During the past few years, material and skilled labor costs have been on the rise, causing increased distress for multifamily developers. If we add trade tensions to the equation, it is understandable why bringing a project to fruition is becoming more and more challenging, especially when building affordable housing properties in gateway markets.
Richard Lara, the president & CEO of RAAM Construction, a general building contracting firm that specializes in multifamily projects throughout California, revealed how developers can combat rising construction costs and avoid overruns. In the interview below, he also talks about several affordable housing developments his company currently has underway in Southern California.
How serious is the affordable housing crisis in California? Which areas are least affordable?
Lara: The affordable housing crisis is one of California’s most pressing challenges. The state’s poverty rate of 18.2 percent is a clear indication that California needs to be building more affordable housing to ease the statewide shortage that is driving prices up and fueling homelessness.
The affordability problem is especially acute in the Los Angeles area as well as cities in the San Francisco Bay Area. However, one commonality we continue to see contributing to the housing shortage are rising construction costs. This statewide issue continues to be an ongoing trend that is restricting affordable housing development and keeping supply low in many markets.
To combat the escalating issue of rising construction costs, it is crucial for multifamily developers to work closely with a general contractor from the earliest stages, to conduct extensive predevelopment planning and identify cost-effective ways to bring affordable housing projects to fruition.
Lara: Summit Grove in Pasadena, Calif., is one of our most recent affordable housing projects that was completed in 2018 in partnership with Heritage Housing Partners. We have several affordable housing projects in the pipeline, but other completed projects include Fair Oaks Court and Haskett Court in Pasadena.
When it comes to the construction of affordable housing, fluctuating profit margins and stalled or even incomplete construction projects are extremely common due to shortage of materials, inadequate budget planning and/or poor scheduling on the general contractor or subcontractor side.
We are currently in the preconstruction phase of an upcoming project in Pasadena—Lincoln Orange Grove, an affordable, mixed-use community. After carefully reviewing site plans and specs, our recommendations to modify the structural design with material substitutions has yielded cost savings of approximately $700,000 and improved schedule by 45 days. This has been extremely helpful on a project that has an expected budget shortfall of $1.5 million.
We make it a point to go over every detail of the scope of work and carefully review and understand the site plans from the earliest stages to craft an accurate project schedule. In addition, we determine the materials needed and ensure that our manufacturers can get us all project materials on time. By utilizing our deep vendor relationships, we are often able to achieve the best price point for our clients to also help drive down construction costs and stay within budget.
What are preconstruction services and self-performing work and what role do they play in reducing overall costs?
Lara: Today’s developers can deeply benefit from utilizing preconstruction service. What this means is that a developer retains a general contractor in the very early stages of planning. During the preconstruction process, we conduct an overall project evaluation, identify costs of planned materials, identify any issues, determine ways to value engineer materials etc.
For example, many developers will bring in a general contractor after any permitting or city approval, then realize that the cost of materials selected put the project over budget. This often results in ancillary costs and change orders, which can result in significant delays of the project. Many times, it is also difficult to get the city to approve changes after the project has already been approved. This can further delay a project or drive up construction costs. By working with a general contractor from the start, developers and architects can identify these issues prior to city approval. General contractors can also aid in value engineering materials during this process to ensure the project captures what the developer is looking for, but remains on budget.
In addition, developers can also realize cost savings by having the general contractor self-perform work rather than working with subcontractors. The industry is experiencing a shortage of skilled tradesmen, so the reliance on a subcontractor can often result in schedule delays. Self-performing work is another way to reduce overall construction costs and combat continuous price increases. When self-performing, the general contractor is able to complete certain aspects of the project, such as concrete, carpentry or framing work with its own skilled labor force.
Developers who hire a general contractor to self-perform the construction work on a given project will benefit from highly skilled workers who have trade-specific experience, which leads to more efficient and dependable schedules while staying within budget.
Lara: There are several factors that contribute to cost overruns and, in most cases, a project’s overrun is a result of inaccurate analysis or planning before the construction even starts. One of the major contributors we continue to see in our industry is the lack of value engineering. We have repeatedly seen developers work with an architect to create a plan and rendering for a new multifamily development, spend time and money to get the project approved and permitted, only to find out later that the project is too expensive to build as designed.
If a developer is able to bring in a general contractor before presenting a project for approval, we are able to take the time to evaluate the right solutions that will bolster our ability to execute complex projects with greater control.
Trade tensions are still a pressing issue. How do you expect the situation to impact construction costs?
Lara: According to the National Multifamily Housing Council, almost two-thirds of developers say tariffs have increased the cost of development in the markets that they are familiar with. Tariffs have also forced multifamily developers to delay or even cancel some apartment projects.
In addition, we are currently witnessing a scarcity in resources due to natural disasters and a rise in construction activity nationwide. If the trade war continues to escalate, we can expect for the price of construction materials to rise. In 2018, material costs increased 10 percent over the previous year, with the price of crude petroleum rising by 49 percent, iron and steel up 14 percent and softwood lumber jumping 23 percent from the year before.
Our solution to combatting these escalating prices is to work closely with the developer from the start and identify what materials are essential and which can be replaced with lower-cost items while maintaining quality.