Labor Woes, Trade Worries Plague Multifamily Development

Posted by Kris Lindahl on Friday, October 12th, 2018 at 9:46am.

Rising Costs of Commercial Construction Worry Real Estate InvestorsAt a time when the economy seems strong, apartment and condo developers are trying to balance growing demand against the rising prices of steel and lumber and the dearth of trained tradesmen. Record low unemployment numbers nationwide contrast sharply with record high number of unfilled jobs in many cities across the country. Labor shortages are especially worrisome for the construction industry.

The New Normal?

Market strength signals more than a classic good news-bad news scenario, according to many industry observers. It may, in fact, be the new normal, one that is going to require an innovative approach if the demand for new apartments and reasonably-priced housing is to be addressed in American cities. This is a change from last year, in which multifamily home development was on the rise in Stearns County and other parts of Minnesota. Prices have increased significantly in just the past couple of years, and even the threat of new tariffs has the effect of sending materials prices higher, according to data provided by the Bureau of Labor Statistics (BLS).

But it's not only the president's economic and trade policies that are driving costs up. Weather, rising fuel prices, labor shortages, recent and planned interest rate hikes, and continuing high demand all contribute to current commercial construction woes. There seems to be no end in sight, and there are certainly no easy answers.

One market segment that is particularly hard-hit is multi-family residential. With a growing need in most growing cities across the country for affordable apartments and convenient close-to-the-core housing, it is hard to balance the need against rising costs.

As costs continue to spiral upward, more and more renters, as well as potential home and condo buyers, find that their only options are to move to outlying suburbs where housing costs are a bit more reasonable. The Catch-22 is that then the cost of housing is offset sometimes by transportation costs or lower wages offered for easily accessible jobs.

The Twin Cities View

In Minneapolis, St. Paul and surrounding suburbs, the multi-family boom continues, and it is also a trend in many other parts of the country. Although it may represent somewhat of an anomaly, in this area the price of single-family housing is higher than that of multi-family units. Demand for new housing is high both in the urban cores and in the suburbs. According to a mid-year analysis of construction starts published by MinnPost, that demand is fueled primarily by two identifiable population groups: Millennials and Baby Boomers.

That's all good news for the Twin Cities, and perhaps for the overall Minnesota economy. As older residents choose to move from their single-family homes to more convenient apartments, condos or planned developments, those suburban homes become available for younger families. Urban core development, including apartments and condominiums close to employment and entertainment centers is enjoying a renaissance. Permit numbers are at an all-time high.

But it's not just the cities that are seeing increased multi-family activity. Permitting for multi-family units, from larger buildings to duplexes as well as three and four-unit buildings, has also increased over the past two years. In fact, multi-family residential permits made up more than half of the total planned housing starts in 2017. Analysts view that as healthy, but an associated trend toward multi-use development is viewed less favorably.

Adjusting to New Realities

Edina's rejection last June of a permit for a seven-story mixed-use development signaled a reluctance, on the part of both governing boards and neighbors to disrupt the familiar pattern of residential neighborhoods. While mixed-use development may be a salve for rising costs, as well as a way for investors to assure higher returns, it is not yet a given that such projects will be viable, either in the suburbs or in city core settings.

Indeed, Minneapolis' experience in finding a developer for a city-owned tract adjacent to the Guthrie Theater parking garage was a signal that it may be time to take a new look at how cities will house their populations and respond to business expansion in the future.

It is not a dilemma that has easy answers, according to observers. One of the concerns, traditionally, is that mixed-use development will have a detrimental effect on surrounding property values, a belief that has been disproved by an MIT study. One thing, at least, is certain. Rising costs and higher housing prices are undoubtedly here to stay. While it is possible that new training programs and employee incentives may solve the existing labor shortage, there is little hope that, short of another devastating market downturn, prices will ever be substantially lower.

Renovation and new building—for both multi-family housing and other commercial uses—will continue. Most hope that demand will remain high. Cities, suburbs, developers, builders and investors must continue to work together to meet that demand.

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