By Taylor Williams
Facing extended construction timelines and elevated costs of materials due to COVID-19’s disruption of global, national and local supply chains, multifamily developers are being forced to pivot, improvise and forge new relationships with suppliers in order to manage overall risk levels within their projects.
Even before the pandemic, real estate developers and users across all asset classes understood how crucial competent supply chain management was to their budgets. But the global health crisis has reinforced that fact, especially for developers whose product type remains in high demand, such as housing providers in the rapidly growing state of Texas.
In terms of basic economics, when COVID-19 hit and ground global commerce to a halt, suppliers across a range of industries decreased their inventories in response to sluggish demand for sundry goods and services. With vaccines now widely available, travel picking back up and businesses reopening at full capacity, pent-up demand is being unleashed on these industries, including real estate development, forcing suppliers to rebuild their inventories. Yet this process is not a simple matter of flipping a switch back on.
Furthermore, being aware of a problem is very different from actually solving it. And a global pandemic that sidelined workers on both the manufacturing and distribution fronts, combined with the onset of inflation, has in many cases tied the hands of housing developers looking to complete their projects on time and within budget. To minimize the damage and keep churning out much-needed product, some hard negotiating, money eating and outside-the-box thinking have been required at many stages of the game.
At the InterFace Multifamily Texas event held on Sept. 8 at the Westin Galleria Hotel in Dallas, a panel of multifamily developers shared war stories and strategies on how they’ve overcome massive supply chain disruption to keep their timelines and finances from spiraling out of control. About 250 people attended the event, now in its 10th year of running. Alisan Rutland, managing director at Walker & Dunlop, moderated the panel.
Panelist Michael Blackwell, senior managing director in the North Texas office of Mill Creek Residential, was one of the first to provide anecdotal evidence of the supply chain woes that have befallen the industry.
“We have a project in Frisco that we were supposed to get roofing materials for in mid-September,” he said. “A couple weeks ago, the supplier called and said they couldn’t get them to us until early January. Roofing subcontractors tend to get attached to a particular supplier, and they can’t immediately find new ones, so we had to scramble to find a substitute roofer.”
Blackwell added that under normal circumstances, his firm, which builds in-house, would never jeopardize a relationship with a subcontractor like that, but rather just take the hit. In the current supply-constrained market, however, Mill Creek had no choice but to find a new roofer.
Stories documenting the skyrocketing prices of key materials, most notably lumber, have certainly made their rounds during the pandemic. According to analysis by Business Insider, the price of lumber peaked in late spring at more than $1,700 per thousand board feet but has since fallen dramatically, leading some to wonder if the stage is set for another demand-fueled price hike before year’s end. But while lumber has cooled, the price of steel, as Blackwell pointed out, has risen by more than 50 percent over the last three months.
Panelist Jason Haun, senior vice president at Orlando-based ZOM Living, detailed an unusual dynamic in the materials market that, while well-intentioned, is further contributing to the disruption.
“We’re getting notices from contractors in which certain suppliers are honoring the deals they committed to at the prices they bid on, but are focusing on single-family [developers],” he said. “They won’t give us multifamily guys a quote, so we have to look for alternative suppliers, and it’s created disruption.”
Haun added that his firm has seen this trend firsthand with concrete providers, some of which are essentially rationing their supply among their various customers.
Along those lines, as some panelists noted, rationing could get even more extreme if the federal government passes the Biden administration’s $3.5 trillion infrastructure bill. This initiative has become a legislative centerpiece of the new administration, and its passing — even at a lower price tag — would put more significantly more pressure on demand for and pricing of key materials.
All the panelists agreed that part of weathering the storm is maintaining strong rapport with suppliers and subcontractors.
“The pandemic reminded us that relationships are important, and the same is true with supply chain management,” said panelist Matt Brendel, senior managing partner at Legacy Partners. “You have to keep communication with contractors and subcontractors. They want to stay in business, and if we keep those relationships, we can get through this supply-chain disruption — though it will take some time.”
Brendel expressed confidence in the American entrepreneurial community to devise new solutions to address supply chain management issues, noting as well that the development industry needs to be “more proactive and less reactive.”
Panelist Greg Coutant, vice president of development at Dallas-based StreetLights Residential, said that uncertainty throughout various supply chains is adding to the overall risk profiles of multifamily projects. He pointed out that the ongoing price escalation starts at the top with the importation of raw product, often from China.
“We normally assign some risk to contractors once a project gets going, but we’re seeing that contractors are afraid of shipping costs,” said Coutant. “So it falls on the owner, and it’s part of this puzzle in which the risk profile for owners lasts longer than it used to.”
According to an analysis by The Wall Street Journal, as of July 1, the average cost to globally ship a 40-foot container was about $8,400, more than four times what it was at that time in 2020. The cost of shipping containers from China to certain U.S. markets, particularly those on the West Coast, typically run even higher.