New Developments: Designing Solutions for a Rising Cost Environment
By Thom Amdur
4 min read
Navigating rising construction costs is currently a primary concern of all NH&RA members—and fittingly the focus of this issue.
Even before COVID-19 infected us, disputes around global trade policy drove up the cost of critical materials, most notably lumber. The pandemic brought about global supply chain challenges that remain unresolved. Whether it’s doors, windows, cabinetry or anything with a microchip, costs are up, and delivery times are delayed. The labor shortage across all industries has taken its toll on construction trades. The great resignation has triggered wage inflation and the extra expenses of staff turnover.
Affordable housing developers have been partially insulated from some of these challenges because we have been the beneficiaries of some fortuitous legislation, including fixing the floor of the four percent Low Income Housing Tax Credit and American Rescue Plan Act (ARPA) funding. Low interest rates that drove additional leverage have also helped, and of course many states’ housing finance agencies came to the table with creative approaches to push deals caught in the middle to the finish line.
With interest rates beginning to rise, inflation at the highest levels in 40 years and labor and supply costs still rising, we are going to have to come up with even more creative and multifaceted strategies to address the challenges ahead of us in 2022.
On the federal policy front, hopefully Congress will find a way to a compromise and enact some or all of the housing provisions in Build Back Better or the Affordable Housing Credit Improvement Act, giving the industry a much-needed tranche of additional funding to address these challenging dynamics. We will keep on working with our champions on Capitol Hill to get housing legislation to the finish line, but, given the uncertainty, it is best not to put all our eggs in that basket and instead consider local policy and design solutions in tandem.
Timeline slippage is one of the biggest challenges I’ve been hearing concerns about from developers lately. The result is having to rebid deals at higher costs. One thing we’ll be focused on this spring is partnering with Housing Finance Agencies (HFAs) to advocate for solutions to process applications and allocations more quickly to help on the front-end. Developers will probably want to focus on relationships and executions that put a premium on closing speed as well.
Developers and HFAs are going to have to be nimble in conceiving solutions. Given how dynamic the bidding and pricing environment is today, even recently adopted Qualified Allocation Plans (QAPs) may not be aligned with current construction costs and may need to be amended mid-cycle. If states are open to making changes mid-cycle, I hope they’ll consider adopting strategies that drive more tax credit equity into transactions to help fill the gaps. These include lifting total development cost or total credit caps, making supplemental credit allocations or facilitating credit exchanges for impacted deals and revisiting developer fee limitations. These solutions are all currently available to states but they do come with trade-offs – providing more credits or volume cap to transactions with rising costs will likely mean fewer overall deals being allocated.
In addition to financing, we need to turn up the heat on design and construction solutions. Value engineering can only take us so far. I think it is also time to revisit some of the innovative design and construction strategies I’ve written about in this column over the past few years (some of which are highlighted in greater detail throughout this issue). Regular readers know I am an advocate for modular development, panelization, 3D printing, light-gauge steel and factory-built housing as part of the suite of affordable housing construction solutions. While there is a learning curve for these strategies, more and more developers are finding success with them, and they become even more compelling in an inflationary and rising interest rate environment.
