Developers Face Cost Escalation, Technology Challenges

Michael Tucker

September 20, 2018

Cost escalation represents the biggest challenge commercial real estate developers will face over the next five years, said Altus Group Limited, Toronto.

Altus surveyed more than 400 property development executives; more than two-thirds cited rising costs as the biggest challenge they face.

Respondents listed several reasons for rising costs that create a "domino effect" for developers. Nearly two-thirds of developers face labor shortages; 60 percent are concerned about the development approval process and one-third said cross-border trade policy can have a negative impact as uncertainty grows about international tariffs and trade agreements.

"The global development sector is facing an increasingly complex set of challenges and rapid change, from escalating construction costs through to a sea-change in the development financing environment," said Altus Group CEO Bob Courteau.

But Courteau noted developers also see significant opportunities to manage risk and take advantage of changing conditions through various strategies including technology investments and performance management along with new ways of managing and financing projects.

Many developers surveyed expressed uncertainty regarding emerging technologies that other industries are successfully adopting. Nearly two-thirds said 3D printing will have little to no impact while 16 percent anticipate it will cause major disruptive change. The report said 3D printing is already being applied successfully to smaller-scale development projects in China and the Netherlands.

A majority of those surveyed--56 percent--said they think process automation will cause little to no impact to CRE development; 22 percent said it could become a major disruptive change. Just under half of those Altus Group surveyed said augmented reality/virtual reality will cause little to no impact while 20 percent said it could be a major disruptor.

The report also indicated a significant on shift in financing patterns away from traditional and institutional lending since the Global Financial Crisis. More than 80 percent of respondents said they use at least one source of alternative financing while 46 percent said they use traditional or institutional financing. More than 45 percent indicated they were considering, planning or utilizing some form of alternative financing exclusively.

This financing source shift coincides with a rapidly expanding range of financial options and a substantial increase in global capital inflow into real estate in recent years, Altus Group noted. "Many alternative lenders and private funds have actively positioned themselves toward the space of traditional lenders, with investors increasingly seeing real estate as an income source as well as an opportunity for premium returns on the equity and joint venture structure side," the report said. "In addition, there has been an increase and acceleration in the adoption and utilization of real estate joint ventures with 62 percent of development executives indicating they are considering entering into partnerships or joint ventures."

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