Time to Put Down the Shovel? So Far this Year, We’ve Dropped Three Projects due to Breathtaking Construction Cost Estimates

His number came in 100% more than the cost of our last store, and the deal no longer penciled out.

By John E. McNellis, Principal at real estate developer McNellis Partners, for WOLF STREET:

A big-time San Francisco contractor told me the other night that he half-wished for another recession. Why? Because his subcontractors—the guys who actually do the work—are so inundated with jobs that they’ve become insufferable: They’re either not answering their phones or they’re handing in stratospheric bids.

His subs may indeed be fattening their profit margins, labor may cost a little more, but construction’s real pain is in the skyrocketing price of materials. Another builder said his costs have risen 15-20 percent in the last 12 months, pointing out asphalt’s 50 percent price spike due to the Russian oil fiasco.

As troubling as pricing is the shortage of critical materials. Just one example: Switchgear—the equipment that transforms the raw electricity in power lines to that usable by a project’s tenants—is only manufactured by three companies in America. Two report a 12 month delay in delivery, and the third isn’t taking new orders. Thus, a developer is faced with a Sophie’s Choice: She can either order her switchgear 6 months before she submits her final plans for city approval (and light a candle), or have her project opening delayed up to a year.

Construction cost hikes are nothing new, they’ve persisted since we emerged from the Great Recession. And material shortages have been around since Covid crept out of Wuhan. What’s new is the tarnish on the other side of the coin: real estate’s uncertain values.

You can live with cost increases and delays if your profitability is assured, but today, a profit is anything but guaranteed. Where real estate prices will be by year-end is pure speculation. Couple runaway construction costs with interest rates and inflation rising like hot air balloons, and one might conclude that it’s a good time to put away the shovel.

I asked one of the Bay Area’s largest residential developers if his company was hitting the pause button on its new developments. “No,” he replied. “Our projects take 5 to 6 years from start-to-finish. So those we’re starting construction on now have the benefit of cheap land we bought years ago. And the brand-new ones won’t come on-line until any recession we may be heading into peters out.”

That may very well work for jillion dollar projects, but for those of us in Double-A ball, that is, with 12-24 month project time horizons, it’s a different story. Here’s one: At the beginning of the year, we had a signed lease with one of our favorite supermarket chains to build a new store. I had blithely assumed it would cost about 25-50 percent more than the last one we’d built for this grocer. Belatedly, we had a reliable contractor price it for us. His number came in 100 percent more than the cost of our last store, the deal no longer penciled out, and we had to tear up the lease.

Thus far this year, we’ve dropped three projects because of breathtaking cost estimates. We sold off one little residential project to a builder more sanguine than ourselves, are in initial discussions to sell or perhaps joint venture another, and mothballed a third.  On the commercial side, we elected to sell rather than develop a self-storage project. We’re finding that retail—our long-time specialty—only works with fast-food ground leases.

I recently likened our development company to farmers, meaning that we plow ahead with our projects despite the economic monsoons and droughts we inevitably encounter because we trust in business’s long-term favorable climate. True enough, but sticking with that metaphor, there does come a time to rotate crops, to let fields lie fallow. New construction just might be the ground to rest over the next couple years.

Veteran developers will tell you to build in good times (because you can’t find decently priced existing properties) and buy finished buildings when, like today, they’re so often cheaper than replacement cost. Not a bad rule of thumb. By John E. McNellis, author of Making it in Real Estate: Starting Out as a Developer.

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  117 comments for “Time to Put Down the Shovel? So Far this Year, We’ve Dropped Three Projects due to Breathtaking Construction Cost Estimates

  1. Kenny Logins says:

    “And the brand-new ones won’t come on-line until any recession we may be heading into peters out”

    They hope.

    Similar boat here, selling something with planning permission that needs 18-24 mo to bring to market completed.

    Who knows how it’ll be valued.

    Nice to be optimistic but is it really as simple as saying “it’ll be all ok in a few years”?

    • Lune says:

      It’s not just optimistic. The big guys have access to funding sources that the little builder doesn’t, and those sources are not only cheaper and locked-in, but they allow the builder to lay off risk to investors and other bag holders.

      For example, given that they always have projects in all stages of completion (from land acquisition to final sales and closeouts), they can internally fund part of the project, sell unsecured bonds to provide stable working capital, and pre-sell upcoming projects to large REITs and other institutional investors. And this doesn’t even count things like collateralized debt obligations and other slice-and-dice securities that Wall St firms can do for you.

      That means that if/when these projects fail, they’re not the ones holding the bag. They can deliver as contracted and move on, even if the eventual bagholder has to eat a massive loss.

      Smaller builders, in contrast, usually get bank construction loans and need to put real assets on the line to secure them. If the project goes bad, you can bet the bank will go after you.

      It’s the usual problem: owe a bank a million dollars, and you have a problem. Owe a bank a billion dollars, and the bank has a problem.

      • Cas127 says:


        I’m fairly sure that pretty small independent used car dealers are able to sell off the (frequently dubious) loan paper they originate, into the asset backed securities mkt (ABS).

        I assume there are middle-men aggregators who bundle these $10k loans into $100 million blocks before they are actually brought into the public mkts.

        Now, granted, the dynamics are somewhat different (existing auto/loan of somewhat uncertain value vs. SFH in progress) but I’m a bit surprised to hear that there aren’t specialty middlemen/banks that don’t perform the same loan paper aggregation function for small builders.

        You would think that if $10k used car paper can be aggregated into public mkt ABS, so could $200k new build home mortgages.

        Any builders/lenders out there care to opine?

        • joedidee says:

          with interest rates rising(was 7-10 now 10-15%)
          the private money lenders are hiking rates even faster and now require LOTS MORE EQUITY – most stop at 50% LTV were they were lending out 80-90% 1st of year

    • kam says:

      Only those with ties to the Fed’s Primary Dealers get the first round of conjured Money. They get to spend their new-found wealth at yesterday’s prices. By the time that money flows over the fences of Wall Street, etc., it becomes a mugs game trying to figure out rising prices on individual categories or single items as excess money sloshes randomly from side-to-side inside the boat of the economy.
      The game is rigged, some will win big time, some will win some, and many without economic or political power, living day-to-day, will lose huge.
      I elected to get off the carousel when the “Too Big To Jail” mantra gave funds to criminals and financial losers.
      And of all things, the cards I kept, my skills and knowledge of my industry, and one small resource asset, have now quadrupled in value (and cashflow) against rising costs approaching 100%.
      There is no sound money, the U.S. economic engine has thrown the crank and no one anywhere in the U.S. realizes the capacity and willpower that it takes to recover the once great country no longer exists.

  2. CreditGB says:

    Tic, tic, tic, read the paragraph that begins “Thus far this year,…” as the article shows, the seeds of the recession weed are sprouting all over the garden and beginning to choke out the crops.

    • Wolf Richter says:


      The thing is, this is taking off excess demand that cannot be filled anyway, in a system that is running at capacity with excess demand. And when that demand would get filled, it would be at the expense of some other demand that then doesn’t get filled. So it has no impact on growth.

      We’ll see a lot of that. Backlogs shrink, but there are still backlogs, and the system is still running at capacity. So when you remove excess demand that cannot be filled and the system is still running at capacity, it won’t even show up as a reduction in growth.

      You have to remove enough demand to where the system no longer runs at capacity, and where all the demand can get filled, and then you’ll the first declines in growth. But not until then.

      • Wes says:

        The supply side needs to catch up.

        • Flea says:

          Not going to happen China is world supplier,there done working for Free ,they also stockpiled everything,rubber,rare earth mineral’s food copper ,who knows what else .While the rest of world had another drink and watched = inflation

      • There’s a byline in the FOMC minutes, maybe corporate Am needs to close those job vacancies (and shelve their growth projections). Killing demand may only set up a self reinforcing cycle, from recession to ??. If Fed is serious about saving Main St. they let inflation works its magic. This time around Am has the energy, they need labor (immigration) and investment (there is a ton of cash out there) This is business as usual, the Fed pulling forward future growth for the benefit of speculative returns in the present (or not so large losses) instead of protecting stock owners they need to remain on the gas, the growth engine has been tamped down for over a decade. Where is Kudlow when you need him?

        • cb says:

          Inflation kills Main Street, and savers.

          Hopefully Kudlow keeps out of sight.

        • Wolf Richter says:

          Ambrose Bierce,

          You’ve got this backwards. I have no idea how you can get this so far backwards. You must have tried very hard.

        • kam says:

          “(there is a ton of cash out there)” ?
          Ton of cash? Cash is relative and cash can disappear.
          Many of the Major stocks have dropped 30 to 75% from their peaks, so near-cash assets will not get you back what real cash bought 6 months ago.
          On the real world side, when $1,000 bought you 2 tanks of diesel for your transport truck last year but won’t buy you 1 tank of fuel this year, and your customer says he can’t pass on rising costs anymore, then cash is scarce.
          Losses, sadly, are cash getting flushed down the toilet.
          We are in 1973/74 all over again, but with the added anchor of insurmountable debt.

        • joedidee says:

          cash always goes to 1%
          called trickle UP theory
          works every time

          Fed is SUPPOSED to start QT – but already the markets are puking to get his attention
          doubt Jerry has balls to keep his QT until 2023

        • For the first time in over a decade the Fed is not repressing interest rates and growth, and everybody is complaining.

        • Wolf Richter says:

          Baby steps too little too late in the right direction.

      • Sams says:

        What if the supply side manage to lead demand destruction? That is remove capacity as fast as demand is destroied.

        • Wolf Richter says:

          Ha, yes, that’s the plan for refiners. That’s the plan in a lot of industries that might face declining demand. But it’s very hard to pull off when prices are high. Supply destruction usually sets in after prices collapse (due to demand destruction), and the process often involves bankruptcies. But no doubt, they will try it.

        • Sams says:

          BBC reported that some poultry farmers in England may go out of business due to costs rising faster than they could raise prices. Causing loss off supply. If that happen in other industries we might see destruction on the supply side as well on the demand side.

          If so, an interesting effect of fast rising prices.

    • RH says:

      At least, you are not in China. I just saw a youtube video that had me laughing on the floor: it claimed that China’s incredible corruption was “weaponized” and had made it successful. By that measure, I guess that Mr. Ponzi also was “successful” for a long time, until his Ponzi scheme collapsed. All you have to do to be similarly “successful” is to make up financial numbers and lie and lie and lie.

      Now, in China, not even the most gullible, Chinese person of ordinary intelligence believes that their shoddily built, Ponzi-scheme caused, real estate is going to go up in value. Most have realized that, as their own premier said, their financial numbers were faked for so many, many years that even their own government does not know the real situation and can only guesstimate it. For example, some Chinese provinces and cities have admitted now to overstating local GDP and government revenues (closely tied to such GDP, because much of the GDP has been the government selling garbage real estate to be developed through massive debt) by 33% or more and those might be under estimates!

      What “GDP” was created often exists of white elephants, like high speed rail lines that will not become economical unless the decreasing, aging, rapidly more impoverished, Chinese population’s numbers double suddenly, like amoebas. Or, it consists of useless assets like overly expensive and overly large airports or train stations or public buildings or unfinished (never to be finished) real estate. Later this year, when the massive famines hit and Russian oil production goes down, CCP RIP.

  3. 2banana says:

    If enough builders cancel projects and enough folks cut back on spending, your wish will come true. Signs are it is already starting.

    “A big-time San Francisco contractor told me the other night that he half-wished for another recession.”

    • Tom10 says:

      That sentiment dominates my little slice of flyover.
      Then again we are all at or over 60.
      Our replacements…competition…is limited or non existent. Burnout is high.

      Time to fishing.

    • Sconnie says:

      I’m an electrical subcontractor and have secretly wished for a slowdown now for a long time. I’m getting light fixture quotes that expire in 24 hours, and I just finished a call where I had to tell a hospital client that their switchgear is going to be 60 weeks out.

      There are actually four distribution manufacturers (Square D, Eaton, Siemens, ABB – formerly GE), but it doesn’t matter. They are all singing from the same hymnal. Same with the generator manufacturers. Lighting is a bit better as long as they can get LED chip sets.

  4. unamused says:

    Indeed. The US economy is in serious need of a serious reset.

    Unfortunately the state of the US economy rather resembles that of an old computer, in that if you reboot it the thing may not come back up again. Who knows what sort of network dependencies were cobbled together over the years which will take time, which you don’t have, to restore.

    Us overpaid systems/logistics/operations guys worry about things like this, and we typically turn down salvage operations in favor of promising restoration projects, which are pretty much dwindling away these days.

    Ultimately the problem is that the system depends on infinite growth when resources are quite finite. It would have been better to transition to a sustainable system while there was still the opportunity to do so.

    All wars, one way or another, sooner or later, are ultimately resource wars.
    They tend to scale up very well.

    • Enlightened Libertarian says:


      “Infinite growth when resources are quite finite.”

      This also sounds like the housing market to me.
      Unlimited population growth and limited land and materials.
      Has to crash eventually.

      • unamused says:

        The obvious solution to global overpopulation is the empowerment of women, but that has only happened on Il Attruvata, Isula dî Fìmmini, which seems to have washed away into the Tyrhennian Sea about 1200 years ago, although there’s still a tourist trap available by that name, none of which is visible while recreating Byron’s swim across the Gulf of La Spezia, even from the breakwater.

        The switch got stuck in the on position again. Sorry.

      • Cas127 says:

        Actual US population growth has been small for a number of years, if you can believe the US government.

        I also don’t know if the G bothers to try and estimate the large illegal population it usually turns a blind eye to.

        But my larger point is that it would be odd for resource constraints to bite hardest at the very time when US population growth is slowest.

        I think other factors may be more important right now.

        • 91B20 1stCav (AUS) says:

          Cas127-areas of relative small population growth create a population vacuum. The Romans encountered this, and much as we have in the U.S., relied for some time on that vacuum to provide low-cost immigrant labor and Legion personnel…until the plebians and immigrants realized that their ‘1% ‘ no longer had ANY horses pulling the cart, and started walking away from the fields and Eagles…

          may we all find a better day.

      • cb says:


        rents just go up …………..

        the rent payer is squeezed to better provide for the owner ………..

        • Wolf Richter says:

          Rents in San Francisco during the dotcom bust went down 25% and stayed down for many years. For the current era, according to Zumper, asking rents peaked in San Francisco in 2019, then dropped over 25% and have since risen from the lows but remain quite a bit below that peak.

    • cb says:

      “It would have been better to transition to a sustainable system while there was still the opportunity to do so.”

      sight of that can get lost while trying to cement ownership and subjugate as many as possible to debt slavery. The elite always have a big task in front of them.

  5. Ben says:

    Same here: Sold all my properties but my office – 2 oceanfront vacation rentals, an office building with apartments upstairs and my residence. All business properties were top income producers in Hawaii and 95% occupied, but when they needed typical repairs and maintenance as they always do, all-of-the-sudden all my normal contractors and handymen were too busy to help and often not answering their phone. Keep in mind I never quibble on price and always pay same day. I tried calling alternates, but they were either unreliable or completely unskilled. The residence had increased 20% in value in less than a year since purchase which seemed insane so I grabbed a quick profit and moved back to my office with all the comforts of home. I now earn 1% in money market accounts while inflation rages. Thanks for nothing Powell.

    • Mark says:

      I gotta know ….

      Which money market is paying 1% ?

    • ru82 says:

      Thanks for the post. interesting to get on the ground reports

    • LeClerc says:

      If you are a commercial landlord, why didn’t you employ any handymen or maintenance people?

      Maybe you tried to squeeze every last cent from the properties and now you can’t do that?

  6. Beardawg says:

    Kind of a macro econ question, and I may be ill informed, but since about 2000 or so, hasn’t the USA been overbuilt with commercial & retail real estate ? Speaking only for the greater PHX area (which has been booming residentially forever), there are still abandoned comm / retail structures strewn throughout the Valley.

    Could this “wall” of unaffordability be the exogenous event which evens out the supply side of available commercial / retail ?

    • Apple says:

      Retail space is grossly overbuilt as internet sales continue to grow.

      • El Katz says:

        You have to wonder who did the feasibility studies for some of these retail properties. There’s a shopping center near me that is on a busy road (Shea Blvd. – Fountain Hills / Scottsdale) that is quite nice and is populated with a Target, a Dollar Store, a PETCO, and a bunch of empty store fronts. The rest of that mall is the dead zone, with acres of empty pavement when they are open.

        Traffic count passing by is terrific….. but few people who are on that road are going there to shop. They are on their way to the interstate or recreational areas. The surrounding population is insufficient to support them (big bomber houses on large lots dot the landscape and the rest is not buildable due to topography) and, when those folks go shopping, they go towards the major retail areas of Scottsdale. A Target can’t survive as a convenience store.

        • cas127 says:

          Dutch Square Mall and Columbia Mall (huge) in Columbia, SC look like neutron bombs hit them – and have for years.

          But these are far from unique – the dying/dead mall phenomenon has been going on for at least 7 to 14 years.

          The strange thing is how slowly redevelopment is going considering that residential values soared absurdly for a long, long time there.

  7. Crush the Peasants! says:

    Cue upcoming stories about shoddy new home construction.

  8. cb says:

    John McNellis said: “We’re finding that retail—our long-time specialty—only works with fast-food ground leases.”

    Why is this the case? Is it because fast-food is willing to pay more than, say Chase Bank, 7-11, CVS, service stations, express car washes, or other traditional lessee’s of well located commercial parcels?

    • Timothy J McLean says:

      I finance a few 7-11’s and express car washes in Florida. Developers are actively still constructing these projects, as the math still works for both. Depending on location, the total project costs are between $6 and $9MM.

  9. Jas says:

    The vast majority of new housing in SF is luxury housing, from my back of the envelope observations. Most of that property sits completely empty. I assume it was purchased as second homes or foreign investors. I’ve lived in SF for over 15 years and make very modest wages and there’s no way I or any blue collar worker could afford a house averaging over $1 mil. Large
    Wall Street investors (Compass comes to mind) buy up whole buildings and sometimes whole city blocks and let them sit completely empty for years.

  10. David Hass says:

    I am still moving forward with new retail projects in Florida but feel all the same pain and more. Never had to personally work so hard to get my construction projects done but there is not enough labor or supplies to complete everyone’s project. It is definitely survival of the fittest.

    Couple pieces of advice:

    1. Never take a thin deal
    2. The deal that hurts you is not the deal you walk away from, it’s the one you don’t

    • cb says:

      In California, for most participants you either take a thin deal or you take no deal at all. I see people building to a 4 1/2 cap rate.

      In the single family re-hab (flip?) market, I see lots of participants bidding and buying to lose money.

  11. Bruce 2 says:

    Want to thank Wolf for having John post occasional columns here. Always thoughtful and well written. It is indeed a little crazy in the construction world. As a supplier, we used to figure 3% escalation per year prior to 2020 or so, and quote prices good for a year or so. Now we hold quote prices for 30 to 60 days and tell contractors to figure 10 to 20% after that. Lead times on certain equipment have gone to 6 to 9 months from the old 6 to 9 weeks. Markup is increased on quotes as well since we have no idea how bad future inflation will be in the next year or so. Labor shortages on the contractor side mean they are often swamped and thus bumping up prices like John mentioned. It’s just a bit crazy at times.

    As the Fed ends the free money / low interest rate party, and the current version of the dot commers gradually close up shop, I’m hopeful things settle down. With work from home still going strong, I see lots of developers and building owners chasing biotech, since that requires lab workers in the buildings. Wonder if in a few years that bubble will pop as well, as they burn through funding and some inevitably fail to launch successful products.

    • HowNow says:

      The Fed has been wrong, often, right most of the time, at the end/beginning of business cycles. But the Fed’s “mandate” has widened. I won’t be surprised if the Fed purchases stocks directly and loudly to support prices. Or they may generate rumors of same through the business media. If it looks as though a hard landing is likely, the Fed will open the $$$ spigot, reduce rates, go QE, buy horseshit, anything short of mass murder, to soften the blow. If the dollar gets jolted, as the world’s reserve currency, the Fed will have to sober-up, but that just hasn’t been the case since forever.
      What I find particularly sad is that the stimulus money that was intended to help main street has delivered inflationary karma to those who can least afford it.
      The road to hell might have been paved with good intentions, but they couldn’t find a contractor.

    • John mcnellis says:

      Hey Bruce, thanks. Here’s a thought: ask Wolf to run all of my monthly essays. 😎

  12. R2D2 says:

    US population growth is parabolic and adding 2-4 million new people every single year. Any slowdown in US construction (if it happens) will be temporary.

    • Kurtismayfield says:

      The growth has slowed tremendously in the past few years. Birth rates have been coming down for awhile, and death rates the past few years have flattened growth. Expect more of the same in the future.

      The under 40 set doesn’t feel economic secure.

      The boomers will increase death rates over the next 20 years.

    • Alku says:

      adding same amount every single year is called linear, not parabolic :)

    • Winston says:

      “US population growth is parabolic”

      Here’s the headline to a nice article with some very revealing graphs which show the case is exactly the opposite. 2021 wasn’t a major outlier either.

      “U.S. Population Grew 0.1% in 2021, Slowest Rate Since Founding of the Nation”

    • Escierto says:

      For those not connected to reality, the fact is between July 1, 2020 and July 1, 2021 the US population from all sources grew by 398,000.

  13. SewerMatt says:

    As CFO of a bay area agency amidst a $1B capital improvement program, we’ve also seen recent bids at double engineers’ estimates. I attribute this to risk management by contractors as they protect themselves from uncertain materials costs, supply chain, and labor rates. Markets abhor uncertainty, and contractors are no different.

    In response to astronomical quotes, owners have to weigh criticality of completing the projects *now*. If my projects were profit driven, they would be shelved.

    • BeenThereDoneThat says:

      I’ve never had an engineer’s estimate come close to actual construction costs. They estimates are a ROM gauge, at best. And I’m not saying it to discount the issue around inflation.

  14. unamused says:

    Ben: “I tried calling alternates, but they were either unreliable or completely unskilled.”

    That’ll teach you to sub out maintenance and repairs.

    We’re into extreme insourcing around here but the rules prohibit us from gloating. Tool fabrication issues in particular were difficult to overcome for a long time.

    Jas: “Wall Street investors (Compass comes to mind) buy up whole buildings and sometimes whole city blocks and let them sit completely empty for years.”

    That way they can limit supply to support price increases on the rest of their properties. In the meantime they have them on the books as appreciating assets, so long as they never have to pay property taxes. Blackrock and a bunch of others have pulled this stunt in an increasing number of markets with a variety of properties, notably residential real estate. I’ve tried to goad, er, interest Our Illustrious Host on this issue but so far he’s resisted the bait, probably because the data on it is still pretty iffy.

    I’ve gone fishing and will get back to the Muddle Through thing later, as will Millions of Weary Americans when they’re returned from holiday. Dang perch still won’t jump into my boat.

    In the meantime I’m over my limit again because the rest of you just aren’t as talkative as you otherwise could be. Just sayin’.

  15. Tony says:

    So what is the cost now to build a custom home in a desirable area? When I got quotes 4 years ago, the price for work for a custom home (with top-of-the-line finishes) was about $350-$400 per sq ft.

    • Wolf Richter says:

      This article is about commercial projects, such as shopping centers, office buildings, and apartment buildings. Construction costs of single-family houses have shot up too, and I discuss some of it in my reports on new house sales.

      Construction costs of single-family houses – excluding the cost of land and other non-construction costs – spiked by 18.2% year-over-year, the worst spike ever in the data going back to 1964, and the fifth month in a row with year-over-year spikes of over 17%. Over the past two years, the construction cost index spiked by nearly 30%. Over the 4-year period you’re looking at, it spiked by 38%


    • Reif says:

      Tony. Price of a new home in the North Bay Area lower 700 up to 900, I priced another one at over 1000, client decided to wait it out. I don’t blame him.

    • The Bob who cried Wolf says:

      Ordinary construction in San Diego is a minimum of $400 per foot now, probably closer to $500 (not the tract guys, I’m talking custom stuff). I can see where high end stuff would push 800 at a minimum, though. I haven’t actually taken the time to really figure it out, though . Lately everything we’ve done is time and materials. Most of the subs we refer to are estimating labor only and telling customers that they get to pay for materials because they’re not predictable at all. Many of them have said that materials have doubled in the last 18 months.
      We’re definitely headed into a recession and I think that when the numbers finally come in we’ll see that we’ve been in one for a few months now.

      • DougP says:

        If a recession is 2 quarters of negative growth, we only have one negative quarter now, and the reason for that growth rate has been explained by Wolf.

        Recessions don’t happen without anyone noticing or being very evident.

        We are not in a recession as of now.

        Heading into one? We will have a quarter’s notice if we do I suspect.

        • Miller says:

          “Recessions don’t happen without anyone noticing or being very evident.”
          That isn’t true at all, Well into the Great Recession and the financial crisis of 2008, there were tons of “mainstream economists and experts” who kept touting record growth, and no reason to fear recession. And most recessions afaik haven’t been “called” at all, they usually take economists by surprise. I suspect that’s even more the case now due to the Fed’s futile, delusional attempts to “engineer away” the business cycle. Instead of allowing for an occasional mild and brief recession to cleanse out asset bubbles and overbought sectors, the Federal Reserve used near-zero interest rates and QE to fuel the bubbles even higher, then fantasized for much of 2021 that the inflation was transitory. The result has been disastrous inflation and almost certainly, a much deeper and more severe recession than would’ve happened before–and much more unpredictable in the timing. It’s been the height of stupidity for the media and some economists to speak of recessions with such dread and completely ignoring the business cycle and why those recessions come up periodically, and indeed it’s only a deep recession that will pop this inflation, housing bubble and other asset bubbles.

          It likely won’t happen with Q2 in 2022, but then again, economists were predicting robust growth for Q1, and that was obviously a big miss. We’re having major inventory drops esp for goods as American consumers just run out of money (savings are at a record low and credit card debt is surging), and consumer spending has been rising largely just due to covering increased expenses, meaning there’s much less left over for discretionary spending, leading to a likely drop. Construction is also way down. So still unlikely to drop in Q2, but hard to predict.

  16. Willy2 says:

    – The largest construction company in Australia (Metricon) is also on the brink of bankruptcy. They have the same problems: higher wage costs, higher interest rates & higher material costs.

  17. polistra says:

    Completely aside from all details and motives, a shrinking population doesn’t need a growing economy and a shrinking population can’t sustain a growing economy.

    Growth was necessary 50 years ago. MAINTENANCE is necessary now, and we’re still growing instead of maintaining.

    • Anthony A. says:

      U.S. population is growing, not shrinking.

      • SoCalBeachDude says:

        Some areas are shrinking while some are growing – as always.

      • MiTurn says:

        And with immigration, legal and otherwise.

      • Miller says:

        Not really, the US population is barely growing if at all, in fact 2020-2021 (the Census measures it from middle of a year) actually saw a natural decrease–more Americans died than were born–and the lowest recorded US population growth in history, and it may still be revised down (initial estimates tend to over-estimate immigration and underestimate emigration from the US). There were even more COVID deaths in the second half of 2021 with those other variants and even fewer Americans born while more Americans moved overseas, and opioid epidemic got worse, so may wind up even lower for this period or a net decrease. And this is even before the Boomers have moved into the later retirement ages and left the labor market in force.

        We’re also having much more trouble attracting skilled immigrants–my firm which has long recruited internationally, has been having a record number of immigrant workers turn down even high salary offers (the high inflation and housing bubble in the US is killing our ability to recruit talent from overseas) and more Americans are becoming expats abroad, so we won’t even be able to depend on immigration to make up for natural decrease anymore. The USA right now is absolutely not a “major growth nation” anymore as far as population, and we’re very much moving into a stagnant or falling population pattern in the next two decades. For the housing market, in practical terms this means demand for US homes is slackening considerably over the next couple years and beyond, even more so with so many more Americans moving back to their parents’ homes with housing prices like this, and more Americans going expat.

  18. georgist says:

    Total cost == building + land

    Productivity is down (same job costs double) so by Ricardo’s law land costs must fall to close the gap. Indisputable.

    • SoCalBeachDude says:

      Land costs near the coasts would be the last thing to fall and have nothing whatsoever to do with so-called ‘productivity’ and building costs.

      • Phimbleburg says:

        My question would be: which coast?

        I think California coastal land (ie housing, we all know most of the price is the land value) is its own animal due to the distortionary effect of Prop 13.

        My thinking is this: many long-term now have annual property tax assessments that are now 0.1% or less of the actual value. That is equivalent to the expense ratio of VAIPX Admiral TIPS fund, which itself is a very low expense fund. VAIPX currently has a real yield right around zero. So it is almost impossible for property owners to find an inflation hedge that costs less than their current property, especially since VAIPX income is taxed yearly unless held in a retirement account. And you would have to pay taxes on the sale of the real estate to roll the funds over. So unless someone is badly in need of cash, or badly needs diversification, it makes no sense to sell.

        The kicker is that all of the above analysis is based on the assumption you never rent out the property and never gain any enjoyment from it whatsoever! It’s purely an inactive investment holding and it still pencils out better than financial assets.

        As long as a property owner at least needs to offer a property for rent to cover costs, then there may be distributional effects from such a tax regime but minimal real economic damage. Though it seems like economic suicide for a government to let land that could be put to productive use instead undercut low-cost investment firms on already ultra-low management fees when it is sitting unused.

        Is this the reason why so many coastal California cities feel like a cross between a ghost town and a boomer retirement community?

    • perpetual perp says:

      Over use of debt ends up making the economy weaker because GDP cannot grow faster than compound interest. Fed stimulus should come in direct form, without any debt being issued. Otherwise per capita productivity declines below previous trend. Citation? Dr. Lacy Hunt.

  19. Finster says:

    Sounds familiar. Even here in small town western Pennsylvania, construction is a tall order. Not only did a recent home improvement project incur delays due to the builders being excessively busy, but they are also not bidding further projects. High as prices may seem, they’re still not high enough to match supply and demand.

  20. SpencerG says:

    Thank Goodness! I was starting to think/fear that WolfStreet wasn’t going to have any more articles by guest writers. It has been a while. Just yesterday I was wondering how long it had been. I learn an awful lot from them that you just don’t see anywhere else.

  21. Cobalt Programmer says:

    In the swamp area couple of malls are marked for destruction (one is crime ridden and other no body goes there for a long time). One mall will become a residential complex and other will be a mixed use town-center. This is in addition to the new metro line and several residential constructions all around. Some going all year around. Rumors are that houses are already sold. Is it possible?
    And, there are no affordable houses to buy. So many memes shows a small house listed for 1 million and that too need repairs. Even townhouses and condos are $800K and above.
    Lot of people think that population is growing (immigration and millennials settling down) but if the salary is not growing these properties will not be purchased. It may be a wishful thinking to ask for a recession. But be careful as your wish may be granted. A hole in the ship will sink everybody.

  22. CCCB says:

    Here in Miami (And all over the South and southwest), older obsolete, low density shopping centers, car lots, grocery stores, schools, hospitals and churches are all being razed to build multi story rental apartment highrises with ground floor commercial and sometimes a floor or two of offices.

    Land always tends to move toward its highest and best (and most profitable) use, which at the moment appears to be residential rentals. This is keeping a floor under commercial land and buildings, but then we’re sandwiched in between the ocean and the everglades. Until home prices drop substantially (25%+) and/or rentals are overbuilt, expect more of the same – I estimate 2 years minimum, recession or not.

    • ru82 says:

      Apartments after apartments are being built in my midwest area. Big empty zone areas that were zoned for single family homes during HB1 and sat empty for years are being turned into apartments. There are not enough house and new house prices are out of reach of 70% of the local population

  23. Digger Dave says:

    Sorry, but good. I guess I’m in rookie ball then. The types of developments talked about here are useless for society – sprawling low-quality auto-centric garbage looking the same across the country. The Feds, States, cities and towns throw huge subsidies at this sprawl – financing overbuilt-overwide roads, excessively stretched out infrastructure all on the public dime. The sooner this market collapses, the sooner we get back to making a society that works the best for the average person. Less strip malls? Sounds good.

    • Iona says:

      I said some time ago, many “cities” in this country are just a collection of strip malls masquerading as such. No point to their existence other than to serve as a focal point for consumption.

    • Calvin Tompkins says:

      spot on Digger.

  24. Brant Lee says:

    It seems to me that the Fed is stretching out this inflation as long as possible for the right people. If you’re in the best position, it’s easy to make a lot of money right now, so what if working people and small businesses are hurting.

    What the Hell sitting on their asses this long to slow the runaway train unless it’s exactly what they want. They talked up the stock market last week so it’s all good.

    • QQQBall says:

      @Brant Lee

      Where are you seeing the “easy money”?

      • John H. says:

        “Where are you seeing the “easy money”?”

        I see a $8.9 T Fed balance sheet. It didn’t generate itself…

  25. MiTurn says:

    I always look forward to posts by John McNellis. Life in the real-world economic trenches.

    Thanks for the effort — great info, as always.

    • John mcnellis says:

      Thanks M, much appreciated. You can always find my monthly essays on both LinkedIn and mcnellis.com

  26. COWG says:


    How many folks are employed and the effects this will have on them, if any…

    Thanks for the article…

  27. Mike G says:

    “Nobody could have expected” that gutting antitrust law and allowing so many markets to become oligopolies, would ever backfire.

    • 91B20 1stCav (AUS) says:

      Mike G-check (“…but, but, what about ‘market efficiency’?…” i hear faintly in the background…

      may we all find a better day.

  28. Marbles says:

    I am sure it depends on where you are, but all the big shovels in my area are busy. Warehouse after warehouse. Mostly very big. Including 17 acres under one roof.

    • Wolf Richter says:


      “I am sure it depends on where you are, but all the big shovels in my area are busy.”

      What John is saying is that they’re too busy, and prices are spiking too high, to where his projects don’t pencil out anymore.

      “Warehouse after warehouse. Mostly very big.”

      This is going to be interesting. Amazon, the gorilla in the room, is cutting fulfillment infrastructure costs, and is now trying to put at least 10 million sf of warehouse space on the sublease market, and in addition, it stopped expanding its foot print. On the leasing end, Industrial was the last hot part of commercial real estate, in part because of Amazon, and now it’s cooling off too after the incredible boom. Over the four weeks since this came out, the shares of Prologis, one of the big industrial REITs, have plunged 24%. So keep an eye on it.

      • Iona says:

        Amazon cut their minimum purchase to qualify for free shipping too – by half. With energy costs where they are, margin compression has to be severe. I bought some pants that were almost half off, which almost accounts for their normally absurd mark up (columbia hiking pants for an upcoming trip)

        • Implicit says:

          The extra expense for pants halfoff is a penalty for showing sthe infamous plumber’s crack.

      • LeClerc says:

        Amazon is so big, 10 mil sq. ft. isn’t really that much for them.

        One fulfillment location can be 1 million sq. ft, so they’re only offering subleases on 10.

        Perfect for storing repo’ed RVs, boats and fancy pickups.

        • Wolf Richter says:


          Mine wasn’t a comment about Amazon but a comment about how industrial CRE is cooling off, from super-red-hot to something else, as depicted by Amazon’s pullback, after its huge binge. That’s a significant shift.

  29. Anthony says:

    I can’t speak for the rest of the planet but much appears the same in the Anglo-Saxon speaking world, mainly where have all the spare workers gone…….

  30. Ben Sargent says:

    Terrific article John thanks for your insights.
    Parts of the USA especially rural parts don’t have many projects that were ever started much less put on hold.
    That said reported in East Texas rents have gone up 40 percent and 20 percent not so much because of a booming economy but rather people moving in to escape the higher cost living areas and then no apartment or condo construction that can keep up.

  31. Dmitry says:

    I’m a subcontractor. I run a small crew of 3, we do residential and commercial windows, doors, and some rough carpentry like decks and patios. We’ve had more work than we’ve known what to do with starting in 2019. I think some of the subs might have burned out from too much work. Everybody is looking for subcontractors at the moment, so some of them are charging more, but some are taking time off to recover, which in my opinion is normal. A few are retiring. But I don’t see a shortage of subs. I see more pickups with job trailers behind them now than ever before. I’ll pull up to a job and there are 2 or 3 other crews working in the same neighborhood.

  32. Jdog says:

    I have seen several recessions in my life but never like this one. As a rule, recessions cause a panic in which capital preservation becomes the only thing that matters. This time is different, it is as if people have turned into zombies, and are trying to ignore what is clearly happening, as if somehow that will change the inevitable. I, unfortunately live in one of the countries hottest housing markets, and the housing tracts just keep breaking ground like we are at the beginning of this cycle, and not at the end. The amount of debt being racked up at selling $500K+ homes at 5.5%+ is clearly not sustainable for the vast majority of family incomes. It is going to end very badly for many people.

    • Sams says:

      If heavy in debt, are there reasons to preserve capital?
      People may even recognize that if their debt is large enough, the bank have a problem.

      • Jdog says:

        Banks never have a problem, because they have no real liability in the loans. The loans are created from thin air, and when the borrower defaults, the banks get the assets. It is always the borrower that has the problems…

        • Sams says:

          Actually, the valuation of the assets can make problem for the banks even before borrowers default.

          If the assets have no value the backing of the money have no value;)

  33. unamused says:

    When builders can’t afford to build because buyers can’t afford to buy, yes, it’s time to put down the shovel and figure out what’s gone so seriously wrong.

    When residential real estate is more valuable as an investment in rental property than as a home, most people will end up becoming rent slaves.

    Meanwhile, For Sale and For Rent signs for commercial properties are popping up like flowers in the spring.

    Two weeks to go before the next Fed Up rate hike.

  34. ooe says:

    The problem continues to be the mis-management of the corporation who cannot match supply with demand. Where are the Harvard MBA”s and the Standford MBA’s ? Where is the AI that was supposed to be our salvation?
    They are doing nothing except moan about their lack of management skills while they are being paid the big bucks.

    • unamused says:

      “Where are the Harvard MBA”s and the Standford MBA’s ? Where is the AI that was supposed to be our salvation?”

      They’re maximizing profits. Which works better when supply does not meet demand.

      You didn’t really think they were doing this for YOUR benefit, did you? So far as they’re concerned you’re a combination ATM/worker bee who shouldn’t be allowed to vote because you might do it wrong.

  35. katesweat says:

    Was surprised by a couple GC bankruptcies in the Austin area over the last year. Not big guys but bailed on good contracts. The developers that do a few duplexes at a time can’t make anything pencil out without an AirB&B.

  36. russell1200 says:

    Can confirm, here on East Coast, lead time (after approval of submittals) on a 4000A Switchboard was noted at 45 weeks.

    Panelboards (the ones that don’t rest on the ground) was 20-24 weeks.

  37. CreditGB says:

    It is called an inflation induced recession. You are in it now, best to figure out how to survive it. Your Government actions and policies are only leveraging the recessionary influences to maximum levels. Energy, taxation, regulation, crushing the economy and demoralizing the workforce.

  38. jack murphy says:

    long time residential contractor here (roofs)…it only takes ONE job where parts stomped on the profit and dug deep into the loss column for the typical small sub to get his shit pushed so bad it might ruin him. consequently they lard the bid and hope they got it right…these are not the sharpest tools in the shed and they typically do not have lines at the suppliers so they are rolling the dice on all gigs. they fact that they got lucky on the full retrace in lumber means nothing to these guys…not that smart

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