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Construction Costs Spike for Multifamily Projects

Apartment projects are becoming more expensive to build, straining development budgets.

The cost of construction is rising rapidly for apartment developers and contractors.

“I expect contractors to pay 4 percent to 5 percent more in 2018 than in 2017,” says Ken Simonson, chief economist with the Associated General Contractors of America. That includes both construction materials and services, such as truck transportation, subcontracting and leasing.

Developers now compete fiercely with each other for the materials and workers they need to complete commercial and multifamily projects. At the same time, U.S. trade officials have started arguments with several of the country’s largest trading partners, driving up prices for materials like lumber and steel.

As a result, apartment projects are becoming more expensive to build, straining budgets. “You can only pass so much of that on to consumers,” says David Logan, director of tax and trade policy for the National Association of Home Builders (NAHB).

Lumber prices out of control

The price of wood has been rising over the last year, and the price hikes have been especially bad over the last month. “The price of wood products over the last 12 months has increased substantially and is imposing a major burden on builders,” says Logan.

The outlook for price increases has become especially grim since December. Futures prices for softwood lumber for March delivery are up about 25 percent over January and February, according to NAHB.

Costs are rising quickly in part because of the strained relationship between the U.S. and trade partners like Canada, which supplies much of the lumber used by developers. The U.S. has added tariffs to Canadian lumber of roughly 20 percent over the last year, saying that Canada unfairly subsidizes its lumber industry. More recently trade talks with Canada over the North American Free Trade Agreement (NAFTA) have not gone well, with Canada threatening to leave the agreement.

Government policy is also pushing up the price of steel products like rebar. “I think it is largely because of steep tariffs put on specific steel producers, beginning in December 2015,” says Simonson. “Prices could go much higher if the president adopts the stiff tariffs recommended by Commerce Secretary Wilbur Ross.”

Simple demand for material is also very strong, and is pushing prices higher. “Global demand increases are probably the major part of the explanation for the large increases in the prices of copper, aluminum and diesel fuel,” says Simonson.

The cost of construction materials may also be rising quickly as worries about the potential for broad-based consumer inflation spread through the economy. Cost increases are affecting a range of construction materials. “Prices of construction materials are outpacing consumer inflation by a factor of two,” says NAHB’s Logan.

Labor prices keep rising

Construction workers for new apartment projects are also extremely hard to find. Contractors have been forced to offer higher wages to attract more workers.

“The labor shortage continues in most locations,” says Simonson. “I expect direct labor costs for wages, salaries and benefits to rise 3 percent to 4 percent [in 2018], with additional costs for longer searches to fill positions and more training for the workers they do hire.”

Even with higher wages, developers and contractors are still sometimes unable to find all the workers they need to complete apartment projects on time. The resulting delays have added 30 to 45 days to the time needed to construct new apartment units at many projects, says Davis.

The number of job openings in the construction industry rose to record-breaking or near-record-breaking levels in each of the last five months of 2017, according to data from the Bureau of Labor Statistics (BLS).

To fill some of those positions, some contractors and sub-contractors are once again trying to lure workers away from the work sites of other contracting firms. “Contractors hiring away each others’ workers is a huge problem,” says Davis.

However, despite the difficulties, projects are still getting completed.

The number of people employed in the construction industry rose 3.3 percent over the year that ended January 2018, according to the BLS. That’s more than twice the growth compared to the 1.5 percent increase in overall non-farm payroll employment. “This implies that contractors are hiring people from outside the industry,” says Simonson.

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