NH&RA Summer Institute
By Scott Beyer
6 min read
Strategies to Combat Material Price Increases
The United States, thanks to a combo of Coronavirus lockdowns, supply chain issues, tariffs and a rise in inflation, is seeing a spike in home material prices. It has affected lumber, steel and cement, not to mention the labor costs of the people who extract, process, ship and build using this material. According to a spring 2021 National Association of Home Builders survey, this has added 26 percent to home costs.
This has an obvious impact on the financial feasibility of affordable housing, which was the topic of a webinar during NH&RA’s Summer Institute. Alongside moderator Jeff Kittle, president of Kittle Property Group, three additional panelists shared how price increases are affecting them, as well as potential solutions, including increased tax credit allocation, design changes and alternative financing.
The panelists, which included three affordable home developers and a housing policy analyst, painted a stark picture. The cost of lumber alone rose to $30,000 per apartment unit by May, versus $10,000 to $15,000 prior to COVID, said Kittle.
Tony Piscitello, president of USA Properties Fund Inc., added that for rough carpentry, the cost has gone up on average by 20 percent for each of his firm’s ongoing projects. Such costs “put a lot of pressure on our return on investment (ROI),” Piscitello said; his firm also notes major increases in resin and conduit-based material.
Increased costs are “eating away at the contingency” of projects, according to panelist Ron Mehl, vice president at Dominium, who also cited a $10,000 to $15,000 increase in material costs per unit. Mehl predicted that the supply crisis would be short-lived, but with considerable delays to some projects. Piscitello expressed similar sentiments: “Being in the affordable housing industry, it does scream that these things are…putting a damper on affordable housing.”
The causes of the material price spike are many, some of them having to do with COVID, others that originated before. Many blue-collar workers who are normally employed by ports or other raw material distribution centers have stayed out of work. This has caused a labor shortage that both cools production and artificially inflates wages. Money that the Federal Reserve has pumped into the economy in response to the pandemic has helped bid up material prices. And lumber tariffs launched by the Trump administration (which may double under Biden) were already causing prices to increase before 2020.
The developers on the panel have responded to these challenges through increased preparation. USA Properties Fund Inc. is collaborating with trade scholarship and apprenticeship organizations to boost the construction labor force. But more immediately, they intend to improve communication with contractors early on, so that the contractors don’t seek out other projects.
“The better your plan is, the better you’re going to have a chance of getting those resources,” said Piscitello.
Dominium has signed contracts with national material providers to ensure consistency and achieve economies of scale, as well as keeping subcontractors abreast of their work pipeline. The main materials that benefit from the scaling approach are flooring, cabinets and locks.
There are, however, things that State Housing Finance Agencies (HFAs) can do to help. Mark Shelburne, a Novogradac consultant, shared strategies for projects facing labor, material or capital difficulties. The first, an option in only four or five states presently, is for developers to be awarded more credit. The second, which is not always possible given allocation, is to award more appropriated sources to a given project. The third option is for the financing agency to directly work with owners to identify the best possible solution.
“It’s not fun to say, ‘Hey, I’m having a problem’,” to the agency that is financing a project, he noted, but he stressed that communication is nonetheless needed.
Shelburne added that timing adjusters can prove advantageous. “There’s a real need to recycle these allocations, and you know agencies have been doing that more and more,” even prior to the pandemic. Nine percent deals, he said, get more assistance because they have more units.
A second workaround for rising material and labor costs is design alterations – namely using technology. For example, USA Properties has invested in Autovol, an Idaho robotic manufacturing firm devoted to modular construction. The method eliminates weather impacts to construction, cuts labor expenses, improves quality and reduces on-site completion times. Recently, Autovol and USA Properties Fund worked on a proof-of-concept affordable project in San Jose, CA, with several one-bedroom units, which was erected in 20 days.
This switch is not easy for every affordable home developer, though. Mehl said that in markets, like Colorado, there are fewer modular producers to work with, and that his firm benefits from the scalability of keeping consistent designs rather than switching them around.
A third workaround for rising material and labor costs is for developers to seek additional financing, either through public or private sources. Several panelists said that the lending environment hadn’t changed all that much, due to low interest rates and continued rent growth throughout the pandemic.
“Quite candidly, with the spikes that we’re seeing…if you’re buying a subcontract as we are, if the materials go up 30 percent, they’re still going to have their hand out,” said Piscitello.
He added that USA Properties has been able to cross-subsidize projects through some market-rate construction.
“It’s a seller’s market,” he proclaimed.
But Shelburne still pointed to the abundance of state and local support from the American Rescue Plan, advising developers and agencies to monitor how these funds are being allocated. In some cases, the available funds “can certainly be nine figures.”
Supplemental unemployment benefits are slated to end in September, meaning that more people may return to work and increase supply chain productivity. But other economic conditions described here are not going away anytime soon. This requires affordable housing developers to improvise and adjust – on material usage, financing and their relationship with HFAs.
“I’m having to communicate a heck of a lot more,” concluded Mehl.
To purchase a recording of this or other Summer Institute Panels, please visit housingonline.com/shop.
This article featured additional reporting from Market Urbanism Report content manager Ethan Finlan.
