While tax reform dominated the conversation at AHF Live: The Affordable Housing Developers Summit in Chicago in mid-November, industry stakeholders also were concerned with rising construction and material costs as well as a labor shortage.
Pat Sheridan, executive vice president of housing at Volunteers of America, said construction directors at the national nonprofit have warned him that the industry could see an approximately 20% increase in construction in the coming year.
“That’s primarily because rebuilding in the Gulf Coast states [from hurricane damage] hasn’t really taken off yet,” Sheridan said during the State of the Industry Power Panel that kicked off the 14th annual conference.
He said he expects to see increases in roofing, drywall, and gypsum in those areas hard-hit by hurricanes Harvey, Irma, and Maria this past fall. Availability also is an issue with some high-end manufacturing goods, such as HVAC systems, that are made in the Houston area and Gulf Coast states.
Sheridan added that the VOA construction directors also are predicting issues about the quality of labor, primarily in the Gulf Coast states, as many untrained workers are starting to work on drywall and roofing.
“I throw out caution that you have your construction folks keep an eye on quality standards,” he added.
While VOA is still getting bids for projects in the hotter markets, such as Denver, it’s been difficult to get three proposals because there is so much demand for the construction trades.
“Likely we are going to see some cost increases and some shortages in products,” said Sheridan. “Certainly building relationships with contractors you trust in markets you are working in and working closely with those folks to bring them in early on the job as well as being flexible to have a good contingency with your budget will go a long way in making sure you’re not short at the end of the day.”
Bart Mitchell, president and CEO of The Community Builders (TCB), said the Boston-based nonprofit also has seen a lot of construction cost pressures in many of the markets where it works over the last couple of years.
In addition to maintaining a good reputation as a preferred partner with the local construction community, TCB has focused on efficiencies and scale.
“When we can build a bigger project, it’s the same amount of construction supervision as a smaller project. Where we’ve been able to be creative is 9%/4% [low-income housing tax] credits at the same time to build twice as big a project. That’s more efficient construction costs.”
Mitchell also said building mixed-income housing on a larger scale, such as a 120-unit development with half affordable units and half market-rate units, is a more efficient method of construction.”
Construction in non-urban markets also has been a challenge, said R. Lee Harris, president and CEO of Kansas City–based Cohen-Esrey, adding that if you lose a subcontractor in a smaller market, the next bid could go up significantly. “On a 36- or 40-unit property, that can be a big hit to your deal. We are all going to see that exacerbated, particularly with the hurricane issues.”
Labor also is causing issues on the operations side for Cohen-Esrey. “There’s not a shortage of people applying, but there’s a shortage of qualified folks that can’t pass the screening.”
To help remedy this problem, Cohen-Esrey is exploring an internship program for veterans coming out of the military that allows them to transition into the workforce.
For Michael Costa, president and CEO of Highridge Costa Housing Partners, higher costs and labor shortages have been geographic. For example, the California-based developer is paying higher costs in the Los Angeles market because of a shortage of labor but not having issues in Hawaii where there’s little new construction happening.
Costa added that it’s time to look seriously at alternative methods for building multifamily housing.
“The way that we have constructed housing for the last 200 years in this country hasn’t really changed much,” he said.
Highridge Costa is starting to look at panelized construction methods for its developments.
“From a panelization standpoint, you bring everything into a warehouse, and weather and other issues go away. You can be faster and much more efficient,” he said. “Depending on what state you’re in or financing programs you’re using, you may be up against prevailing wage or union labor. All the work that is done inside the warehouse is not subject to prevailing wage because that is only work done on-site. We’re taking a very serious look at that. That will for sure bring down the costs.”
Mitchell added that TCB is looking harder at modular construction, which it has done occasionally as a one-off project over the past few years.
“We are looking ahead to what’s happening. Where we can find a good modular partner, it might be a fit for a quarter of our projects in the coming year using some manufactured components or full modular for multifamily,” he said.
Sheridan also noted that VOA recently served as a construction manager on a supportive housing development for veterans in California that used shipping containers.
“It was a great learning opportunity. What we learned is that it isn’t necessarily cheaper, but it can be done in an attractive manner and very fast. We are exploring that.”
Looking ahead, Tom Feusse, CEO of Ohio-based Wallick Communities, also predicted that the multifamily industry is headed toward the back end of the real estate cycle. “We think market-rate unit production will stay strong in 2018, but we think it will soften in 2019,” he said. “If market-rate production starts to soften, then we might see some costs soften as well.”
As developers struggle with costs, state housing finance agencies (HFAs) also grapple to address the situation.
Costs have always been a difficult issue to fully comprehend because affordable housing can cost more often due to stringent development and regulatory standards.
“We’re sympathetic to the fact that construction costs have gone up and continue to do so,” said Debbie Olson, assistant executive director and chief of staff at the Illinois Housing Development Authority (IHDA). “We’re trying to be thoughtful and a partner in this endeavor because we want to keep these units being built, yet we realize the sensitive nature on the cost side.”
IHDA is analyzing projects back to 2011 to see if it can identify issues that are increasing construction costs in the state. It also just published its most recent qualified allocation plan with revisions based on input from developers, advocates and local officials from around the state.
“Costs will remain a hot topic,” added Sean Thomas, executive director of the Ohio Housing Finance Agency. “There’s no silver bullet to this.”
He said an issue for state HFAs is balancing all the different interests and how far to push the QAPs in terms of policy.
“Housing is looked upon as a solution for a variety of different issues, such as health care, education, job training, etc. We weigh those types of things in the QAP. The hope is that eventually people will understand by solving the housing issue you will have savings in other areas.”
Thomas added that the National Council of State Housing Agencies will be releasing its revised best practices on housing credit allocations and underwriting next year.
Beth Mullen, partner and affordable housing industry leader at accounting firm CohnReznick, also noted that the Government Accountability Office is expected to release its final report on development costs next year, as part of a series on the low-income housing tax credit.
“The HFAs need to be a unified front and get the word out they are serious about the question of cost per unit or cost per square foot or else the feds are going to do something drastic like impose a number, and no one will like that,” she said.
David Gasson, vice president and director at Boston Capital and executive director of the Housing Advisory Group, added that costs will remain an issue at the federal level as anti-housing groups tout the costs to produce affordable housing and rally to end government funding.
“It’s absolutely going to be an issue at the federal level,” he said. “It’s something the industry has to get its hands around.”
