The Rising Cost of Apartment Construction: It’s More than Labor Shortage
Much has been made about the impact on construction of a weakened skilled labor force, but the shortage of workers isn’t the only reason some projects are delivering late and costing more. Increasingly difficult apartment designs and regulatory issues are among several factors that have slowed progress at a time when units can’t be delivered fast enough.
Apartment construction is on overload and the bag isn’t getting slimmer, although starts are expected to be down 10 percent this year. For an industry that strives to impress renters, multifamily may have to rethink its approach to meeting the demand of amenity-driven consumers to keep projects rolling while managing costs.
Difficulty of apartment construction projects compound cost, labor issues
At a recent Marcus & Millichap conference, Ben McGilton of Dallas/Fort Worth-based Rampart Construction, a multifamily general contractor, said price increases have not only been driven by labor shortages but increased project difficulty and the general nature of construction.
“Construction cost increases haven’t missed any segment of multifamily,” he said. “And these projects are just getting harder.”
He said the apartment industry may be its own worst enemy in its effort to remain competitive. The race to create dynamic, cutting-edge living spaces doesn’t always come cheap at a time when materials costs weigh on builders’ minds (and wallets).
In January a National Association of Home Builders survey noted that the second most significant problem facing builders in 2017 – aside from labor issues – was building materials cost. Of the five major materials that NAHB tracks, all increased in the first 11 months of last year. OSB prices skyrocketed 30 percent. Softwood lumber was up nearly 15 percent.
With the combination of inflated raw materials costs and labor, finishing out apartment interiors and exteriors with high-end materials has gotten pricey.
“It’s this continued evolution of design to constantly push the envelope to offer more amenities, offer higher-end finishes, make your apartment more like a single-family home,” McGilton said. “It’s things like that that continue to cause apartment construction costs to increase. We’re using more expensive materials.”
He notes that a handful of Rampart projects are aimed at similar demographics as several communities built a few years ago for the same client. However, they are noticeably different inside and out. What changed is the introduction of technology to apartments, faux finishes, more expensive cabinetry and fancier fixtures.
The project is another example of how developers are squeezing more perks and pleasures in the same or smaller spaces. While a second sink in the master bathroom may not seem frivolous for a Class A apartment community, it adds up.
“It used to be a one-bedroom, one-bath had one sink,” McGilton said. “Now pretty much every one-bedroom, one-bath on a Class A deal has two vanity sinks. Nobody thinks that’s a big deal until they have 150 extra sinks on project. The cost just compounds.”
Stricter building codes, approvals lengthen build times
Some things that drive up the ante aren’t in the developer’s control. Because many of the premium build sites have been taken, developers are sometimes left trying to fit a square peg in a round hole on asymmetrical infill lots. Also, code compliance and lender scrutiny have become the Achilles heel for much of the multifamily construction industry.
Steve Lawson, chairman of the board of The Lawson Companies, said strict building codes have lengthened build times, and lenders are more critical of how apartments are built than ever before.
“That’s just an added layer of management, and it creates delays with construction draws,” said Lawson, whose companies specialize in multifamily and single-family construction in Virginia and South Carolina.
“Permitting is a real issue as well. At the municipality level, our plans are getting scrutinized at a level that we’ve probably never seen before. The same applies to the civil side of our plans. It’s very hard to get your site plan approved.”
Storm water management regulations continue to be an issue, although Lawson says “regulatory creep” is easing in some areas. “But a lot of other areas are still dealing with a lot more oversight, a lot more headaches than we’ve ever had.”
McGilton added that greater requirements for insulation and ventilation and air filtration, plus tightening construction waste management regulations are also factors.
Design efficiencies, standardization can help keep costs in line
Developers can help themselves by abiding by some basic apartment building principles and striving for design efficiencies, especially when dealing with the confines of urban infill building. A big ideal is to maintain uniformity where possible, a concept that may irk marketers who view variety as the spice of leasing apartments.
“What (uniformity) does help with is efficiency and the operations of the construction site, and it pays dividends,” McGilton says. “The reason why developers sometimes can’t do it goes back to the site not being efficient. You might have a weird geometric shape of a building that has five outside corners instead of four. If a building has five outside corners, it’s not square. Like hotels, apartments are designed to squares and rectangles.”
In any case, McGilton says limiting variables, like number of unit types or styles of cabinets, standardizes and speeds construction. Plumbers, carpenters and electricians can work more systematically and efficiently if they’re dealing with just a few variables across a 350-unit property.
“That helps the trades get a better flow going, they’re faster at (building), and there is a lot of efficiency in that. It allows you to standardize things like cabinet layouts and countertops. Production increases dramatically.”
Also, just making efficiencies a priority goes a long way, as well as capitalizing on savings opportunities and evaluating all decisions based on a good, better, best approach.
When dealing with more expensive materials that can give that apartment a marketing edge, developers should seek ways to offset the cost elsewhere, especially if it won’t bring more rent. Expensive kitchen backsplashes aren’t likely to command higher rents, McGilton says, so why pay for them?
“Save on things that don’t contribute to growing revenue. The labor (issue) is going to continue because projects get more difficult. People are asking us to put more into these same buildings.”
Hirings, wages growing in construction industry
Still, labor struggles are an acute issue in housing construction. At January’s National Association of Home Builders International Building Show, industry leaders told stories of rogue activity at construction sites where some builders are luring workers with cash.
“It’s like the Wild West,” Lawson said.
Neither Lawson nor McGilton expect that to change in 2018 because replenishing the labor force devastated by the recession is slow, although it’s heading in the right direction. Last year, construction employment was up 3.1 percent and reached a nine-year high at 6,993,000.
Wages are growing, too. In January the Associated General Contractors of America reported that average hourly earnings in the industry climbed 3 percent year over year to $29.24. Based on a 40-hour workweek, construction workers earn an average of $61,000 annually, about 10 percent more than the private-sector average, says AGCA Chief Economist Ken Simonson.
While average construction worker pay compares well with civil service jobs (a police officer earns $62,790), it’s no match for a computer programmer ($85,180) and other technology occupations that attract younger workers.
Being good stewards of the resources available
Yet NAHB Senior Economist Michael Neal said construction is simply a hard sell, despite the organization’s efforts through education to attract younger workers. He cited recent NAHB research showing that only 3 percent of 18- to 25-year-olds would consider making a living in construction if the money is right. Many others said they weren’t interested, no matter the size of the paycheck, even though construction wages are nothing to ignore.
“When we ask, how much would you need to be paid to come to our industry, they say $75,000 to start out,” Neal said. “People will tell you that’s not what they will probably be making starting out. A sizable number also said there is no amount you can pay me to come to the industry.”
McGilton and Lawson say labor woes vary from market to market and, depending on the location, construction issues may or may not severely impact a project. McGilton says labor costs at Rampart Construction have gone up 25-30 percent since 2010, or about 4-4.5 percent annually. Not bad, considering the volume increase in construction since then, he says.
What amplifies that cost is the build time and expense related to other variables like higher-end materials and difficult designs. During a project that takes 14-17 months to complete compared to nine to 10 months, prices could go up 7-8 percent.
McGilton anticipates that labor will continue to be tight in 2018 and says keeping good hands will come at a premium. All the more reason for developers to build as smart as possible.
“That’s where the onus comes on everybody to try and be mindful about what selections they are making so there is room in the budget to account for an annual increase of 3-5 percent for labor and commodity materials,” he says. “At the end of the day, we all have fiduciary responsibility for ourselves and our clients, shareholders or investors to make sure we’re being good stewards of the resources we have.”