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Contractors Face Uncertain Materials Costs, Lull in Student Housing Activity Due to COVID-19

Construction

Marous Brothers Construction recently completed Axis at Ansel, a 400-bed student housing development located near Case Western Reserve University and the Cleveland Clinic Medical School. The developer was Signet Development.

Rising construction materials costs have been one of the biggest stories of the pandemic era. When COVID hit, many factories ramped down production. In addition, some raw materials industries had challenges like tariffs, natural disasters and COVID-related slowdowns. When construction continued during the pandemic, supply suffered and pricing rose dramatically. This has been especially true for lumber and steel, but natural disasters in areas like Texas have even hampered the manufacturing of other goods, like appliances. 

Student Housing Business, sister publication to REBusinessOnline, spoke to six general contractors to get their take on the student housing sector at present, and to get their advice on what they are telling clients who are pricing projects for 2022 groundbreakings and beyond. SHB spoke with Arne Goldman, director of business development at Marous Brothers Construction; Marty Hoffey, business development manager at MW Builders; Emily Kessinger, business development manager, and Chris Harrison, executive vice president at The Weitz Company; Sean Studzinski, president of strategic initiatives at Modular Design+; and Sky Sanborn, executive vice president and chief operating officer of Broeren Russo Builders.

SHB: How busy is your student housing pipeline? What projects have you recently built/completed?

Goldman: We have some projects that are lined up for 2022 and 2023. We completed Axis at Ansel, which a 162-unit, 400-bed off-campus project near Case Western Reserve University/Cleveland Clinic Medical School. The developer was Signet Development. Projects have definitely been impacted by the pandemic and by rising costs. Certainly developments have changed somewhat. There are more efforts that need to be made to account for increased construction costs in a highly volatile pricing market that isn’t going to correct anytime soon. 

Hoffey: Our pipeline is strong, and there is a lot of pent-up demand. We have projects in pre-construction. There is, however, a lot of caution in the market due to materials prices. We just completed a project called 848 in Arlington, Texas, near the University of Texas at Arlington for Fountain Residential. We are under construction with The View at UNC-Charlotte. 

Harrison: We are finishing two projects for Landmark, one in Coral Gables, Florida, and the other in Berkeley, California. Both are $65 million to $70 million projects. We had to shut down and sanitize a few times during COVID, but it really did not hinder us too much. We also had projects at Florida Atlantic University (FAU) in Boca Raton and Jupiter that we are finishing this summer. We are starting a project for Servitas in Santa Rosa, California, this summer. It seemed like about a year ago that a lot of customers wanted to pull the reins back because students weren’t in class. Pre-development slowed for about six to nine months, but now it seems like it is really starting to heat up again with the optimism in the market.

Kessinger: A lot of clients are waiting to see what fall 2021 enrollment looks like. Our FAU project, for instance, has a Phase II component. Until they know that Phase I will be fully occupied by students, they are going to wait and see on Phase II. That is likely also the case with a number of P3s that are in the works. Pricing is continuing on a variety of projects right now, so developers are considering how to make something pencil, or what the market feasibility looks like in different markets.

Sanborn: We are finishing up a project called Gather Illinois in Urbana for RAELCORP. Beyond that, we have some smaller remodel projects in North Carolina and Georgia. 

SHB: Materials and labor costs have increased substantially. What are your thoughts on those price increases, and when will they abate?

Goldman: Pre-pandemic, costs for lumber were ranging between $350 to $500 per thousand board feet. As of early June, lumber was trading at $1,391 per thousand board feet. That is an increase of more than 250 percent. That is caused by short supply due to pandemic shutdowns, further exacerbated by tariffs and restrictions on Canadian softwoods, and a huge demand for single-family housing. There were also wildfires before the pandemic in the Pacific Northwest that hurt harvesting of trees for lumber. And the construction industry has been reeling from a labor shortage before the pandemic. That has not improved. Steel pricing was up 11 percent in the month of April 2021, and up 9 percent in May. We are seeing steel prices more than 50 percent higher than they were pre-pandemic. Other natural disasters, like the freeze and flood in Texas, have also impacted supply. Those knocked out several plants that make the insulated foam that goes in appliances. We had a huge problem with getting appliances. There are also shortages for computer chips that power appliances. The inventory correction for these will take months to settle out. We are seeing a surge in Southern lumber production to offset some of the shortages from the Pacific Northwest. 

Harrison: All is not bad. Of course, you are hearing about lumber prices that are terrible. If you went down the line items on an estimate and saw the wood pricing, you would be shocked. The same thing with metal studs and some steel materials. On a project, about 35 percent to 40 percent of the cost is materials. On a typical project, one-third of the cost is labor, one-third is materials and one-third is the overhead and profit. Even though some items are up drastically, materials are only 35 to 40 percent of the cost of your project; there are other things in play. Labor is generally steady; it moves up 2 percent to 3 percent per year, depending on the market. If you have an all-wood frame building, you will see a big difference. We are seeing lumber futures fall to about $1,000 per board foot, which is still historically high, but it is better than the $1,700 per board foot we saw a few months ago. I would advise clients to remember that your project pricing isn’t based entirely on the commodities you are looking at. There are many other buckets.

Studzinski: If a client is just starting for 2022, I think we are going to see the supply chain catch up in the next five to six months. If they are looking at a 2022 start, we are going to see some pricing flatten out. It might not come all the way down to where it was pre-COVID, but it will be more reasonable. Most of what we are seeing shortages of now is due to supply chain issues. If you are starting design for a 2022 project, we have plenty of time for those issues to work themselves out. If you look at the long term from 2018 to 2021, you are really seeing the average inflationary increase year-over-year on some materials.

Sanborn: No one likes uncertainty. There are question marks out there for owners and for materials suppliers. The pinch that I’m seeing most is with subcontractors. They have to inflate prices because they are seeing that after they go under contract, their prices rise and they get impacted with current jobs. Even without seeing their books completely open, we know that is happening to them. They have to hedge against that happening again going forward. From the contractor side, hopefully we will see a way to be flexible on material costs with subcontractors so that they don’t have to build in that security blanket to all their numbers. That means some exposure to risk on our side, but it will lead to fairer pricing. Like everything, if prices on something have gone up 200 percent, you know it is not going down 200 percent. 

SHB: What are you advising clients who are looking at future construction projects to do?

Goldman: These projects need much larger contingencies built in for construction costs. The owners should have their own contingencies to offset rising costs. Student housing projects do not happen quickly, especially when there is university involvement. Over the course of that year or two years that it takes a project to get drawn, priced, scheduled and financed there can be a lot of price volatility. We try to price that volatility through contingencies, but we do not have a crystal ball. We used to consider that construction prices would rise 2 to 3 percent per year; that metric no longer holds. 

Hoffey: We talk to our clients, almost on a weekly basis, with regard to where we are seeing material prices. We discuss patience with them: we feel that material prices will be coming down, it is just a matter of time. We have seen lumber prices decrease each week for the past four weeks. For a number of our clients, deals won’t pencil at the current prices. They do understand that this is temporary, and that prices will come down eventually. They want to be prepared for when prices reach a point that makes the project feasible for them.

Sanborn: Contractors are well-known problem solvers. Our team has done a really good job of finding alternate materials and alternate sources. We are never ones to take the first ‘no’ as a reason to not do something. We will find a way. It means getting a little more creative and reaching outside our usual sources to get something done.

SHB: What is your outlook for the student housing sector?

Goldman: We are seeing continued interest from developers; we think the space is strong. Universities realize that their outdated dorm-style housing doesn’t allow for the right kind of social distancing that students are looking for. Many older dorms are likely going to be mothballed or replaced with suite-style student housing. We are seeing more demand on-campus for suite-style. We are seeing demand off-campus as well.

Hoffey: Our outlook is strong. The demand is increasing and we think that student housing is going to be a solid market for the foreseeable future. It also seems that on every project, our clients are trying to outdo the last student housing project. They are always trying to find new and innovative things, especially with amenity spaces. 

Kessinger: I am an optimist. This summer and fall will be telling to see what 2022 is going to look like. I feel very good about 2023 and 2024. 

Harrison: I would agree. We are getting a lot more requests since the first of the year. There are a lot of NDAs floating our way to look at projects on specific sites and locations. As our customers see their customers — the students — get back to school, I get more confident. 

Studzinski: We are still seeing significant increases in the numbers of students who want to attend four-year institutions. There will be high demand in the future. When we see what colleges are anticipating for fall 2021 enrollment, I’m hopeful that we will see the enrollment increases that we were seeing pre-COVID, which will in turn hopefully lead to greater demand for new development. The issue for all of the projects that were put on hold or delayed during COVID is going to be the need to catch up. With our business, we focus on that, allowing for some significant schedule compression and cost savings through pre-fabricated off-site construction. 

Sanborn: We’ve seen less chatter about new projects because of the pandemic. But I have  been a resident of a college town for going on 30 years and student housing will come back. Society is going to miss having the college experience and parents do not want their kids at home for another four years. But there was a pause in the development cycle that we are going to feel for the next year or two. 

Randall Shearin

This article was originally published in the May/June 2021 issue of Student Housing Business magazine. To subscribe, please click here

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