New Construction Multifamily- Why Costs Rise
So many communities talk about a lack of housing. In the markets I focus on, typically smaller communities of less than 30k people, it's very apparent. Unless a town is proven as a “hot” growth market there is usually little attention provided by developers to add additional multifamily housing to supply.
In this article I want to take a minute to explore some of the reason why costs rise in multifamily developments and how that can change from community to community. At JFH Capital we are actively building a model to address these issues and curb the trend in the communities we invest in. Ill dive into our solutions more in future articles.
1. Expanded Scope: The easiest way to add cost is to make things bigger or increase the amenities. As our quality of life increases as a society we have grown to demand more amenities. Looking at apartment designs of the past can tell us some interesting things about what has changed. To provide a few examples, renters of today want to see central air conditioning, dishwashers, in unit laundry and a 2nd bath.
Each additional amenity that is now expected adds dollars to a project. With these few but very common examples changes in consumer demand for features has added $18,000 in additional cost to building each unit.
2. Skilled Labor: As society has transitioned to offering more work based in an office on computers it has left the skilled trades lagging in their ability to recruit new employees. Add in an aging and now retiring workforce of boomers who grew up in an era where the trades were a celebrated career path, we are at an interesting crossroads in the construction industry.
I don’t want to be all doom and gloom because there are amazing advancements in technology that allow for fewer workers to get more done, but those come with a catch. This added level of equipment and technology in the trades has led to higher overhead for these crews and business owners. Tools that used to last for decades now often need to be repurchased every 5 to 10 years or sometimes less.
There is some strong evidence that shows us that the larger cities actually have less of a problem in recruiting labor needs to get projects done as compared to rural communities. Whether this is a new trend or an old standing one it inevitably leads to cities being able to grow as projects are easier to move forward with which leads to further investment. The building machine takes time to build and needs constant projects to keep it going, something a city can provide but smaller towns often struggle with.
3. Sub It Out: A trend that I see happening all too often is massive chains of sub-contractors. I have had so many conversations with contractors who went through the great depression and got hurt substantially. Many of them have made a conscious decision to never build back their teams to the level they once did. This has left many companies that used to have scale to get projects done faster and cheaper to be in a position where they do one of two things. They either accept less work and charge more to make up for the difference or they keep a rolodex of sub contractors that they bring in as needed to get jobs done when they win the contracts. Combined with the skilled labor shortage this has left customers needing to pay for what they can get and ultimately that price is a lot higher!
4. Speed of Construction: When we look at some of the discussion points of a labor crunch and a trend of increasing numbers of sub-contractors you can already guess that construction timetables have extended. Many are also aware of the substantial impacts to supply chains that have resulted in material delays getting to job sites. This along leaves jobs at standstills while they wait for major components like electrical equipment, windows, cabinets, or other key materials.
Another point that I have also experienced is an increase in the number of inspections required by local municipalities. In our area regulations have been added which lead to more inspections during the construction process. Each time requiring the job to not move forward until an authorized individual can make it to the site to confirm and sign off.
The biggest thing that impacts costs with respect to speed are overhead costs for the developer and general contractor as well as financing costs associated with the job. Stretching a job from 12 months to 18 months can easily result in a 10% increase in cost with all labor and material staying equal.
5. Material Prices: Last but certainly not least is the cost of materials. In the world of construction many material prices rise and fall based on larger impacts to the commodity markets but ultimately there are some items that when they go up in price, they generally never go back down. We also see changes to code requirements over time that add additional materials into the scope of work which just decades past weren’t included. While these changes may make buildings safer and stronger, when evaluating the increases in cost we certainly must acknowledge them.
A great example that I can give is our cost for flooring in a typical apartment unit. We used to be able to buy the material for a flooring package for a 900 sq/ft unit for about $1,500. Today that same package costs us over $2,000. This change has happened in just the last 4 years.
Closing: In future articles I will dive into some of the ways we are addressing these problems. As a multifamily developer JFH Capital is laser focused on creating solutions to solve these problems. By driving down costs we not only make projects more profitable, but we open the door to having projects be feasible which otherwise would never get past an idea. This helps investors, communities, and the residents who call our properties home.