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Delay in construction is hurting apartment investors

The past two years have brought with them myriad disruptions to the multi-family development pipeline, including delays caused by the COVID-19 pandemic and ongoing issues with the global supply chain. None of this has been cleared in the early part of 2022 and apartment developers are still struggling to complete their projects on time. These delays are spoiling their construction schedule and cutting into their returns.

Construction delays began two years ago when the first wave of coronavirus infections shuttered workplaces around the world – including some construction sites and several factories that make materials for multi-family projects.

The delay is likely to continue even as the number of coronavirus cases continues to decline this spring. Labor shortages have stalled deliveries and made it difficult to predict with any certainty when the required materials would be found at job sites.

“The supply of most goods should improve … but delivery times remain highly uncertain,” warned Ken Simonson, chief economist at Associated General Contractors of America (AGC), headquartered in Washington, DC. “If the coronavirus is really ending, the factory should be shut down. But the outlook for getting enough truck drivers to deliver those materials remains unclear. ,

Delayed strike in apartment projects

Many apartment developments that are going on now are facing some kind of delay.

“A typical apartment project can take 10 to 20 percent longer to complete than it was a few years ago,” says Jay Parsons, RealPage’s vice president and head of economics and industry.

Even worse- these delays are unpredictable. “Contractors often tell me about deliveries earlier than expected… although not so often that deliveries are delayed, often longer delays are discovered,” Simonson says.

These delays are affecting all types of construction materials from wood to steel to concrete. Overall, three-quarters (72 per cent) of construction projects were delayed in 2021 due to the pandemic, according to the Hiring and Business Outlook Survey released in January by AGC and SEZ Construction. The survey covered all types of construction projects. “We didn’t ask what type of project or specific reasons for the delay,” Simonson says.

Many of these delays were serious. Nearly a third (32 percent) of these contractors said they had a project postponed or canceled in 2021 and not rescheduled until December 2021.

The delay may lead to additional financing cost to apartment developers. Every day an apartment remains unfinished due to construction delays, there is another day that developers will have to pay interest on their construction loans without earning income from rent.

If interest rates start to rise this year, these additional financing costs will become even more difficult to bear, as most construction loans are floating rate. Xiaodi Li, an economist at Moody’s Analytics, says, “Rising interest rates could create financial problems for manufacturing.

Apartment developers are still being surprised by new delays in the delivery of materials as the factors leading to those delays change. “Delays can happen at any stage of the supply chain,” Simonson says.

In the first months of 2022, some factories were closed again due to the latest wave of infections from the Omicron type of corona virus. But due to the heavy burden of the global logistics chain, the delivery of materials was also taking longer.

“Ships wait offshore – on the East Coast as well as at the port of Los Angeles Long Beach – for varying lengths of time because the port is full of containers that cannot get to their next destination due to lack of chassis, truck drivers Or Rail Crew,” says Simonson.

It is not clear when these delays will finally go away. “It’s very difficult to predict at this point when we’ll see real improvements across the board,” Parsons says. “There is no consensus.”

New problems could make the latest set of delays even worse. “There is a strong possibility of West Coast longshore workers going on strike this summer. This will cut off the movement of goods from Asia,” says Simonson.

Developers manage delay threats

“Developers are adjusting their timelines to try to be more realistic given the challenges in securing labor and materials,” Parsons says.

In addition, more than two-thirds (67 percent) of contractors are buying materials more quickly after winning a contract to try to avoid these problems, according to an AGC survey. Nearly two-thirds (61 percent) of contractors say they have turned to alternative suppliers. Nearly half (48 percent) switched to alternative ingredients. And about a quarter (23 percent) are also stockpiling potential materials before winning the contract.

“All of these steps require the approval or participation of a developer,” Simonson says. Investors and developers may need to provide financing, storage space for materials, or adjustments prior to design or phasing out of projects.

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