Subcontracting Capacity, Code Changes Affect Apartment Market

The tide is changing for subcontracting in the Washington, D.C., multifamily market. In the past year, while much of the country has been in recovery, Washington construction managers experienced a white-hot market in wood-frame, market-rate apartments. Along with multiple building opportunities, there was an abundance of qualified subcontractors offering extremely competitive pricing. Currently, new properties continue to be developed, but reductions in the subcontracting pool and changes in building codes are creating a climate of increased pressure for construction managers.

Subcontractor Capacity
Recently, our industry has seen unprecedented subcontractor failures, workforce leaving the area and some company owners leaving the business altogether because they are not willing to risk their livelihoods anymore. Profits and cash flow were just too tight.
At the same time, more than 20,000 units will be added to the D.C. market during the next two years. Affordable and tax credit markets have come back strong as well, and rent increases in the new ground-up apartments have created a booming submarket in Class B renovations. For example, Snell Construction Corp. of Arlington, Va., is repositioning two major properties: Southern Towers, a 2,500-unit, 1960s era high-rise community in Alexandria, and Monticello Gardens, with 794 apartments in Falls Church, Va., inside the Beltway.
All of these markets are competing for shrinking resources. It is extremely difficult not only to get competitive bids that work within cost constraints, but also to find a subcontractor who will have the resources available when the project schedule dictates. Few subcontractors are able to qualify when schedule is taken into consideration, and with smaller workforces, there are lower productivity rates as well.
The construction manager can respond by using pre-awards and a design-assist approach with major subcontractors such as mechanical, electrical, plumbing, and framing. This approach will produce the best design for the financial resources available and ensure there are qualified subcontractors available when needed. At The Lutheran Village at Miller’s Grant, a 240-unit mixed-use project in Ellicott City, Md., the framing contractor is being brought on a full year in advance to guarantee that resources will not be an issue.
In this climate, lack of advanced notice to subcontractors, late awards to general contractors and size and complexity of a project work against team members. Just-in-time bidding and contracting are recipes for disaster in the current D.C. multifamily market, and these issues are not limited to wood-frame construction. There are concrete subcontractors at capacity who are not accepting any new work until the spring of 2014, and masons, electricians and metal stud contractors who are refusing to bid work until their backlogs subside. For Mid-Atlantic Healthcare’s Waldorf Skilled Nursing Facility, purchasing teams are forced to consider second and third bidders to find the right combination of price, quality and availability, while simultaneously juggling a moving start date.
Code Changes
Other factors are influencing our market at an inopportune time. Significant code changes were adopted in the International Energy and Conservation Code (IECC 2012) and the International Mechanical Code (IMC 2012), including:
• Stricter energy and green requirements, and significant price increases are coming in drywall and insulation.
• Blower door testing of apartment units, testing, balancing, commissioning, and makeup air are now required in individual apartment units.
• Windows are no longer acceptable as a means of ventilation in multifamily units.
• Air changes and ventilation have new requirements, necessitating expensive rooftop systems. Outside air taken through the exterior wall with a duct tied to the unit mechanical system will add a significant amount of untempered or moderately tempered air in the unit, causing humidity and condensation issues.
Buildings are built tighter than they were in the past, which can be a problem when it comes to fresh air requirements. On one senior living multifamily project, the rooftop makeup air design is adding more than $2,000 per unit to the HVAC costs.
Our industry has always been one of change, and those who adapt are the ones who survive. The subcontractor market is playing catch-up to capacity, profit and cash flow issues, and code changes are causing the construction manager to think differently. Knowing the external factors and the clients’ needs, as well as planning in advance, will help all parties weather the storm. As the markets balance out, remaining flexible and ready to deal with the current constraints are key to building in the D.C. multifamily market.
— Larry Kraemer, senior vice president of preconstruction services with Harkins Builders Inc.
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