5 ms·

CRE guy here. A lot of this "productivity loss" is also due to government related staffing issues and bureaucracy. Most people are describing more complex build

CRE guy here. A lot of this "productivity loss" is also due to government related staffing issues and bureaucracy. Most people are describing more complex building codes, so I'll add something new. I had a project that was delayed by over a year during Covid because the city approved incorrect plans, came back and requested revisions, and then lost the physical plans (without us knowing until we checked in asking what the status was). This was almost a year delay and added cost overruns, etc. It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money). Remember, there's someone at the city working 9-5pm clocking in and out.. they are not impacted if the project is denied, delayed, etc... while the developer is incurring cost of capital of 7-10%. Another example of bureaucracy: you have to go through a particular order of inspections when developing property. One of them includes elevator inspections. You have to have power before that, so that's another set of inspections. IIRC, during Covid there were only something like half a dozen elevator inspections for the entire state of CA. The source below says there was 15 in 2019. If your elevator inspection is 2 months late... guess what, your project is going to be late. https://laist.com/news/elevator-inspections-los-angeles https://laist.com/news/elevator-inspections-los-angeles Remember the modular startup Katerra that gobbled money from Softbank? I knew a developer who did one of their projects. He said Katerra would deliver the units on time, but the city's permitting process was so broken that they couldn't actually install or inspect these units. So they would have to find lots to store the material (+costs & +issues). Katerra's "value-add" was the speed of delivery would cut costs down, but in reality this was hard to achieve "on-site".

runnerup 4y ago
> made the required rent higher If, all along, you could have rented it out for more money ... why were you planning to rent it out for less money? I get that you wouldn't have to, but it appears that the "market rate rent" was higher than you initially anticipated. As a corollary, assuming that you had initially planned on the highest rent that the market would bear...it seems that after a year of unexpected delays you'd most likely still choose to finish the project even at a loss. This is because all the loss would have already been sunk cost that you can't change anymore, and at the "original maximum rent the market would bear" you'd still make your IRR/ROI on the marginal future investment of finishing the construction. So, assuming you couldn't raise the rent, you'd lose money either way, but you'd lose less money by finishing the construction vs. losing more money by abandoning the project entirely.
- bfeynman 4y ago
  My guess is they probably put more money into it (higher quality appliances and such) to get higher rent that would give acceptable cap rate.
- bobkazamakis 4y ago
  They want all risk to be put on external factors, that way their business can make profit without any - a tale as old as time.
- brewdad 4y ago
  Because outside of an economics textbook, no one has perfect information on what the market will bear.
- s1artibartfast 4y ago
  Your comment only makes sense if you ignore the rest of the sentence you quoted. "It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money)." required rent =/= planned rent =/= actual rent Higher costs than expected can easily cause a project that would be profitable to be a loss.
  - mannerheim 4y ago
    To be fair, GP has a point: unexpected expenses and delays in construction represent sunk costs, and don't matter with respect to maximising profits, as the landlord should pick the price which maximises profits with respect to whatever the operating costs of the apartment are, without considering the cost of construction. However, as sibling comments to yours mentioned, there are flaws to this perspective: - You can make the apartments 'better' and charge a premium on top of whatever the better appliances cost. So if that raises operating costs by $100/unit month, raise rent by $200/unit month. - Real life doesn't always map perfectly onto microeconomic theory. In particular, discovering the profit-maximising price is tricky. However, I would still argue that the landlord would rationally still pick whatever they would assume the profit-maximising price would be. - Since everyone else is probably facing delays and cost overruns, probably not as much construction is getting done as might have been assumed, therefore the landlord faces less competition than anticipated and can raise rent higher than expected without losing too many prospective tenants.
willi59549879 4y ago
When i read the article i expected something like that to be the reason. Some paper pusher writing down rule books to follow. Then someone else who hasn't gotten his hands dirty in his life writes a report the workers are to blame for bad productivity.
yamtaddle 4y ago
State and local governments are, as far as I can tell, simultaneously spending way too much money and are badly understaffed in certain areas. Sometimes even while appearing well-staffed, because there's some bottleneck elsewhere in the system (due to insufficient staffing there) preventing the efforts of an army of other frontline workers from being effective. Like the elevator inspector thing—you may have more than enough electrical inspectors but not enough elevator inspectors, so, the extra electrical inspectors can't improve the situation. Of course the pay's shit, you're subject to all kinds of quality-of-work-life destroying whims of politicians at the top, the bureaucracy is as abusive and ineffective as stereotypes about bureaucracies would lead one to expect, and if you have an effective union shielding you from some of that, about half the politicians are constantly trying to weaken or eliminate that, plus trying to mess with your pension which is practically the only attractive thing about those jobs... so, no fucking wonder, really. Recent wage inflation has made all this stuff worse by making unresponsive government pay scales far less attractive than market-driven wages elsewhere, so systems and offices that were teetering before are now falling over.
- onlyrealcuzzo 4y ago
  > State and local governments are, as far as I can tell, simultaneously spending way too much money and are badly understaffed in certain areas. Shouldn't be a mystery. In many states and localities a massive portion of spending goes to pensions.
- zbrozek 4y ago
  They might also simply be exerting too much oversight. The other way to reduce these pressures is to reduce workloads by simply caring less. I'm doing a remodel and I got three pages of comments that were 90% about minor annotation issues that won't make any difference to anything on the ground ever. But it burned tens of hours of plan checker time.
- lotsofpulp 4y ago
  >the politicians are constantly trying to weaken or eliminate that, plus trying to mess with your pension which is practically the only attractive thing about those jobs... so, no fucking wonder, really. >Recent wage inflation has made all this stuff worse by making unresponsive government pay scales far less attractive than market-driven wages elsewhere, so systems and offices that were teetering before are now falling over. These two are related. The pensions work for government workers because politicians get to advertise low taxes, voters get to enjoy lower taxes and punt the costs to future generations, and union bosses who are older, get to cash out before shit hits the fan (almost all governments have tiers of pensions, where older workers have more benefits than younger will ever have). The solution is to get rid of ALL deferred compensation. Government pays employees the same as private does. No more muddying the waters with understated liability numbers and underfunding for deferred compensation. Then government can match wages in real time.
ryanwaggoner 4y ago
IIRC, during Covid there were only something like half a dozen elevator inspections for the entire state of CA. The source below says there was 15 in 2019. If your elevator inspection is 2 months late... guess what, your project is going to be late. I couldn't believe this is true, so I actually read the article. Turns out, it's not true. It's multiple orders of magnitude off. There were 15 inspectors for the city (not county) of LA when this article was written: "In order to be up to code, each of the 20,974 elevators in the city of Los Angeles needs to be checked once a year. But there are only 15 inspectors to do it." Roughly half of the elevators were past due, which means they were inspecting 10k+ elevators per year just in the city of LA, let alone the entire state.
- karaterobot 4y ago
  Seems like the off the cuff guess about the numbers is wrong, but the actual point they were making remains valid.
  - eagleinparadise 4y ago
    IIRC the City of LA actually has its own elevator inspectors, but if I'm not mistaken CA has inspectors that cover the rest of the state. An elevator inspector told me this directly to my face, but it was some time ago so I could be a bit off. But you get the general point I was trying to make.
ineedasername 4y ago
>...also due to government related staffing issues and bureaucracy. Most people are describing more complex building codes, so I'll add something new. The two are interrelated. There'd be a lot less opportunity for error if building codes were cut in half. For example where I live there is a fair bit oil heating & therefore underground oil tanks. Building code requires that upon switching to something else, like natural gas, the submitted plans must include information about the planned removal or decommissioning of the tank. This wasn't always a requirement, but now that it is that means someone has to check the plans to make sure that requirement is met. So, bureaucracy and building codes go hand in hand. Of course in the case of residential oil tanks remaining in the ground, or not being properly decommissioned, there it can cause a variety of problems. Water contamination for example, a major concern for abandoned tanks in any area where residential well water is common. (and for other reasons) I'm not arguing that bureaucracy as it exists is at all a model of efficiency, but you can't examine or solve that problem without understanding how we got there.
nocoiner 4y ago
When you say the deal will lose money, do you mean that (1) the project’s operating expenses exceed its income, (2) the building can’t be satisfactorily recapped after completion/stabilization, (3) the MOIC at exit will be less than 1.0x, (4) the investor won’t receive their full preferred return or (5) the sponsor won’t earn any promote? I could see any of these as being a way to describe a deal that “loses money.”
- eagleinparadise 4y ago
  I was modeling a 2-3% IRR on aggressive numbers when I last worked on it. It was acquired with a proforma 18% IRR. Whenever it's sold, it's going to return less than 1.0x. Not sure how bad the loss will be. Even if it is recapped, the deal will require a significant cash-in refinance. If the business plan is saved and it takes you another 4 years to exit at a better number, that 4-yr now 8-yr deal results in say a low single digit IRR. Sponsor makes no money and the project sucks up even more resources & labor. But depends if your capital partner is willing to ride it out and if you can even recap where the numbers work
  - nocoiner 4y ago
    Sorry for the late reply (not sure if you’ll even see this) but thanks for the response. Oof, yeah, that’s a tough one. Definitely think calling that project a money loser is a fair characterization. Sorry to hear about it, the CRE guys I know are all pretty damned smart and incredibly hard working and it’s nonetheless a tough business for them. Though if one has the chops, not a bad “get rich slowly” scheme, lol.

runnerup 4y ago

> made the required rent higher If, all along, you could have rented it out for more money ... why were you planning to rent it out for less money? I get that you wouldn't have to, but it appears that the "market rate rent" was higher than you initially anticipated. As a corollary, assuming that you had initially planned on the highest rent that the market would bear...it seems that after a year of unexpected delays you'd most likely still choose to finish the project even at a loss. This is because all the loss would have already been sunk cost that you can't change anymore, and at the "original maximum rent the market would bear" you'd still make your IRR/ROI on the marginal future investment of finishing the construction. So, assuming you couldn't raise the rent, you'd lose money either way, but you'd lose less money by finishing the construction vs. losing more money by abandoning the project entirely.

bfeynman 4y ago
My guess is they probably put more money into it (higher quality appliances and such) to get higher rent that would give acceptable cap rate.
bobkazamakis 4y ago
They want all risk to be put on external factors, that way their business can make profit without any - a tale as old as time.
brewdad 4y ago
Because outside of an economics textbook, no one has perfect information on what the market will bear.
s1artibartfast 4y ago
Your comment only makes sense if you ignore the rest of the sentence you quoted. "It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money)." required rent =/= planned rent =/= actual rent Higher costs than expected can easily cause a project that would be profitable to be a loss.
- mannerheim 4y ago
  To be fair, GP has a point: unexpected expenses and delays in construction represent sunk costs, and don't matter with respect to maximising profits, as the landlord should pick the price which maximises profits with respect to whatever the operating costs of the apartment are, without considering the cost of construction. However, as sibling comments to yours mentioned, there are flaws to this perspective: - You can make the apartments 'better' and charge a premium on top of whatever the better appliances cost. So if that raises operating costs by $100/unit month, raise rent by $200/unit month. - Real life doesn't always map perfectly onto microeconomic theory. In particular, discovering the profit-maximising price is tricky. However, I would still argue that the landlord would rationally still pick whatever they would assume the profit-maximising price would be. - Since everyone else is probably facing delays and cost overruns, probably not as much construction is getting done as might have been assumed, therefore the landlord faces less competition than anticipated and can raise rent higher than expected without losing too many prospective tenants.

willi59549879 4y ago

When i read the article i expected something like that to be the reason. Some paper pusher writing down rule books to follow. Then someone else who hasn't gotten his hands dirty in his life writes a report the workers are to blame for bad productivity.

yamtaddle 4y ago

State and local governments are, as far as I can tell, simultaneously spending way too much money and are badly understaffed in certain areas. Sometimes even while appearing well-staffed, because there's some bottleneck elsewhere in the system (due to insufficient staffing there) preventing the efforts of an army of other frontline workers from being effective. Like the elevator inspector thing—you may have more than enough electrical inspectors but not enough elevator inspectors, so, the extra electrical inspectors can't improve the situation. Of course the pay's shit, you're subject to all kinds of quality-of-work-life destroying whims of politicians at the top, the bureaucracy is as abusive and ineffective as stereotypes about bureaucracies would lead one to expect, and if you have an effective union shielding you from some of that, about half the politicians are constantly trying to weaken or eliminate that, plus trying to mess with your pension which is practically the only attractive thing about those jobs... so, no fucking wonder, really. Recent wage inflation has made all this stuff worse by making unresponsive government pay scales far less attractive than market-driven wages elsewhere, so systems and offices that were teetering before are now falling over.

onlyrealcuzzo 4y ago
> State and local governments are, as far as I can tell, simultaneously spending way too much money and are badly understaffed in certain areas. Shouldn't be a mystery. In many states and localities a massive portion of spending goes to pensions.
zbrozek 4y ago
They might also simply be exerting too much oversight. The other way to reduce these pressures is to reduce workloads by simply caring less. I'm doing a remodel and I got three pages of comments that were 90% about minor annotation issues that won't make any difference to anything on the ground ever. But it burned tens of hours of plan checker time.
lotsofpulp 4y ago
>the politicians are constantly trying to weaken or eliminate that, plus trying to mess with your pension which is practically the only attractive thing about those jobs... so, no fucking wonder, really. >Recent wage inflation has made all this stuff worse by making unresponsive government pay scales far less attractive than market-driven wages elsewhere, so systems and offices that were teetering before are now falling over. These two are related. The pensions work for government workers because politicians get to advertise low taxes, voters get to enjoy lower taxes and punt the costs to future generations, and union bosses who are older, get to cash out before shit hits the fan (almost all governments have tiers of pensions, where older workers have more benefits than younger will ever have). The solution is to get rid of ALL deferred compensation. Government pays employees the same as private does. No more muddying the waters with understated liability numbers and underfunding for deferred compensation. Then government can match wages in real time.

ryanwaggoner 4y ago

IIRC, during Covid there were only something like half a dozen elevator inspections for the entire state of CA. The source below says there was 15 in 2019. If your elevator inspection is 2 months late... guess what, your project is going to be late. I couldn't believe this is true, so I actually read the article. Turns out, it's not true. It's multiple orders of magnitude off. There were 15 inspectors for the city (not county) of LA when this article was written: "In order to be up to code, each of the 20,974 elevators in the city of Los Angeles needs to be checked once a year. But there are only 15 inspectors to do it." Roughly half of the elevators were past due, which means they were inspecting 10k+ elevators per year just in the city of LA, let alone the entire state.

karaterobot 4y ago
Seems like the off the cuff guess about the numbers is wrong, but the actual point they were making remains valid.
- eagleinparadise 4y ago
  IIRC the City of LA actually has its own elevator inspectors, but if I'm not mistaken CA has inspectors that cover the rest of the state. An elevator inspector told me this directly to my face, but it was some time ago so I could be a bit off. But you get the general point I was trying to make.

ineedasername 4y ago

>...also due to government related staffing issues and bureaucracy. Most people are describing more complex building codes, so I'll add something new. The two are interrelated. There'd be a lot less opportunity for error if building codes were cut in half. For example where I live there is a fair bit oil heating & therefore underground oil tanks. Building code requires that upon switching to something else, like natural gas, the submitted plans must include information about the planned removal or decommissioning of the tank. This wasn't always a requirement, but now that it is that means someone has to check the plans to make sure that requirement is met. So, bureaucracy and building codes go hand in hand. Of course in the case of residential oil tanks remaining in the ground, or not being properly decommissioned, there it can cause a variety of problems. Water contamination for example, a major concern for abandoned tanks in any area where residential well water is common. (and for other reasons) I'm not arguing that bureaucracy as it exists is at all a model of efficiency, but you can't examine or solve that problem without understanding how we got there.

nocoiner 4y ago

When you say the deal will lose money, do you mean that (1) the project’s operating expenses exceed its income, (2) the building can’t be satisfactorily recapped after completion/stabilization, (3) the MOIC at exit will be less than 1.0x, (4) the investor won’t receive their full preferred return or (5) the sponsor won’t earn any promote? I could see any of these as being a way to describe a deal that “loses money.”

eagleinparadise 4y ago
I was modeling a 2-3% IRR on aggressive numbers when I last worked on it. It was acquired with a proforma 18% IRR. Whenever it's sold, it's going to return less than 1.0x. Not sure how bad the loss will be. Even if it is recapped, the deal will require a significant cash-in refinance. If the business plan is saved and it takes you another 4 years to exit at a better number, that 4-yr now 8-yr deal results in say a low single digit IRR. Sponsor makes no money and the project sucks up even more resources & labor. But depends if your capital partner is willing to ride it out and if you can even recap where the numbers work
- nocoiner 4y ago
  Sorry for the late reply (not sure if you’ll even see this) but thanks for the response. Oof, yeah, that’s a tough one. Definitely think calling that project a money loser is a fair characterization. Sorry to hear about it, the CRE guys I know are all pretty damned smart and incredibly hard working and it’s nonetheless a tough business for them. Though if one has the chops, not a bad “get rich slowly” scheme, lol.