A.CRE

Hard Costs

Any development costs associated with the physical construction of a building. These costs are easy to quantify and typically include items such as raw materials, labor, and interior finish, etc. Hard costs are also referred to as Direct Costs.

Putting ‘Hard Costs’ in Context

Sonoran Vista Development, a real estate development firm based in Arizona, is embarking on a ground-up development project for Palo Verde Plaza, a new 45,000-square-foot neighborhood shopping center located in Tucson, Arizona. The project is situated on a 6-acre site, strategically positioned at the intersection of two major roads to capture high traffic volume and visibility.

The Role of Hard Costs in Palo Verde Plaza’s Development

In this ground-up development, the hard costs—those directly tied to the physical construction of the property—are a critical component of the project budget. These costs are straightforward to quantify and include:

  • Site Preparation: $1.2 million for grading, utility connections, and foundational work.
  • Structural Construction: $6 million for raw materials like concrete, steel, and roofing, as well as the labor to build the structure.
  • Interior Finish: $1.8 million for flooring, lighting, HVAC installation, and tenant build-outs.
  • Landscaping and Parking: $800,000 for green spaces, parking lot paving, and external amenities.

The total estimated hard costs for Palo Verde Plaza are $9.8 million, accounting for approximately 65% of the overall project budget.

Example Calculation of Hard Costs per Square Foot

To analyze the efficiency of the development, Sonoran Vista Development calculated the hard costs on a per-square-foot basis. The formula is:

Hard Costs per Square Foot = Total Hard Costs / Total Gross Square Footage

$9,800,000 ÷ 45,000 = $217.78 per square foot

This figure provides a benchmark for evaluating construction efficiency against similar retail projects in Tucson and allows for more accurate financial forecasting.

Importance of Hard Costs

For a project like Palo Verde Plaza, managing hard costs effectively is vital to the development’s financial success. Rising material costs or unforeseen construction delays could inflate the budget, directly impacting the project’s feasibility. To mitigate these risks, Sonoran Vista Development locked in prices with suppliers early and ensured rigorous oversight of labor costs and schedules.

Outcome

The inclusion of precise hard costs allowed Sonoran Vista Development to confidently secure financing for the project, meet lender requirements, and attract interest from prospective tenants. Anchored by a national grocery chain and several smaller retail tenants, Palo Verde Plaza is expected to generate a stabilized NOI of $1.4 million annually, yielding a healthy return for the developer.

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