Michael Lewis’ book “Liar’s Poker” includes a story about a Wall Street trader who, just minutes after first learning of the Chernobyl nuclear disaster, makes a decision: Buy potatoes.
“Of course,” Lewis wrote. “A cloud of fallout would threaten European food and water supplies, including the potato crop, placing a premium on uncontaminated American substitutes. Perhaps a few folks other than potato farmers think of the price of potatoes in America minutes after the explosion of a nuclear reactor in Russian, but I have never met them.”
Whether it’s a near-meltdown in 1986 or a viral pandemic in 2020, you can expect problems and opportunities to develop in the supply pipeline. As with that trader, developers have scrambled to adapt as the pandemic sweeps through the nation. Some of the thorniest difficulties they’ve faced should go away once health officials give the all-clear sign, but others are likely to linger for several years. Here are several parts of the pipeline worth monitoring.
Count on a Lengthy Slowdown at the Permit Office
Fifty-five percent of the respondents to a National Multifamily Housing Council (NMHC) survey said they are experiencing construction delays, NMHC reported April 3. Of those, three-fifths had delays in starts and three-quarters reported delays in permitting. The problem with the former should ease once a handful of key states and local areas lift bans on construction. The slowdown in permitting, however, looks likely to hang around in many jurisdictions, as reductions in hours and suspension of service is causing a pileup in requests for permits and building inspections across the country. Developers will need to pay even more attention to the limited times that governmental offices are open.
One more thing: A recession will reduce taxable income while unemployment compensation will drain budgets. It wouldn’t be surprising if states and localities eventually raised taxes and/or fees.
Ships, Trains, and Trucks All Have Problems
American Shipper, a news agency that tracks maritime, rail, and truck traffic, reported April 7 a quadrupling in the number of canceled sailings by container lines over the next three months. The 212 cancellations may have been prompted by COVID-19, but they also are designed to prevent a “catastrophic drop” in rates, American Shipper quoted one expert as saying. Respondents to the NMHC survey said they already are having trouble getting timely delivery of products like cabinets, countertops, light fixtures, and elevators. Close to a third of the respondents reported that they’re starting to source materials from other places.
Meanwhile, we’re just coming off what may only be the temporary end of a blockage of Canadian rail lines by members of the First Nation Tribe protesting energy pipelines through their lands. The protest effectively shut down rail transportation in various provinces for almost three weeks, severely impacting their ability to move goods and enable trade to the United States. “After intervention from the Canadian police, lines were opened back up, but, by that point, there was a backlog of hundreds of trains and their cars that needed to be moved,” Shepley Lumber reported recently. “As fuel and perishables took precedence, lumber and plywood sat on the tracks, and, as a result, key building materials from the West Coast and Canada quickly became in short supply as replenishing orders had an indeterminate arrival.”
And even if the goods never travel by ship or train, there are other problems. NATSO, an organization that represents truck stops and travel plazas, has complained to state and local officials that occupancy limits they have imposed on retail establishments have turned what normally might be a 20-minute stop for a trucker into a two-hour ordeal. “It is crucial that [drivers] have quick and easy access to fuel, food, restrooms, showers, and other services so they can get back on the road in a timely manner,” John Pertchik, CEO of TravelCenters of America, told the FreightWaves news service.
Fewer Projects, But Still an Overabundance
It’s all or nothing for construction these days. In most of the United States, builders continue to be busy and considered essential. However, several states and cities have deemed construction non-essential, effectively banning it until further notice. Those closures, combined with an expectation that the pipeline ultimately will run dry elsewhere, lead forecasters to predict multifamily construction will drop. The Zelman Group expects multifamily starts to decline 12% this year to 355,000, while completions will fall 15% to 315,000.
Some economists compare how many projects are started versus how many are completed to get a sense of whether the pipeline is getting unduly large. Zelman predicts that by the end of 2022, there will be 555,000 apartment units in the pipeline. That’s 336% more than the backlog at the end of the last recession in 2010. Such an overhang is likely to subdue the market, Zelman believes.
Looking even further ahead, Evercore/ISI’s Stephen Kim believes the pandemic will “drive immediate and lasting changes in the features of the ideal American home.” Expect more demand for home offices and extra space now that we’re going through a period in which we’re all confined to home, he says. But more ominous for multifamily developers is this forecast: “We also expect to see an increased preference for one-family units, as opposed to multifamily dwellings with elevators, and rising anxiety about dense urban living.”
