Developers report delays in permitting, starts
COVID-19 has disrupted the commercial real estate industry in more ways than we can count. Some of those changes have been positive, such as accelerating the industry’s embrace of virtual leasing. Others, however, threaten to create long-term impacts that will negatively affect our communities. Top among those is the effect of the pandemic on multifamily construction.
The U.S. had a shortage of apartments before COVID-19. According to research conducted by Hoyt Advisory Services, the U.S. needs to build at least 328,000 new apartment homes each year through 2030 to accommodate household growth and losses to the existing stock. We’ve only hit that mark three times since 1989. Prepandemic, 2020 was likely to be the fourth.
We have been here before, sadly. In the Great Recession, apartment construction virtually shut down. Starts plummeted from 266,000 in 2008 to 97,300 in 2009, and it took several years for construction levels to rebound to prerecession levels. The end result of that contraction was a housing affordability crisis that spread beyond the coasts to middle America and beyond low-income households to middle-income families.
In other words, beyond the immediate impact of construction slowdowns on the firms engaged in housing production, there are meaningful, long-term impacts to communities. For that reason, the National Multifamily Housing Council created a COVID-19 construction survey to help inform the industry and policymakers how the state of apartment construction is changing during this health crisis.
When the national state of emergency was declared, states took varying approaches to housing production. Some allowed work to continue, deeming it to be essential, while others shut down all job sites. In late March, NMHC successfully lobbied the Department of Homeland Cybersecurity and Infrastructure Security Agency to include residential property management and residential construction as “essential workers” under the CISA guidance that many jurisdictions were relying on to determine what work should continue during the state of emergency.
That, plus new job site practices to better protect worker health, helped convince more localities to allow construction to proceed, and by June, construction was allowed in all 50 states. Nevertheless, many construction projects have stalled. On July 20, NMHC released the results of the fourth iteration of its survey, which found that more than half (57%) of respondents said they currently are experiencing construction delays in jurisdictions where they operate.
Significant construction delays reported. Of this group, 83% reported experiencing delays in permitting, up from 76% in the first round of the survey. Fully 71% of those experiencing construction delays are experiencing delays in starts, up from 59% in round one.
The causes for delays were numerous. Over half (56%) blamed permitting, entitlement and professional services. Economic uncertainty was the second-most common response at 52%, followed by availability of construction financing (48%) and health and safety concerns (28%). Sixteen percent said projects were no longer economically feasible. Firms also reported delays because of material shortages or crew members testing positive for the virus.
How long do firms expect these delays to last? Half (52%) said less than six months, while 44% predicted six to 12 months.
Pauses outnumber cancellations. Two-thirds of respondents have paused at least one construction project since March 23. Just under a quarter (23%) expect to resume construction, but 18% are uncertain if they will resume work. Only 2% of respondents have cancelled projects entirely, and over one-third (36%) indicated they have not paused or canceled operation at this point. Moreover, over half (51%) of respondents indicated that the recent spike in coronavirus cases has affected their operations in some way.
COVID-19 impacting deal prices and financing. In addition to causing delays, the pandemic also is impacting deal prices and financing. Fifteen percent reported deals being priced down 5% or more, 11% are seeing deals priced down 3% to 4% and, 15% of respondents, down 1% to 2%. At the other end of the spectrum, 8% reported deals being priced up 1% to 2%, and 3% of respondents are seeing deals going for 3% to 4% higher.
Survey respondents also reported widespread issues in obtaining financing or construction loans since mid-March. Nearly a quarter (21%) were unable to obtain financing at their desired price point, and 2% were unable to obtain financing at all.
Material shortages and price increases materialize. Over a third (36%) of respondents reported materials shortages, the highest share recorded since the first survey was conducted. Specific shortages reported include appliances (41%), cabinets and countertops (36%), electrical components (23%), fixtures (23%), tile/wall finishes (14%) and AC/condenser units (14%).
While only a handful of respondents reported price increases in the first two iterations of this survey (5% and 4%, respectively), that share has now jumped to 18%. Lumber and other structural materials, such as concrete, steel or trusses were the most commonly cited items as being more expensive.
Labor constraints growing. While the majority of respondents have not been impacted by availability of labor, the share of respondents who indicated they still are facing labor constraints increased 14 percentage points during this round of the survey, from 25% to 39%.
Many (38%) of the operators currently facing labor constraints said that employees were not working right now either because the workers were infected or concerned about getting infected, they needed childcare, or because they simply did not want to return to work. Other constraints cited during this round of surveying include restrictions that limit crew sizes or when crews can work (25%) and general delays caused by the labor shortages and schedule extensions (17%).
Firms adopt new strategies. Construction firms are adopting new strategies to deal with the hurdles formed by the virus’s continued presence. This includes sourcing materials from alternative locations, staggering shifts to reduce on-site exposure, using technology to replace in-person transactions like inspections and approvals and sourcing alternative building materials.
Long after a vaccine is developed and the world returns to whatever our new normal is, it is likely that the pandemic will have long-lasting effects on apartment construction and housing affordability. Anecdotally, firms have said that they will permanently alter their supply chains, relying less on Asia for materials. Others are embracing new technologies to continue work. And many city planning offices unexpectedly joined the 21st century and adopted online permitting and other evolutions to keep work going.
Ultimately, it remains to be seen what kind of contraction will be recorded by the end of the year, but given the widespread nature of our prepandemic affordable housing shortage, any contraction is likely too large.
Featured in CREJ’s August 2020 Multifamily Properties Quarterly