Multifamily Construction Faces a Power Outage

Throughout the early 2020s, costly delays have hammered multifamily projects thanks to supply chain, labor force and interest rate challenges. However, another cause of delay is inspecting projects and installing utilities.

Sean Imani, a senior project manager at Dominium, puts it starkly, “Nearly every building we build has been impacted by delays…The result is added time and cost and ultimately future residents being told their home wouldn’t be ready when we thought it would be.”

In response, some developers have turned to third-party providers to install utilities where allowed.

Many of the delays stem from supply chain issues, according to Brad Glenn with Pacific West Builders, which works mainly in California, as well as elsewhere in the West, such as Arizona and Idaho. The problem has been going on for several years—in Rochester, NY regulators had three open complaints about utility delays in early 2020—but it was worsened by pandemic-related supply disruptions, which Glenn says continue to linger. In California, just three suppliers exist for the necessary materials.

“So, you’re beholden to those manufacturers,” Glenn says. “Most of all, our gear packages, even the simple ones, are at least a year out…It hasn’t been that uncommon for it to take a year and a half to get your electrical gear.” Glenn notes that manufacturers have since become more transparent about lead times in recent years.

On the East Coast, Charlie Adams, Pennrose’s regional vice president for New England, is also seeing delays for gear packages in his projects, and occasionally HVAC equipment, otherwise, the COVID-induced disruptions have largely abated.

But the most cumbersome holdup is often the time it takes for utilities to be connected.

In California, Glenn notes, the state’s largest utility, Pacific Gas & Electric (PG&E), will not start the connection process until a builder has ordered and received all necessary materials. “Then you’re dealing with the PG&E bureaucracy going through them to get transformers set, cables pulled and permanent tie-ins done. Even then you don’t have electrical in the buildings, not until you have all your meters set.”

Why Utility Delays Happen
In addition to the supply chain challenges, PG&E faces challenges keeping up with an increasing demand for housing and other energy needs in the face of older infrastructure, according to a KQED report. The problem is particularly acute in rural areas with unprecedented demand spikes. Glenn adds that fires have forced PG&E to shift crews, leading to further delays.

Adams spoke of similar challenges facing the utility industry nationwide. “Everyone’s really stressed from an employee resource in this environment…whenever you have some kind of a major storm or disaster, all the best-laid plans fall by the wayside because they have to deal with what is more important.” “The utility company makes things twice as hard sometimes,” Imani adds.

But Glenn and other California developers also fault inefficiency within the PG&E bureaucracy. “All those departments are separate from each other to do all those checks. So, they like to blame each other.” Developers who spoke to KQED complained of an untransparent process with vague or no estimates. An affordable project by Mission Housing in San Francisco faced indefinite delays when the report was published, with no information from the utility. “When you reach out to PG&E, it’s like a black hole. You get nothing,” adds Burbank Housing CEO Larry Florin.

In February 2023, around 30 percent of residential projects statewide were held up by connection delays of 90 or more days. From 2018 to 2022, the typical PG&E connection took over 60 days. (Southern California Edison, which mainly serves rural counties, had a much shorter average delay, though in Glenn’s experience delays are common with them as well.)

“It’s seniors remaining homeless, families and kids remaining homeless because PG&E refuses to do the right thing,” Mission Housing’s Sam Moss told KQED. For its part, PG&E argues that municipal utility regulators won’t allow for temporary power, slowing the project down.

These delays aren’t equally present or cumbersome nationwide. Glenn speaks favorably of utilities in Idaho. Whereas PG&E waits for the developer to complete electrical work, “Idaho Power is working with you along the way…that’s a huge difference.” Adams notes that Pennrose has been able to minimize utility delays when the firm works as directly with utilities as possible, noting that municipalities can aid, highlighting two senior housing projects in Auburn, MA as examples of good cooperation.

Property Inspection
Property inspection delays present another problem. “Inspection delays are significantly slowing down project timelines,” says Imani, a firm that operates nearly 40,000 units in 19 states. “The main causes of inspection delays include a shortage of inspectors, increased demand for inspections due to a high volume of construction projects, and sometimes, bureaucratic inefficiencies within local governments.”

Adams concurs. “Towns sometimes don’t have the building inspection crew that they would like to have in terms of numbers. So that delays it. And then, fire department inspections oftentimes can’t happen till the very end.”

Existing affordable units also face rent delays thanks to slow inspection. This is partly a legacy of COVID disruptions: properties insured by the Department of Housing and Urban Development, for instance, did not have routine in-person inspections from the beginning of the crisis until early summer 2021, slowing down HUD loans by as much as a year. However, a March 2024 Urban Institute report indicates that inefficiency in inspections has been a longstanding problem for Housing Choice properties, creating a four to six-week lag from a tenant’s approval to actual move-in.

Delay Impacts: High Costs and Builder Pullback
These delays compound the already challenging outlook for affordable multifamily construction.  “In the last couple of years, that’s been almost a double whammy because not only [are you] having delays, but then the interest rate has been going up during construction,” Adams emphasizes. “So, you’re paying more interest and you’re paying a higher amount than you had been during the job…And then if we’re not able to complete the projects on time, we have tax credit adjusters.”

All-electric construction requirements add costs, Adams says, as more power is needed for a given project. The combined costs of lost rent, higher interest rates and other factors can add up to six or seven figures.

Project delays are particularly dangerous for construction financed with Low Income Housing Tax Credits. “If the property is not fully rented by the end of the year,” says CPA Jennifer Galasso, “the credits related to the unrented units would be delayed one year and could not be taken over ten years but would be taken over the 15-year compliance period,” meaning developers have a diminished return on investment.

And there are costs when power isn’t available during construction. “We had to spend hundreds of thousands of dollars building [the units] on generators,” Moss told KQED.

“We have carried interest and other ramifications that occur…these delays cost us millions and millions of dollars every year,” adds Glenn. “Unless developers can do it in such a way to at least make money or make it feasible, they’re going to pull out of the markets. And I think we’re seeing more and more of that.”

Enter the Third-Party Provider
These delays and their costs have led developers to turn to third-party providers, both for utility connections and property inspection, where allowed. According to Glenn, utilities in Arizona certify providers who are then authorized to make connections. “We kind of cut out that middleman,” Glenn says. “I can just contract with [a] contractor who has the line crews…And then all they’re doing is scheduling the outages and the inspections.” But in California, the practice isn’t possible, Glenn says, because PG&E insists on hiring crews and scheduling connections themselves. The bidding process can add weeks, then the contractor must assign a bidder.

This is also often possible for property inspections, though as Imani cautions, municipal authorities still need to sign off on the projects. “While third-party inspectors can help with their expertise of local building codes, they don’t address the core issue of backlog with public inspectors, which remains the primary challenge.” Hiring an outside inspector carries costs; a Florida lender’s anecdotal report from 2016 indicates a cost of $50 to $125 per unit, likely higher today. Nonetheless, Adams argues, the cost can still be worth it compared to the alternative of losing rent and compromising credit allocation that comes with delays.

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In California, legislation passed early this year requires utilities to set and meet deadlines for connecting individual homeowners. Another bill, which has yet to pass, proposes requiring utilities to compensate developers for connections exceeding eight weeks. “We want to send a strong message that the lights need to go on fast,” State Sen. Scott Wiener, the bill’s author, told local media. PG&E expressed wariness about this solution, arguing it would lead to price increases. “We will continue to work with lawmakers to ensure the right policy and regulatory frameworks are included to support the state’s goals,” spokesperson Lynsey Paulo told KQED at the time.

So far, there’s no indication that PG&E, other utilities or state legislators will be opening the bidding process for connections where it’s not currently allowed. Glenn hopes that manufacturers will once again allow developers to order transformers to install directly; they shifted to prioritizing utilities during the pandemic because of their order dominance.

However, developers can take steps to mitigate delays or lessen their likelihood. Adams stresses that getting as much enabling work done as possible before a connection is helpful, as is coordination with all involved parties. “We try to organize meetings with entire town or municipal departments involved in the permitting and approval process around the table. So, you get Planning, Public Works, Building, Fire and Police departments sitting around the table to get everyone’s input and feedback and ensure that everybody knows what’s happening when it’s happening.”

Until broader supply chain improvements and policy changes occur, that may be the best way to address the problem.