Labor and materials help drive up development costs of building seniors’ residences

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Development costs of building retirement homes have risen dramatically since the start of the pandemic and continue to rise, according to a CBRE study report released on Wednesday.

“The cost of developing a senior housing project is rising sharply, fueled by rising labor and material costs, operating expenses, and fee-related expenses. Meanwhile, returns – projected stabilized net operating income as a percentage of overall development costs – fell slightly to 8.6%,” the authors wrote.

Since 2020, the cost of developing a senior living project has increased by 17.8% to $317,400 per unit, or $333 per square foot. Hardware costs accounted for the largest portion of the total development cost at 70.2%, followed by soft costs at 18.5% and site acquisition costs at 8.2%, according to the data. Return on cost, when measured as projected stabilized net operating income as a percentage of overall development costs, averaged 8.6%.

Site acquisition costs represent a large portion of the total development cost. According to the report, site costs for most developments ranged from $12,100 to $33,500 per unit of revenue. Site costs are affected by area density, regulatory climate, and demographic trends.

Site work, foundations, construction of the building envelope, roofing, interior finishes, landscaping, signage and labor are the largest costs, the authors noted. Core costs range from $173 to $262 per square foot of gross building area and 65.6% to 75.8% of the total development cost.

Developers should count on approximately 18.5% of total development costs and $63.50 of gross building area for soft costs such as inspection fees, building loan costs, architecture and design, project management, operating deficit and any other cost carry, during construction and leasing. phases, according to the report.

And don’t forget to factor in furniture, fixtures and equipment costs, which average about 3% of total development costs and $9,700 per unit of income, the authors said.

“Although considerable, these expenses are not always included in development costs because they are not an integral part of the building,” they write.

Cap rates on stabilized assets have compressed slightly over the past year, to 6.2%, according to the report. Despite a significant increase in stabilized value, cost returns fell slightly to 8.6%.

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