Hard Costs Are Up 8.8 Percent. Rents Are Up 1.6. The Dirt Pays.

Facilities Dive reported on September 15 that construction input prices rose 1.2% in August and now sit about 8.9% above August 2025, citing Associated Builders and Contractors' analysis of Bureau of Labor Statistics producer price index data. Nonresidential construction inputs specifically are up 8.8% year over year. The same report cites the Associated General Contractors of America saying roughly 55% of contractors had projects abandoned or delayed over the prior six months, with a third of those disruptions attributed to cost increases.

Our position: a pad deal has four numbers in it, and three of them now belong to somebody else. Rent is set by what the tenant's unit volume can carry. The exit cap rate is set by the tenant's credit. Hard cost is set by tariffs and fuel. That leaves the land basis, which is the only line the developer still controls, so the land basis is the line that has to move. In our read, seller pricing is now a larger constraint on 2028 openings than tenant demand is.

The spread is the story

CoStar Group reported in July that national retail asking rent growth slowed to 1.6% year over year in the second quarter of 2026, the slowest pace in more than a decade. Per the release, softer consumer spending growth, elevated interest rates and greater tenant cost pressure have reduced landlords' ability to push rents at the pace seen earlier in the cycle.

Set the two numbers side by side. Inputs 8.8%. Rents 1.6%. That spread does not resolve in the rent, because the rent is a function of sales and the tenant already knows what it can pay.

The Southeast does better and still does not close it. CRE Daily, summarizing the same CoStar data, notes Atlanta and Charlotte posting annual rent gains in the 3% to 6% range. Better than national. Still well under the cost number.

Metals, not lumber, are the problem

USGlass reported on September 14, citing AGC's read of the same BLS release, that aluminum mill shapes rose 27.3% year over year, steel mill products 23.4%, copper and brass mill shapes 20.9%, and diesel fuel 77.8%. ABC's chief economist said August increases were widespread across materials, naming iron and steel, softwood lumber, switchgear, and copper wire and cable as all up more than 10% year over year.

Read that list against a drive-thru pad. Joists or structural steel, a metal canopy, aluminum storefront, rooftop units, switchgear, and a paved field larger than the building sitting on it. Our view is that a small freestanding building reprices faster than a big box, because metal and site work are a larger share of a small building's cost. A tenant's prototype does not shrink to meet an estimate.

Planning is already thinning

Dodge Construction Network reported on September 8 that its Momentum Index slipped 0.4% in August to 282.0, with commercial planning down 3.0% and institutional planning up 4.9%. Per Dodge, planning activity slowed for data centers, retail stores and warehouses in August, while office buildings, parking garages and hotels picked up. The index remains 4.2% above August 2025.

One month is not a trend. It is worth noting what the index measures: projects entering planning, which is the earliest public reading on what gets built two years out. Retail was on the wrong side of it in August.

What we watch for

We underwrite the dirt against a current hard-cost number, not against last year's comps for the corner. Cost increases land on the land, and the seller's expectation is usually the last input to reset.

We ask for a bid validity window in writing, and we treat an expired bid as a new deal rather than a formality.

We do not assume the cost side has stopped moving. We would want to see consecutive monthly prints of flat or falling metals PPI before underwriting anything to a flat hard-cost assumption.

And we separate the two questions a seller usually blends together. What a corner is worth to a user and what a developer can pay for it are different numbers. In August, the second one moved.