The challenges facing multifamily developers such as labor shortages and supply chain issues are causing rampant construction delays, according to the National Multifamily Housing Council’s (NMHC) most recent Construction Quarterly Survey. An overwhelming majority (97%) of developers reported experiencing delays over the past three months. Among those who experienced postponements, 83% reported delays in permitting and 93% reported delays in starts. The number of developers who reported projects were not economically feasible rose to 38% during the second quarter of 2022, up 20 percentage points over the previous quarter.
Regulatory issues slowing development
Among developers who reported delays, 85% said that the largest factors contributing to the issue were permitting, entitlement and professional services. In addition, 58% said that materials sourcing and delivery caused interruptions.
In June, 37% of developers said they were told by jurisdictions that obtaining a permit would take 5 to 6 months; 23% were told it would take 3 to 4 months; 13% were told it would take 1 to 2 months;10% were told it would take 7 to 8 months, and 10% were told it would take nine months or longer.
Nearly half of respondents (43%) said that jurisdictions are imposing additional project requirements unrelated to actual project construction. As examples, developers mentioned impact fees, sustainability requirements, affordability requirements and public infrastructure initiatives.
Labor and materials costs impacting deals
While rising costs of materials are an issue, labor shortages and higher wages also continue to impact development. More than half of the survey respondents (53%) reported that labor costs increased as expected over the last three months and 40% said labor costs increased more than anticipated.
While half of developers said labor availability was about the same in the second quarter of 2022 as it was during the first quarter, 40% said that construction labor was less available in the second quarter. Only 7% said labor was more available during the second quarter than the first quarter of 2022.
Most developers (83%) reported that deals had to be repriced during the last quarter. While the average price of lumber dipped by 5%, electrical components typically cost 12% more during the past quarter. Other price increases include an 11% rise in the cost of exterior finishes and roofing, a 10% rise in insulation prices and a 5% increase in the cost of appliances.
Among the solutions to higher materials costs, developers report using alternative brands and suppliers, using alternative products and types of materials, making design changes, changing purchasing schedules including pre-purchasing and/or warehousing products and materials, and giving greater focus on escalation clauses and acceptance of higher escalations.
Developers are trying a variety of tactics to overcome the challenges of importing materials, transportation bottlenecks and delays. The solutions developers have found include using alternative product and materials (41%), sourcing more products and materials domestically (33%), sourcing more products and materials locally or from specific domestic regions (11%), and sourcing more materials from Canada (4%).
Switching markets for development opportunities
Leaving a market or looking for opportunities in other markets to overcome challenges such as regulations and labor shortages isn’t common for most developers, according to the survey. However, nearly one-fourth of respondents (23%), said they are looking for more construction projects in the Southeast, such as in Atlanta, Charlotte and Orlando, because of fewer issues related to finding labor and fewer delays related to permitting and entitlement. That compares to 13% seeking projects in that region during the first quarter of 2022. In addition, 20% of respondents were looking for multifamily opportunities in Texas during the second quarter of 2022 for the same reason.
A smaller number of developers (10%) reported that they no longer will seek out projects in South Florida because of greater challenges with permitting, entitlement and labor shortages. An even smaller number (7%) reported that they are no long seeking out projects in West Coast markets for similar reasons, such as San Francisco, Seattle, Los Angeles and San Diego.