• Apartment Industry’s Supply-Chain Woes Worsen, With Delays Hitting Nationally

    A construction materials shortage caused by the COVID-19 pandemic has plagued the U.S. commercial real estate industry. (iStock)
    A construction materials shortage caused by the COVID-19 pandemic has plagued the U.S. commercial real estate industry. (iStock)
     
    By Cara Smith-Tenta
    CoStar News
     
    To understand how dire the construction materials shortage has become for the commercial real estate industry, consider the difficulties Joe Pecoraro at Skender, a Chicago-based contractor, faces on a multifamily rehab project.
     
    In the first week of August, Pecoraro and his team ordered cabinets for the apartments. Shipping usually takes two or three weeks, but the vendor quoted Pecoraro a six-week lead time. That was still fine — six weeks meant he would get the cabinets in mid-September, and he didn’t need them until early November.

    But soon after, the vendor told Pecoraro he wouldn’t receive the cabinets until the end of November. Pecoraro pushed back and eventually secured a guarantee he’d get them by Nov. 10. Pecoraro, who oversees various projects, later took a disappointing call from the vendor: The cabinets won’t arrive until the end of the year.

    “Here’s a situation where, in a normal year, those cabinets would take three or four weeks. We were quoted six weeks, we ordered 12 weeks [in advance], and now it’s going to take 20 weeks,” Pecoraro told CoStar News. “What can you do?”

    Across the country, Pecoraro’s experience has become common among construction and development firms. The shortage of lumber and steel, not to mention a scarcity of labor needed to assemble products and get them ready to ship, often feels like it’s getting worse, according to professionals in the industry.

    That sentiment is backed up by a recent survey from the National Multifamily Housing Council, which found that 93% of the largest U.S. multifamily construction firms are experiencing delays. That’s the highest such figure NMHC has recorded since April 2020, when the research and public policy organization first launched the survey at the outset of the COVID-19 pandemic.

    A staggering 100% of those firms said they’re seeing material prices increase, and another 98% said their business is being affected by a lack of construction materials.

    “Stresses in the supply chain … are very, very concerning,” Steve Wiley, senior vice president of preconstruction at Chicago-based McHugh Construction, said in an interview.

    Pandemic Disruptions

    Commodities such as steel, glass and softwood lumber are already subject to shifting values, in the same way oil prices often waver. But the pandemic supercharged the cyclical nature of material costs in housing construction.

    Pent-up demand couldn’t be met in 2020 as mills and factories shut down, stopping the flow of materials needed for production and decreasing overall supply.

    Meanwhile, Americans who began working from home during the pandemic no longer needed to live in small apartments near their offices and began searching for larger spaces. That kicked off a nationwide flurry of construction projects to address a need for housing, which has led to record-high pricing for materials.

    The sharp, quick uptick in steel and softwood lumber prices is clearly illustrated in the Bureau of Labor Statistics’ producer price indexes, which measure average changes over time.

    The index for steel starts in June 1982, and the price of steel that month is used as the index’s baseline price. In January 2000, for example, the price of steel had risen above that June 1982 price by 15.4%.
    But as of July 2021, steel is priced more than 522% above that June 1982 figure. Softwood lumber is priced at more than 185% above its June 1982 figure, after peaking in May at 465.9%, according to the index.

    Months of Waiting

    Wiley shared examples of price hikes he’s experienced recently. Metal roof decks used to cost about $5 per square foot and take between six and 10 weeks to deliver. Today, the price is more like $20 per square foot with a delivery time of about six to eight months. The formed framing parts that go around a window typically take about 25 weeks to arrive but can take as long as 40 weeks today.

    And at a recent teleconference hosted by the National Roofing Contractors Association, Wiley said companies that provide roofing systems told contractors that if they don’t get orders in by the end of September, they likely won’t get any new products in 2022.

    “None of these projects are being planned with huge cushions. The viability of these projects is resting on a fairly thin margin to begin with,” Christopher Ptomey, executive director of the Urban Land Institute’s Terwilliger Center for Housing, told CoStar in an interview about the materials shortage's impact on apartments.

    Another hurdle plaguing contractors involves the availability of the large cargo shipping containers required to transport nondomestic goods to the United States.

    Normally, the cost of having something sent to America in a shipping container is about $4,000, and that cost is built into the overall product price. Today, though, the cost has swelled to about $25,000, and the containers have grown increasingly difficult to find, Wiley said. “That’s just one kind of oddity that is greatly driving the price up,” Wiley said. “We’ve had that particular issue affect one project to the tune of $2 million.”

    Wiley and Pecoraro declined to name specific developments that have been delayed, but both said they’ve had multifamily projects set back because of the shortage.

    Effect on Renters’ Lives

    For most apartment dwellers, increased construction costs may come as a surprise, but there is also an effect: “I think the way most people experience the shortage is in the cost of their housing,” Ptomey said.
    Higher costs can be significant on lower-wage renters. The National Low Income Housing Coalition says the United States is facing an affordable housing deficit of more than 7.2 million units. And a 2018 report from NLIHC found that a full-time, minimum-wage worker could afford a one-bedroom apartment at market rent in just 22 of the nation’s more than 3,000 counties.

    Naturally, the materials shortage and its pummeling of schedules, budgets and contractors’ ability to plan is raising a singular question: When will the situation improve? It’s a difficult question for those in the industry to answer. The makers and procurers of steel and timber are still working through a production backlog, and many are doing so without enough labor. To bring production back to near normal, there are jobs that need to be filled, followed by a massive amount of catch-up activity.

    Until then, Ptomey and others are hopeful the situation can shed light on the huge effect that a lack of affordable housing has on those who can’t afford pricier alternatives. “Every week or month that a building is delayed in being turned over has a direct impact on somebody’s life, even if it’s hard to see sometimes,” Pecoraro said. “The faster those units come into service, the quicker you can improve those residents’ quality of life.”

    Source: CoStar Group, www.costar.com