This year’s development projects will be a race to the finish.
More than 240,000 units are expected to be delivered nationwide this year, according to Dallas-based Axiometrics. But the pipeline may get a little clogged: Over the last year, the costs of labor and materials (not to mention land) has gone up significantly, creating difficulties for developers to come in on time and on budget.
We asked three industry veterans on what effect labor and material costs will have on the pipeline this year.
Here’s what they said:
Albert Berrizsays his company, Ann Arbor-based McKinley, has seven projects in the pipeline this year.
"In our opinion, labor and material pricing is a headwind for Multifamily development in 2014,” the CEO says.
The projects are a mix of market-rate and low-income housing tax credit developments.
“We are really digging in to make the numbers work and it's all in the hard costs,” he says. “We have been very diligent and as a result are bringing these projects on line after much more work than expected on the vertical construction side. These projects are located in tertiary Midwest markets with very strong economics from both a supply and demand standpoint, as well as rental rate perspective. However, labor and material pricing has had an overall adverse impact on project feasibility. Obviously, the impact could derail projects in markets that are not as strong as those in which we own and operate."
Mike Rovner, of Moorpark, Calif.-based Mike Rovner Construction, says this year the pipeline may be strained by increasing costs.
“Within the next year, labor and materials will cause the cost of projects in the multifamily pipeline to rise by 10 to 15 percent,” he says . “After experiencing a 61 percent increase in multifamily construction activity in 2013, I expect continued construction activity in 2014 to place a strain on the supply of qualified labor and put an increased demand on material. As a result of this influx, the base of General Contractors and qualified subcontractors are facing dilution by quantity of work. In addition, a large amount of construction companies closed their doors in the downturn, allowing developers to take advantage of an extremely competitive market. Many that stayed in business found themselves in a liquidity crisis, which put a cap on the number of jobs that they were capable of executing. Today this results in high demand for labor and materials, as they are faced with a resurgence of activity in the multifamily pipeline.”
Ron Lloyd, of Cleveland-based RDL Architects, says time is a greater factor this year compared to labor and materials.
“The Great Recession has had its most lasting impact on labor,” he says. “The recessionary slowdown drove many out of their respective trades or professions. Drastic cutbacks occurred along the entire supply chain; material manufacturers, suppliers, architects and engineers, even municipal employees such as plans examiners and inspectors. The resulting manpower and knowledge void is being filled by either the inexperienced or over worked, making this recovery expensive now and into the future. Schedules are being compromised, time is money.”
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.