Residential / Multifamily Housing Challenges and Developer Considerations

By Eric Greene / VP, Residential Group Manager

What an unpredictable several years it’s been in the construction industry and economy! I can’t recall a time when we’ve had to address so many challenges in such a short period, not just at work but personally as well. I have vivid memories of body surfing as a kid off Long Island’s Montauk Point, where I would sometimes get repeatedly toppled over by the waves. After being disoriented and out of breath, I would come up for air and see the blue sky. I believe that’s what the past three years have felt like for many.

With most of the impact from the global pandemic behind us and “the blue sky” on the horizon, it’s a good time to pause, take a few deep breaths, assess where we are, and how to best move forward. 

Here are some of the key challenges we are all facing:

• Rising interest rates; the Federal Government has been raising interest rates to slow down the economy and relieve inflationary pressures, and like it or not, it’s working.
• Higher cost of debt is putting increased pressure on new real estate development.
• Uncertainties created by the war in Ukraine and a stock market that hasn’t rebounded back to late 2021 levels.
• Costs that have stabilized but have not necessarily decreased. The extreme volatility is gone, but we’re not seeing a return to pre-pandemic prices. 
• Continuously changing construction codes that only increase costs. An example is the new energy Stretch Code due out this July and then again next year.
• With some subcontractors absorbing material cost escalation over the past few years for projects already under contract, they have been left financially weak and must be carefully monitored. 
• The permitting process continues to be time-consuming and costly in many cities and towns. Some locations and neighbors are more welcoming than others.
• Construction timelines were challenging to meet during the pandemic for obvious reasons with lasting effects. How do we return to pre-pandemic durations?
• Coordination of new services with overextended utility companies has historically been challenging on large residential projects. The past few years have exacerbated this problem.
• Most of the “easier” sites to develop are gone. The remaining majority present challenges with meeting parking ratios, soil concerns, tight lot lines, height restrictions, etc. 

Here are some things that can be viewed as positives:

• COVID-19’s impact on manpower and materials is lessening daily; not as many workers are out sick or unable to work due to personal matters, and material lead times are generally improving.
• As subcontractors start to feel the slowdown, they are becoming more active in pursuing new projects, leading to more competitive pricing. 
• It is anticipated that labor will become more readily available. This should help to reduce construction durations slightly.
• The Multi-Family Zoning Requirement for MBTA Communities; this new law will create new housing in walkable neighborhoods closer to transit.
• It continues to be documented that there is an ongoing need for more housing.
• Rents are still strong, with increased interest rates driving “would-be” home buyers to rent.
• The single-family housing supply is low, and people with relatively low mortgage rates will likely stay where they are rather than move and incur a higher interest rate.

We share a common goal to build housing that meets the market’s needs and is profitable for the client/developer. From a construction managers perspective, here are a few thoughts on how Erland can support you as you work to put deals together that meet your pro forma and create value:

• Assemble a small team of trusted advisors as early as possible and share what project cost works within the pro forma. Very early collaboration between the developer, architect, civil engineer, and construction manager is critical to understanding and controlling cost and schedule. Be transparent about what the costs need to be to make the deal work. 
• Fully understand the cost implications of the site, parking plan, facade materials, building height, site logistics, etc., before presenting to the town or city. Many times, by the time we are engaged, our hands are tied by previous commitments, and real opportunities to save money are forfeited.
• Talk about the design and approval timeframes, construction duration, and site logistics early and often. These all impact the pro forma. 
• Get input from key subcontractors early so that material lead times, costs, and manpower availability are understood, and concerns are addressed. Determine if certain pieces of equipment need to be released early.
• Put extra effort into the construction schedule. As a team, discuss what can be done to keep the schedule as tight as possible without putting the project at risk. The construction manager will lead this discussion, but all parties have a seat at the table, and their input is critical.
• Be open to new ideas, new materials, and creative ways to address challenges as they arise. If the pandemic has taught us anything it’s that we have a much greater ability to find solutions to issues than we give ourselves credit for.  

Now more than ever, our residential clients are relying on us to provide insight into market conditions, building materials and lead times, construction costs, and subcontractor availability. Erland is here to be your trusted advisor and ensure you have all the information needed to update and evaluate your project’s pro forma. 

For any questions regarding this topic, please contact Eric Greene at egreene@erland.com.