A subject that has been ignored by all of the pundits, “talking heads” and economic experts on the constant drum of 24 hour news television is the extreme disparity between construction costs and purchase prices for commercial real estate.  This imbalance has created tremendous opportunity for alert investors.

In the last couple of years, the cost of construction materials rose dramatically.  Construction materials are usually tied to commodity prices and big economic trends tend to affect them.  Many commodities were on a tear over the last few years- oil, steel, plastics, etc- in other words- all of the stuff we use to build buildings dramatically rose.  Some blamed China for hoarding materials, others blamed day traders for profiting from extreme rises, but the fact remains that prices jumped.

The material prices have moderated somewhat now- but we all know what happens to the shelf price of a product that goes up- it never goes all the way back down.  So, we now have a situation where construction costs are between  $300 and $700 per square foot in the New York suburban area (Rockland, Westchester, Orange, Long Island).  Construction costs in New York City range from $400 to $1200 per square foot. (or more)

However, the cost to purchase commercial buildings is significantly lower than new construction.  Consider this property:

http://listing.loopnet.com/16200369

This is a 35,000 square foot building (30/70 office space to warehouse) in good condition, close to highways in Rockland County.  It is listing for $76/square foot.  To build a building like this would cost at least $300/square foot.  And when you add the price for land, approvals, site development, design, etc, the cost would likely be closer to $600/square foot.

Another example:

http://listing.loopnet.com/16015283

This is a portfolio of fully leased office buildings in downtown Mt. Vernon.  It is listing for just over $80/square foot.  These buildings would easily cost over $700/square foot to build new.

In reviewing most of the properties for sale in Orange, Rockland and Westchester, it is clear that purchasing commercial buildings is several times less expensive than ground up development.  This fact should be enough to overcome any complaints about the building being not properly situated or laid out or finished to meet a business’s needs.  Any one of these buildings could easily be renovated and repositioned to serve just about any need at a cost far less than the cost of new construction.

This is, I believe, a tremendous opportunity for businesses and individuals who want to take advantage of the current imbalance in the market.  It also reassures building owners, that the value of their property has nowhere to go but up.