The first Construction Quarterly Survey of the new year from the National Multifamily Housing Council (NMHC) is likely not going to show the fresh start to 2022 that some were hoping for. Businesses and supply chains that were only just recovering from the pandemic have now been confronted with the shock of Russia’s invasion of Ukraine and are dealing with the impacts of Russian sanctions on global trade. This has resulted in a drawn-out struggle with supply chain disruptions that have driven prices up for certain construction materials, leading to 92% of survey respondents reporting deals that have been repriced by an average increase of 25%. In addition to added costs, 89% of those surveyed reported experiencing overall delays on their building projects.
Main Causes of Delays and Price Increases—Permitting, Materials, & Staffing Shortages
Permitting (75%), sourcing materials (64%), and staffing shortages (43%) were some of the main drivers of the delays in construction projects. The most common length of delays waiting for permits are between three to four months (32%) and five to six months (26%). The majority of Construction Quarterly Survey respondents show local jurisdictions holding back on imposing additional project requirements that cause delays, but there is still a significant number (37%) who have reported superfluous requirements that were unrelated to the construction project.
Economic uncertainty and a lack of economic feasibility at the time were each cited by 18% of respondents as reasons for delays as well, but over the last three months, a striking 0% named health or safety concerns as a cause of delay. While safety should never be ignored, clearly this is not an issue and energy can be placed elsewhere to reduce construction delays.
It is no secret by now that the cost of labor has gone up since The Great Renegotiation, but 55% of survey respondents have been reporting an unanticipated increase in labor costs just over the last three months. Even with paying more for labor, 63% of respondents still found construction labor to be less available compared to three months ago. Despite these labor issues, hardly any of the responses in the survey indicate an intention to abandon current projects. However, areas like Orlando, Atlanta, and Charlotte have increased in consideration as locations for future projects among survey respondents, citing fewer issues with sourcing labor and permitting delays.
The Role of Sanctions on Russian Exports—Gas & Metals
Russia is famously the third-largest producer of oil in the world and as its main export, it has been hit hard by global sanctions. The rising gas prices have affected almost every industry and aspect of trade, but the less buzz-worthy sanctions on Russian exports of metals such as copper, nickel, aluminum, steel, and platinum explain the results in the survey that show materials for electrical components are up in price by 15% with exterior finishes and roofing products up 14%.
Some survey participants reported using alternative brands or suppliers to circumvent these price increases, which was easier for exterior finish products according to the 63% of those who found successful substitutes. When it came to electrical materials, survey responses indicated about half as much success with finding alternative brands or suppliers which forced 29% to make whole design changes, and 45% changed their purchasing schedules to implement pre-purchasing items directly from warehouses to save money. In the cases where successful alternatives were found for pricier construction materials, 34% of survey responses indicated sourcing those products domestically to achieve savings—but this is not always possible.
While the dependence on Russian gas and oil seems like it would be solved by switching to renewable energy, the essential building materials for things like wind-powered turbines would likewise be affected by sanctions on Russian metals. Renewable energy options will also take time to build and roll out so they will not be a solution in the short term.
Other Factors Impacting Construction Material Costs
After an initial frop earlier in the year, lumber prices are up again, which poses a significant obstacle for apartment construction. Insulation is also up 12% and like lumber, this product is more challenging to substitute suppliers with almost a quarter of survey replies indicating there were no applicable alternatives. Unlike metal or gas, lumber pricing is unrelated to Russian sanctions and is instead the result of U.S. legislation last November that doubled the tariff on imported Canadian lumber in order to support domestic lumber production initiatives so these pains are unlikely to dissipate soon. Therefore, lumber pricing will not be particularly linked to wartime volatility. NMHC survey replies indicate the primary relief for lumber pricing is to change purchase schedules and make those orders directly from the warehouse.
There are many challenges causing delays that are increasing the costs of construction—especially for larger apartment complexes—but responses in this survey have ultimately revealed a determination to find creative solutions and power through regardless of the current economic volatility.