As we look at the lack of affordability plaguing our cities, it’s hard to believe that the cost of construction could become much worse. Affordable developer BRIDGE Housing has more than 60 projects in predevelopment or construction in West Coast markets from Seattle to San Diego. After 36 years of existence, we pride ourselves on our mission and the ability to get things done in volume. That said, the daunting prospect of year-over-year construction escalation has us continuously scrambling for more subsidies to keep rents affordable for the families and seniors we serve.
Last spring, we witnessed a project budget bust in San Francisco following two years of carrying a cost escalator of 8%. The $10 million increase occurred just weeks prior to signing a guaranteed maximum price contract. We’d been working closely with the general contractor and doing everything right along the way, but late in the game we had to do some difficult final value engineering, cutting significant amenities and swallowing fees and general conditions. It was either that or walk away—and given the community’s dire need for housing, walking away would have been abhorrent.
As an organization that prides itself on developing at scale in some of our highest-cost markets, we’ve realized that the “one-off” nature of affordable housing development can be detrimental to the health of the industry. Everyone knows that adding layers to affordable development increases regulatory oversight expense. This can occur from design review, overeager housing agencies, or community acceptance guidelines. Add to that soft costs from subsidy layering or tax credit syndication, and, frankly, the dollars just go up.
But hard costs have gone up too, exponentially. This is rooted primarily in labor shortages across the country tracing back to the last recession, when the housing market collapsed and laborers simply got out of the business.
A recent Associated General Contractors (AGC) study cited skilled labor shortages that resulted from the net loss of over 2.3 million construction jobs dating back to the last recession between 2006 and 2011. As a result, we currently have 23% fewer laborers in the workforce than we had in 2006, while higher-skilled tradespeople such as plumbers, electricians, and carpenters are down about 17%. And a recent survey by AGC found that 80% of residential construction firms reported having a hard time filling skilled labor positions.
In addition to the labor shortage, productivity in building has remained essentially flat since 1945. Low builder profit margins have not led to investment to incentivize productivity, even though other global markets such as agriculture and manufacturing have reported productivity increases of up to 1,500% during the same period. These facts have impacted construction time and costs to the extent that we need to explore alternatives such as off-site construction and building techniques to more quickly and efficiently create the housing our communities need.
While off-site construction, ranging from volumetric modules to panelized components, has been around for a long time, more developers are turning to these solutions to make up for costs associated with time and the labor shortage. Volumetric modules arrive at the jobsite equipped with everything down to refrigerators and even shower curtains, but they still need to be set and stitched together on-site. Panelized components—ranging from a grid system of framing to hybrids where six sides create a partial unit—can be transported to the site to be assembled and finished.
All of these typologies provide potential time savings, but the jury still seems to be out with respect to actual construction costs. Still, given the lack of available labor, there remains a compelling case for affordable developers and developers of all types of residential buildings to explore what is out there and how it might compare with typical stick-frame construction.
Based on our exploration and execution of a variety of building types, BRIDGE offers the following suggestions to developers:
- Don’t start design until you have selected a building type, whether it’s volumetric modular, panelized, or a hybrid.
- Make sure the architect and engineer have experience in the building typology, as well as references from the manufacturer.
- Understand the transportation costs associated with delivery and staging requirements.
- Calculate upfront costs such as bonding, insurance, and who carries the freight.
- Check with your lender, as typical expenses can vary, sometimes with a requirement to front-load expense.
- Manufacturers are few, and many are in the startup phase. Make sure they can hit your delivery schedule and are realistic about how many projects they can deliver.
- Prior to staging, ensure there is ample staging room for product delivery.
- Check with the local building and other city departments to understand requirements and ensure acceptance.
- Inspect and minimize change orders.
Visit bridgehousing.com/publications to download “Faster, Better, More: Promising Construction and Technology Approaches for Accelerated and Efficient Affordable Housing Development” (May 2019).