I can try to answer some of this. Lest get a few things out of the way first. Yes, you can refi later but that has NO bearing if you can't make the numbers work to begin with.
"5 floors sitting empty" ... depending on what percentage of space that 5 floors is, yes it can make a huge difference. Most buildings generally are say, ten to fifteen floors, so that's 1/3 to 1/2 the space. SO let say your building a 15 story hotel, typically 30 rooms a floor, that's 450 rooms, so cut 135 rooms off right off the bat, 5 floors, then count on occupancy being 75% of the remaining and your down to 220 rooms paying your bills, it wont cash flow.
On the issue of Materials and labor have value, sure they do. But lets look at costs right now, using pre-covid prices I could buy concrete around $100 a yard, right now its running 155 at best assuming you can get it due to the cement shortage. Lumber, steel, copper, anything oil related, conduit, roofing etc..., it is all up 25-40%. So yes it has value but with the cost now, its value will be LESS in a few years as costs come down. Don't get me started on labor, people are already starting to see that no, you aren't worth 75 an hour to drive a dump truck but I'm paying it right now because there is no choice. As construction starts are crashing labor rates are already coming down and will accelerate soon so I hope you have been putting some of that money into savings!
Now for the big question, are the the short term increase in costs "counterintuitive" , no, not at all because at the end of the day on most projects you have 18-24 months to get a project stabilized and cash flowing. Rental rates, room rates etc... are not much different now then 4 years ago but costs are 30-40% higher and interest rates are almost triple. The project's numbers still have to work for todays market at the elevated costs and on MANY projects that's just not possible. You can try and scale down but then do the numbers work because the land cost has gone up thru the roof. In some cases it actually works to go go bigger as you have more SF or rooms, to spread a lot of the more or less "fixed costs" over. I have a project I am involved in that the only way to make it work was to INCREASE the room count from 130 to 180 it is a huge balancing act that right now is a big moving target. All that to say at the end of the day the numbers have to make sense that the project will cash flow at market rates today, 5 years down the road doesn't matter.
Not sure if that answers the questions but thought I would give it a shot!
It is very counterintuitive to me that short-term fluctuations in material and labor costs, demand, and interest rates seem to have a outsized impact on an asset that is expected to be performing for 30 or 40 years. Not just performing, but taking up land opportunity (not that we don't have too much of that).
Is it impossible to refinance x years down the road if interest rates get better?
Is it really all that terrible if 5 floors just sit empty for a few years until demand builds up?
(it is not like you {normally} can build more all-new floors later when demand picks up -- you have committed the smaller project to not be able to meet the needs of 5 years from now)
The money is in a steel and concrete and glass asset that has a value. Sure, it is not super-liquid, but it is a pile of money in a different form.
And these things do eventually have some kind of residual value when it it time to change hands way down the road. Is it seems like that number will be better out there in the future if it is not value-engineered so much today.
