How Multifamily Builders Are Tackling Lingering Construction Challenges

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In spite of ongoing economic headwinds and persisting geopolitical issues, the multifamily sector experienced exceptionally high demand throughout 2022, driven by strong fundamentals and evolving demographic trends.

According to Yardi Matrix data, multifamily construction starts across the U.S. through the third quarter of last year totaled 363,575 units—or one-third of the total number of units underway at that time—which was only 3.2 percent lower than the figure recorded over the same interval in 2021.

The same data provider expects 2023 to be another strong year for new multifamily supply, with more than 400,000 units scheduled to come online by the end of the year. But despite record-breaking numbers and positive forecasts, pre-existing conditions and unforeseen construction challenges are creating a perfect storm for multifamily development.

“Aside from construction costs escalating significantly over the past two years and rent growth not keeping pace, capital markets headwinds have also come into play. Exit cap expansion and interest rates make it difficult to reach a desirable return on investment,” Matt Sayre, vice president of construction for multifamily and senior living at Ryan Cos., told Multi-Housing News.

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The lingering effects of the pandemic on the supply chain continue to fuel construction challenges for multifamily contractors. Over the past three years, Levine Builders has been constantly faced with the uncertainty of when construction materials would actually end up arriving at their sites. Even after follow-up contact with subcontractors and vendors, there was a new surprise arising every week.

“While not present to the same extent as at the height of the pandemic, the flow of the supply chain has not yet returned to where it was pre-pandemic,” said Levine Builders CEO Paul Finamore. “As we all continue to adapt to this new normal, supply chain grievances will likely continue to be an issue. While it has overall been a difficult time, pivoting and finding various solutions in lieu of current conditions has, in a way, been an exciting process,” Finamore further noted.

Dealing with today’s multifamily construction challenges

To overcome the issues constantly coming at them, multifamily builders had to get creative and change the way they operate, specifically how they procure materials. Some companies started to do more in-house work to minimize costs and wait times, while others such as Levine Brothers took a more proactive approach to its trade procurement strategies.

“In the past, we might have taken for granted getting elevator machine room equipment delivered in four months after it was released for fabrication. Today, it could be eight months or more,” Finamore confessed. “These challenges have led us to move up the procurement strategy in purchasing with some trades, with an understanding of which trades are experiencing the most difficulty due to post-pandemic recovery as well as economic constraints,” he added.

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Not so long ago, Levine Builders would rely on subcontractors to prepare shop drawings, get them approved, and release material for fabrication and installation. Today, they know where these subcontractors are buying their materials from and other behind-the-scenes details, subsequently becoming more in tune with their subcontractors’ businesses.

Having become dialed into the global markets as it pertains to what types of materials and location sources are experiencing the most delivery delays has given Levine Builders the chance to steer away from using products and materials from areas that are still going through significant supply chain and shipping issues.

And while the current economic climate has inevitably created delays in multifamily project completions, Sayre believes that having robust relationships with suppliers, banks and equity partners can go a long way in making up for the lost time.

What’s ahead for multifamily construction?

It’s no secret that home purchasing has decreased because of higher interest rates, and this translates into higher demand for market-rate rentals. Sayre expects the construction slowdown to lead to a lack of housing available for the next two years, which will only further intensify the need for multifamily construction.

“The current headwinds the multifamily sector is experiencing are just speedbumps on a long road, not a cliff,” Sayre said. “Demand and demographics aren’t changing any time soon, and that presents an abundance of opportunities,” he added.

In the short term, however, the fight against inflation will likely lead to an economic deceleration that will curtail job growth, and a potential recession in the second half of the year, according to recent Yardi Matrix research. For multifamily, this translates into fewer households forming as the labor market weakens, and a decrease in migration.