By Paul Bergeron | September 30, 2022 at 08:17 AM
NMHC survey shows that permitting, start delays, access to financing, and rising materials and labor costs key factors.
A remarkable 90% of survey respondents reported construction delays, according to National Multifamily Housing Council’s monthly construction survey released Sept. 29, with permitting and start delays being the main culprits.
A lack of availability in construction financing is also a rising concern —with 31% citing that challenge, compared to 7% who said so in March and 15% in June.
Costs remain on the rise with 76% of respondents experiencing price increases in projects, at an average rate of 9%. Labor costs are up according to 21% of respondents indicating they have risen “more than expected over the past 3 months.
‘Buildings Can’t Be Built ‘Remotely’
Michael J. Romer, Managing Partner of New York City real estate law firm Romer Debbas, tells GlobeSt.com, that “it’s no secret that the cost of construction continues to increase. For starters, a record inflation rate of approximately 8%, continued supply chain issues and lack of construction financing have all combined to place willing developers behind the eight ball.”
Additionally, developers (like many other industries) are facing labor shortages and worker availability, he said. “This has absolutely increased the cost of labor. It goes without saying that buildings cannot be constructed remotely.”
Delays ‘Continue to be the Norm’
Brian Gallagher, Vice President, Corporate Development, Graycor, tells GlobeSt.com that delays in construction continue to be the norm due to disruption caused by demand, supply chain delays, price volatility, material availability and labor shortages.
“Completing construction projects on-time and on-budget requires rethinking business-as-usual, because competition for labor and materials is intense,” he said.
“The most challenging commodities continue to be roofing materials, metals (both rebar and structural members), concrete and cement, mechanical equipment, piping, electrical equipment and components and insulation. Pricing and availability for lumber and metal products have become more stable recently.
“A proactive strategy includes exerting greater control over the value chain by collaborating with industry partners for preconstruction planning, early release packages, making early commitments to suppliers and subcontractors, and as well as becoming more involved in procurement decisions.”
Construction Completion Times Lengthening
Doug Ressler, business manager, Yardi Matrix, tells GlobeSt.com that part of the increase in-under construction apartment properties can be explained by lengthening construction completion times.
“At a national level, the average days a property has spent under construction is at or near a cyclical high for garden-style and high-rise multifamily developments,” he said.
Despite increasing completion times, “new construction starts remains robust,” Ressler said. “Through Q1 2022, there is little sign of a pullback from multifamily developers.”
Office and Hospitality Suffering Less
Levi Reilly, principal, director of development, Marcus Partners, tells GlobeSt.com that changes in construction labor costs are specific to the asset type.
“This is partly due to inefficiency in the labor pool as it reaches saturation (i.e., the least productive workers are employed last) and partly due to how motivated the subcontractors are to win work.
“Labor costs for assets that are less in demand, like office and hospitality, are not experiencing the same rate of increase.
“Our outlook is that the recent surge in borrowing costs will impact construction starts, which in turn will put downward pressure on labor prices. However, we don’t expect that this will happen overnight. It will take some time for the ongoing construction projects to complete before the labor pool will be impacted by the lack of new construction starts.”
What Developers Can Do About It
Michael Kupin, partner, Duval and Stachenfeld, tells GlobeSt.com, “In this environment of construction delay and cost overruns, it’s no surprise that developers/owners across the country are asking what they can do to protect themselves from skyrocketing prices and major supply chain delays.
“Fortunately, they can start mitigating the impact on their projects by fine-tuning their construction documents. There are a variety of steps owners can take in these contracts:
Kupin said they should define carefully and with detail the materials and/or trades for which a contractor can claim a price increase or schedule change.
Also, require within the agreement that contractors start pre-construction activities early, including buying out trades or materials. Storage issues for materials should also be addressed upfront, and contractors should outline plans to seek out and propose alternate suppliers and materials.
Kupin said that allocation of the supply chain risk need not be binary; instead, it can be shared to align both parties’ interests and avoid placing all the risk solely on either the owner or the contractor.
Finally, require the contractor to verify and provide evidence of the cost increases or delays, including invoices, bills of sale, payroll reports, pricing sheets, and work orders to support a claim for an equitable price increase or extension.
Consider Alternative Finance
Emily Zhu, Chief Marketing Officer of New Empire Corp, tells GlobeSt.com, “Those who caught in the middle of pre-development or the construction phase may consider using alternative finance in order to complete the project on time.
“Ultimately, if the developers can wait out the ‘construction winter’, they are likely to be compensated by the price appreciation. Other means to offset this is to seek for opportunities that are encouraged by government programs such as build on wetland or assisted living.
For those who experience labor cost increase will need to re-evaluate the total costs of the project and either to borrow or raise more capital to make up for the increase. If the rise of labor cost leads to construction cost increase, it will build into the future sales price that will be paid by consumers.”