Housing availability and affordability had already reached a critical point in cities across the United States even before the coronavirus pandemic. Now a combination of factors has made the demand for housing even greater at a time when skyrocketing materials prices, a tightening labor market, and supply chain inefficiencies have made building multifamily buildings more expensive and complicated.
With the added complexity of securing financing for multifamily construction or rehabilitation, as well as obtaining time-intensive zoning approvals, real estate developers and multifamily owners and their builders must take action to mitigate the financial impacts and keep projects on track.
Building component costs have risen at an unprecedented rate in the past year, making project bidding, due diligence for financing, and construction and renovation budgets more difficult to predict and control. According to the U.S. Bureau of Labor statistics, from May 2020 to May 2021, material prices increased an astounding 114% for lumber, 107% for cold-rolled steel sheets that are used for metal studs, and 39% for copper wire and cable. In mid-June, lumber futures for July delivery were down more than 40% from their record high reached in early May.
Such extreme material price volatility has intensified over the pandemic and spread to other components, all while severe shortages and supply chain bottlenecks have lengthened timelines for production and delivery. These challenges are impacting both ground-up and renovation projects across all property types, but multifamily, in particular, has seen the rising costs of building new units erode the gains the sector made in rental and occupancy rates. In April, the National Association of Home Builders reported that the spike in lumber prices alone added nearly $13,000 to the price of a new multifamily home.
How can owners, developers, and builders overcome these economic challenges and mitigate the risk to their project’s bottom line? Consider the following five solutions:
1. Blend the Team Early
Ramp up speed from development to multifamily occupancy and owner revenue by breaking down barriers and combining teams sooner than later. Early collaboration between architect and contractor—in a design-build or design-assist delivery method—will accelerate schedules and prevent expensive, time-intensive redesign. For example, making smart design choices in terms of where the major vertical circulation (i.e., stairs and elevators) is placed in a ground-up project can preserve substantial budget dollars.
Stronger, earlier collaboration on these elements avoids do-overs later, but challenges are bound to happen. Develop backup plans in advance—this strategy will allow the team to rapidly and seamlessly shift to an acceptable plan B or C and avoid delays or cost overruns.
2. Build Lean
Lean construction—the proactive method of decreasing waste and increasing efficiencies to save time and money and increase project value—provides greater stability, reliability, efficiency, and flexibility. A Lean builder can help navigate market conditions and material shortages and will maximize ROI by conducting ongoing research, monitoring economic trends, and providing counsel on lifetime costs, environmental impact, inflation, and more. Builders with Lean DNA are master planners and professionally trained in delivering optimally efficient projects, reducing waste during all stages of construction.
Dodge Data & Analytics research demonstrated that “high Lean-intensity projects” were three times more likely to complete ahead of schedule and two times more likely to complete under budget. Dodge found that of projects that did not implement Lean methods, 61% finished behind schedule and 49% completed over budget.
3. Expand the Material Mix
Evaluate and analyze substitute materials and systems to expand the menu of choices for all components of a building, including foundations, superstructures, framing, enclosures, systems, interior building materials, and more. Working with the contractor and strategic trade partners early in the design phase can ensure that extending the list of acceptable substitutes does not compromise on safety, quality, durability, or functionality. Every project has options. For example, precast concrete, ready-mix concrete, and different wood species have become useful substitutes. For multifamily projects, while wood has typically been used for framing, developers may explore steel-framed structures, which add longevity, if the price delta between the two materials contracts further.
4. Procure Materials Earlier
Material prices are moving fast and furiously, causing daily uncertainty about how much a product could cost down the line. Working from real, data-driven expectations can aid in making material procurement decisions earlier. Buying materials earlier will typically result in cost savings and greater decision-making power about other factors later in the project. It mitigates unknown exposure to shortages and can ensure access to materials when needed. In the multifamily sector, planners should also take into account longer lead times for cabinetry and fixtures and large appliances, which could hold up move-in dates after major construction is complete.
5. Establish Strategic Budget Reserves and a Reinvestment Plan
Try to carry extra contingency and avoid building to your max budget upfront. Build a strategic buffer and, more important, a schedule of milestones for reassessing risk at the last responsible moment and gradually releasing reserved funds back into the project as risk diminishes. For instance, if your project budget is $15 million, target a spend of $14.5 million and then systematically release the balance if economic conditions improve. Converting surplus contingency adds real value and allows for adding project wish-list items such as upgraded finish materials, appliances, technology, landscaping, and more—these upgrades can help with quicker lease-up in a competitive marketplace.
The economy is uncertain, but the construction risks are tolerable and quantifiable and the need for more plentiful and affordable housing is only growing. Experienced builders know how to manage multifamily projects throughout increased volatility. A combination of these solutions—early team collaboration, Lean best practices, material flexibility and agility, and strategic budget reserves with reinvestment milestones—will help mitigate risky economic variables and ensure the reliable, on-time, on-budget delivery of your next multifamily project.
