Hoarding, Cost Increases, and Risk; OH MY!

Remember when the pandemic hit, and everybody collected toilet paper? It’s happening today with subcontractors and vendors throughout the trades (not TP; material like rigid insulation, ductile iron pipe, copper pipe, drywall, lumber, metal studs, coiled steel, etc., etc.). Material price surges, a continuing supply chain roller coaster, and the omicron variant have us all guessing how long to receive and how much material will cost when it is finally installed on the job site. An extended construction duration and price increase pass through are deal breakers for us at The Douglas Company, so we are tested to come up with alternate methods to deal with the aforementioned challenges.

Our advanced procurement of construction materials and equipment soon after a contract is executed and well before the equipment or material is needed, is a sensible practice which assures that specified materials and equipment are available for installation or use in accordance...

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Material Cost Increases Abound

The turn of the calendar has brought about an unfortunate turn for material pricing. At this point, it seems like nearly all materials have seen major increases. All of this is in line with some of the largest inflation increases ever. What’s going on?

While each material has its own nuances, the primary driving cause behind all of them is the same condition we’ve been dealing with for years: High demand supported by low-interest rates means a lot of construction is happening right now. Costs are up quite simply because projects continue to be built in spite of them. Subcontractor backlogs have been surveyed as being at some of the highest levels in recent history. And there doesn’t seem to be an end in sight. 

The message now is to stay the course in spite of material cost increases. We...

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The Rule of the 5 P’s

Reflecting on this year, it sure has been one of the more chaotic and challenging years that I can recall in my career. Just this year, the construction industry has battled everything from record-high lumber prices, rapidly changing material price increases, supply chain issues, increase in labor shortages, and many other challenges. The old adage of Proper Planning Prevents Poor Performance, or the 5 P’s as they were introduced to me early in life, has been at the foundation of our successes for the year. Ben Franklin said it well “By failing to prepare, you are preparing to fail.”

Planning is woven into our DNA at The Douglas Company, many of our Associates have been through a form of personal productivity, where we learned to plan for the day, week, and month. In both our preconstruction and operations groups, our main planning tool...

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Is Inflation Here to Stay?

Everyone knows that inflation right now is the highest it’s been in 30 years, which is shocking.  Nearly all of my friends who run businesses can’t find workers, and they are paying dramatically more for those they find.  The Toledo Blade picked up a story that showed one in five workers expect raises of 10% or more the first of the year, which is also shocking.

So what’s going on?  We dealt with this with a wood pricing surge last year, but those prices came down significantly.  But now it seems we are dealing with material shortages and price increases on nearly everything.  Associated General Contractors reported that contractor costs rose 26.3% overall from June 2020 to June 2021, an astounding number.  Mortenson reported that costs jumped 7.1% from September to October of 2021.  Our clients are surprised and distressed at the price increases, and we don’t like them...

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Finally, Some Encouraging Trends in Senior Living

Earlier this month several of us from The Douglas Company attended the annual NIC Fall Conference, held this year in Houston, Texas.  It was encouraging to see more than 2,500 senior living professionals in attendance (in person) and optimistic about the future of the Senior Living Industry post-COVID.

NIC has also released the 3rd Quarter 2021 NIC MAP Data, which shows that demand in the 3rd quarter rebounded with the strongest quarterly increase since NIC began reporting the data in 2005.  Overall seniors housing occupancy increased to 80.1%.  Still 7.3% below pre-pandemic occupancy, but finally trending in the right direction.  Additionally, one statistic we heard is that the age cohort for senior living will double every 5 years between 2020 and 2040.  That is a lot of new seniors who will need some type of senior housing!

One topic that seems to be on everyone’s mind is “Active Adult”. ...

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Where Are The Workers?

It's a topic we seem to be answering daily, "Where are all the workers?". While it's an issue that spans more than just the construction industry, unlike those other industries, we've been trying to answer this question for decades. For those answers, we have to look at more than just the last 18 months.

 

Staffing issues in the trades can be traced back to the 1970s when college students increased nearly 25% from 1969-1979. That phenomenon would again repeat itself in the 1990s when that decade saw an increase of over 15%. (Source: Nation Center for Education Statistics). The nation's focus on higher education and white-collar professions set the trades up for inevitable challenges...

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The Current Supply Chain Environment

The disruptions and unpredictability of the current supply chain environment have been well documented, and unfortunately, the forecast is that these disruptions will remain with us for the foreseeable future.  While there is no silver bullet to insulate a construction project from the potential impacts, strategies can be deployed to mitigate delays caused by this problematic supply chain market.  For these strategies to be effective, though, they need to be planned early in preconstruction.

Your General Contractor should be surveying material and equipment lead times during the preconstruction process so the entire development team understands the risks and a plan to deal with them can be formulated.  One way to build around the excessive and unprecedented long lead times the industry is currently facing is to procure the materials and equipment subject to excessive long lead times earlier than typical, even before execution of the construction contract.  This will ensure...

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Design Build – We’ve Only Just Begun

"..white lace and promises, a kiss for luck, and we're on our way". Yes, that is the opening lyrics by Carpenters, but what a common association when most people hear the word DESIGN-BUILD. If done correctly, Design-Build can be all sunshine and rainbows; however, We've Only Just Begun!

DBIA forecasted that by 2025 design-build is anticipated to represent up to 47% of construction spending. The Douglas Company has found that our successful design-build projects have three common factors:

  • Early Involvement with The Douglas Company
  • Clear Definition of Expectations
  • Alignment between Owner and Design-Build Team

These factors are critical to a clean, fast-paced process. Our ability to influence the project's design is most appreciated and provides the best value to the owner prior to construction and issuance of subcontracts and purchase orders. The industry's increased project complexity and fast-paced schedule demands align best with the benefits provided by our design-build teams. Utilizing design-build also creates...

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The Importance of Pre-construction Schedules

Developers often think of the actual construction schedule when the word "schedule" comes to mind.  But before that, it is just as crucial that a project has a solid pre-construction schedule to even have the feasibility of breaking ground when desired.

Of course, many things go into getting to that point of starting construction. Still, when there is an understanding of the start date goal, you can back into the schedule and plot a course from where you are today and the timelines of what needs to happen to be able to hit that goal.

One of the main goals during the pre-construction phase is to assess the plans as they develop to help mitigate risks while under construction.  This requires regular communication between the owner, architect, and contractor. 

The schedule holds each member of the development team accountable for their deliverables. Owners have to make decisions on everything from HVAC systems...

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Supply Chain Disruptions Continue

As most people have experienced in the country, certain materials are tough to come by, whether in a personal or business realm. This is not a new development, but the scale of the issue has seemingly grown, and new challenges are presented in our industry every day. Some may ask, what is driving this? One of the primary factors driving this is a lot of the raw materials that we utilize come from overseas. In an article I read the other day, a record 65 ships were sitting in the ports along the West coast waiting to be unloaded, compounding an already challenging logistics industry. This is causing a lot of uncertainty for suppliers when these raw materials will be received to produce the needed components to build our projects. In the interim, demand continues to increase, resulting in the challenges upon us today.

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The Buzz Around “Build-to-Rent”

Recently, several developer clients of ours have mentioned a multi-family product type called Build-to-Rent (BTR).  The concept is to develop and build single-family home communities where the houses are rented to tenants in lieu of being sold to homebuyers.  According to Northmarq’s March 2021 report, strong consumer trends support the growth of this type of multi-family development.  Renters are growing more affluent, causing shifts in their desired types of rental homes, features, and amenities.  People also have lasting scar tissue of the housing crash of the Great Recession, which negatively impacted so many.  More recently, the COVID-19 pandemic has created a need at the top of people's shopping lists for more work-from-home space.  Also, the desire to live in less dense apartment buildings has people moving towards the BTR solution. 

BTR multi-family developments offer tenants the larger space of a traditional house to people who can’t afford the large down...

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What Will Happen With Construction Prices?

We continue to get buffeted by price increases, seemingly weekly, which puts pressure on our estimates and has a negative effect on feasibility for our clients.  Though prices are being locked in for Fall starts up North, clients have repeatedly asked me what will happen to them for their Spring starts.  It’s certainly understandable.  I’d want to know too.  Normally, I’d have a good sense of this, but I don’t feel that I have a good basis to know now.  This summer, home building continued at a brisk pace, and lumber peaked at over $1,800 per mbf.  Clients kept asking me what they should do at those prices, but this situation was unprecedented.  Most locked in, and then lumber started to come down.  Jeff Korzenic, Chief Investment Strategist of Fifth Third Bank, said earlier this summer that the best cure for high commodity prices is high commodity prices since it...

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Defining Active Adult Communities – Notes from the Interface Conference

Last month we wrote about how The Senior Housing Evolution Continues, specifically discussing the Active Adult concept. Last week, The Douglas Company attended an Active Adult conference hosted by Interface, where we heard from pioneers and visionary leaders in this new product. Three major conceptual questions stood out through all the sessions:

How to Define Active Adult?

While there is huge excitement about the space, there isn't a clear-cut, one-size-fits-all definition of what an "Active Adult" community really is, or for that matter, if the term "Active Adult" is going to stick. While time will probably resolve these issues, there is consensus on the place in the market - Seniors in their early 70s want to take advantage of the equity in their homes and sell them to downsize in an effort to reduce maintenance and find a new social circle. This is want-based, not need-based like other senior housing...

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The Senior Housing Evolution Continues

The resilience of active adult communities during the pandemic and resulting recession has resulted in many developers, operators, lenders, and equity investors taking another look at the product and determining how it fits their strategy for future growth.

Many skeptics have become supporters after seeing the performance turned in by active adult communities through 2020.  Active adult rental properties were already among the senior housing product types with the strongest performance prior to Covid-19.  But the segment outperformed all other types of senior housing during the pandemic according to data from Senior Housing News.  Active adult communities are outpacing Independent Living and attracting a younger and healthier demographic.

At a recent Active Adult Virtual Summit hosted by The National Investment Center for Seniors Housing (NIC), they shared the belief that active adult is taking over the role that Independent Living played in the continuum of care 20 years ago.  While dining...

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Supply Chain Issues – The Impact on Construction Projects

Government regulations have been loosening up lately, but some impacts resulting from them are increasing as construction keeps moving forward. One specific item that comes to mind is material lead times. Items that we were accustomed to being readily available now seem to carry a 2-3 week lead time, and items that were normally 4-5 weeks have jumped to 10-12 weeks. If anyone has tried to buy any furniture or appliances for your home lately, I am sure you can attest to that. This creates unique challenges for our project teams to overcome, but our company processes have been developed to help mitigate these issues for our clients and us.

Purchasing materials early is the essential first step, but that is just the beginning. We have come to learn in the past 18 months that there is a lot of uncertainty in the supply chain industry due to constraints of...

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Make the Numbers Work!

A little while back, I came across some extra marketing collateral of ours that was previously in circulation with the motto of “Make the Numbers Work.”  Some of the collateral may or may not have had an expletive gesture mixed in of “!!@!%#!!@!!”.  You get the point.

It was all good fun, and I thought it was great! 

That’s the foundation of getting a new project out of the starting blocks.  Make the Numbers Work!  Of course, a project has to pencil for it to make sense for the developer and investors. An easy way to do that is to start cutting finishes and amenities, but that will not help you compete in the market or get the rents you need.  Sometimes, it is needed to get you there, but it often doesn’t even get you a good bang for your buck. 

You should first try to attack what’s “behind the walls” to...

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COVID After-Shock

It has been a little over a year since the COVID 19 pandemic began and we are still feeling the after-effects of its impacts over the past year. With more of the population getting vaccinated and some states loosening restrictions, it feels as though we are getting back to normal but there are still many challenges upon us in the construction industry.

Material supply chain and volatile pricing continue to impact new starts with our Clients as many are eager to get shovels in the ground but we are challenged to hold pricing for extended periods of time like we could pre-pandemic. Then, if we are able to get the project going there are extended lead times that we are dealing with to hold our schedules, timely purchasing to mitigate further price increases and expedited submittal procurement are extremely important in our current...

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Construction Costs and Operations Costs: What’s Really the Problem?

I am hearing different stories from clients in my discussions.  There is no doubt that occupancies in Senior Living are down.  There is no doubt that projects are requiring more equity, and equity demands a higher return.  There is no doubt that staffing is more difficult to find and more expensive.  There is also no doubt that construction prices have risen dramatically in the past six to eight months due to supply issues caused by a myriad of factors. 

A client said to Bob Ritter, our Director of Business Development, the other day that he couldn’t look at new construction projects because construction costs were too high.  I wonder if that is accurate.  My experience in owning Senior Living projects is that capital costs are a minor part of the total operating budget.  Operating costs are the vast majority.  So if construction costs go up 10%, as an example, it...

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A Brief History on Lumber Prices

Lumber - It has been the word in construction this year that we simultaneously hate talking about and can't stop talking about. At this point, anyone who has speculated on what's going to happen with pricing has been wrong at least once. While no one can predict what's going to happen, there may be some answers to find by looking at how we ended up here.

First, let's assess the current state of lumber. This information is taken from pricing and supply from several large providers we work with across multiple states:

  • The commodity index has been posting new record highs nearly every day so far this month (NASDAQ: LBS), until mid-week this week. The pace is the most startling thing here - On April 8th it passed 1100 for the first time in history then, only 7 market days later on April 19th it passed an astonishing 1300.
  • Futures are very...

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Active Adult – Leading the Way Post-COVID

Active Adult – Leading the Way Post-COVID

A somewhat new segment of rental active adult housing is showing signs of leading the way for senior living development post COVID.  Our estimating department is currently budgeting and pricing several active adult projects for multiple clients.  The product targets baby boomers in early retirement, looking to downsize, but who are years away from needing independent living or assisted living services.

Many seniors no longer want the maintenance and overhead of a large house, like the idea of increased socialization, but don’t require assistance with activities of daily living.  Active adult communities tend to command a premium over standard multi-family products, and because the residents are primarily retired, their incomes are somewhat insulated to swings in the job market and economy.  Another plus for developers, residents of active adult communities typically stay for five years or longer.

While the pandemic has impacted occupancy in all senior living sectors, several owners and operators...

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