The Burden of Rising Costs
By Thom Amdur
7 min read
Competition for land and labor makes building less affordable
As the economy continues recovering from the Great Recession, the number of families and individuals who rent their homes instead of buying is growing. While this is in some ways a boon for those who develop rental housing, it also creates competition. For every developer who tries to buy the same piece of land, the cost of that land goes up. For every development project that requires a construction worker, the fewer there are available for the next developer. Developers are feeling the pressure. Recent surveys of the National Association of Home Builders’ membership reveal that more and more developers are concerned about the availability of labor and land.
At the same time, federal subsidies for many key housing problems get smaller with each passing federal and state budget. Qualified allocation plans across the country are emphasizing cost containment. But as they tighten the purse strings, housing finance agencies are asking for more: more environmental sensitivity, more human services, more development in areas of opportunity.
The confluence of these factors poses a severe burden on those trying to create affordable housing that also makes financial sense. The community of multifamily affordable housing developers has a reputation for innovation and is now being forced to be even more nimble. While market-rate rental developers can pass rising costs on in the form of rent, how do you cover them when rent is restricted?
Getting a Project on the Ground
“The market is incredibly overheated,” developer Andrew Burnes told a packed room of affordable housing professionals at the National Housing & Rehabilitation Association’s Fall Forum in November 2015. Burnes, President and CEO of HallKeen Management, Inc., continued, “We find we’re not even competitive [in many cases.] We are not always in the last round.”
Burnes was talking about the rising demand for multifamily properties. HallKeen works throughout the Northeast corridor, from Virginia to Maine, and has seen acquisition costs rising.
As many real estate markets heat up, affordable housing developers across the country are seeing land costs go up as well. Qualified Census Tract (QCT) and Difficult to Develop Area (DDA) designations, as well as other state qualified allocation plan (QAP) provisions, often encourage development in specific areas, which can lead to competition among tax credit developers. In the summer of 2015, the Supreme Court upheld disparate impact under the Fair Housing Act and the U.S Department of Housing and Urban Development issued the Affirmatively Furthering Fair Housing (AFFH) notice. Both events renewed the affordable housing community’s focus on “areas of opportunity,” which means that developers will seek to create housing in areas that are already seeing investment. This creates competition with market-rate developers, as well as other tax credit developers, in areas where land prices are likely already higher. All of this increased competition for a limited amount of land can drive up prices.
Developers are tackling this issue in different ways.
“We’ve been very geographically concentrated and try to use knowledge that’s hyperlocal, whether that’s for land permitting purposes, whether that’s the smaller deals, whether that’s to find deals off-market,” said Andrew Chaban, CEO for the Lowell, Massachusetts-based multifamily rental housing developer and owner Princeton Properties. Chaban said they also tend to look for “deals that have hair on them in some way” in order to give themselves an edge against the competition who may shy away from problem properties.
“[We try to] find something where we can put in a better mouse trap and solve a problem.”
Duncan Barrett, COO at Omni Housing Development in Albany, New York, said, “The properties that we can compete for are very distressed properties. We’re not positioned, nor do we think it’s prudent for us, to compete for properties for which there are a lot of bidders.”
The developers also look for ways to maximize the value of the land or property they acquire. Chaban explained that Princeton Properties looks for ways to “monetize the roof.” The company has sold leases to the roofs of multiple properties in Lowell to telecommunications companies looking to boost cellular coverage in the area. They are able to harness the income, and in the case of one project, were able to use it as a tax credit guarantee.
Reversing the Loss of Labor
“A deal we did 24 months ago priced today on a per unit basis is up 33%,” Chaban said at the Fall Forum last November. “These are real numbers with a contractor we’ve worked with for decades.”
Chaban contends, “It’s labor that’s driving all of
the costs.”
Whether a developer has an in-house construction department or hires a general contractor, labor costs have a big impact on the project’s bottom line. Labor costs are, in part, a product of the size of the labor force, which is at a critical juncture in the construction industry. More than 40% of construction jobs disappeared from April 2006 to January 2011. That means the economic downtown pushed more than two million construction workers out of the industry, into other sectors, into retirement, and back to their countries of origin.
The Associated General Contractors recently surveyed more than 1,300 construction firms about what they are seeing in the labor market. Nearly nine out of ten respondents reported that they have had a hard time hiring hourly tradesmen and salaried supervisors and specialists. More than half of respondents have had difficulty finding carpenters, sheet-metal installers, concrete workers, electricians, equipment operators, roofers, bricklayers, cement masons, plumbers, and flooring installers.
This is a critical issue for the construction industry as a whole, and particularly important to multifamily affordable housing developers who are working on tight budgets and schedules. If construction firms are uncertain about their ability to staff projects, they are less likely to bid on them. Fewer contractors competing for work means less competition and higher costs for owners, according to the AGC.
Additionally, the shortage of construction workers, particularly tradesmen, creates delays. The schedule on which a building must be built does not always align with the schedules of subcontractors. Every time a project is delayed, it adds to the project’s overall costs and threatens the placed-in-service deadline that tax credit developments are required to meet.
Instead of trying to attract former construction workers back into the industry, the Associated General Contractors recommends recruiting new workers. AGC sees more robust technical education and training programs as the answer to the labor shortage. A recent AGC report notes that there has been a 29 percent decline in federal funding for career and technical education, with society focusing more heavily on college-preparatory programs in high school.
Recruiting a new generation of construction workers is important to the sustainability of the industry.
“I haven’t seen a plumber or an electrician on our sites in the past five years who is younger than the age of 40. Not a one. And it’s a real serious problem,” said Chaban.
His experience aligns with the data. The 2013 American Community Survey found that about 40% of the construction workforce is over 44 years old. Duncan Barrett, COO of Omni Housing Development, suggested, “creating the next generation of our labor force ought to come out of the communities we work in.”
Developers and general contractors can support Barrett’s vision by collaborating with programs like YouthBuild, which has partnered with the Department of Labor to create a program that trains young adults from low-income neighborhoods in construction skills.
Ensuring Financial, and Political, Sustainability
When it comes to land prices and labor shortages, creative approaches to cost containment is a financial issue across the real estate sector. For the affordable housing industry, it is a political one too.
From the local boards that approve each development to the federal legislators that appropriate funds for the programs that make the developments possible, the industry is often asked to defend the cost of creating affordable housing. With no easy fixes to these issues on the horizon, it looks like creative approaches to keeping land and property acquisition costs down, finding unique income streams for properties, and supporting ways to rebuild the construction workforce are key elements to continuing to provide housing for all income levels.
