrock? Has the soil been contaminated?
  • Building Type: Are you constructing a low-, mid-, or high-rise building?

It is, of course, imperative to plan and build foundations suitably to these factors.

Low- or mid-rise developments can utilize more straightforward structures or floor plans that require only shallow foundations. In contrast, high-rise developments common in urban locations require a more solid foundation. Expect significantly higher costs if the project builds multi-level underground parking, which requires more geotechnical work and site assessment early on.

What developers can do is be more judicious in the selection of project locations. It is vital to accurately estimate required sub-structural and geotechnical work during the early stages of project planning. More effective estimation can reduce wastage in expenses such as manpower, heavy construction equipment sourcing, and purchase of construction materials throughout the several stages of the project.

Strategy 3: Negotiate Parking Regulatory Requirements

A single-level surface parking facility is the most affordable option, though not always suitable for all developments, particularly in dense metro areas. Multi-level underground parking is the most costly to construct. Negotiate the possibility of building more cost-efficient parking facilities, such as a single-level parking structure mixed with multi-use units (such as commercial retail spaces) instead of just multi-level exposed or bare parking structures.

Local governments are being lobbied upon to revisit local regulatory requirements and consider location factors such as accessibility to public transport or accessibility to commercial hubs. Developers can negotiate for more flexibility in design or utilization restrictions and lower parking-to-dwelling unit ratios with the support of the local community.

Real estate developers and contractors are mostly unanimous that managing project costs is more complex before a development project has surpassed the site preparation phase. However, running site preparation concurrently, planning for less complicated foundation structures, and working with local governments to optimize parking-to-dwelling ratios are three strategies for managing project costs. At the same time, you can complete structurally sound and sellable housing developments.

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