🔒Apartment developers, homebuilders feel global supply chain pains, but ‘good’ projects still move forward

Eric A. Santini, a principal in Vernon-based Santini Homes, hopes soaring building material costs moderate later this year so he can launch a 240-apartment project currently moving through local approvals in Tolland.

“If we got the approvals last year at this time, with the way things are, I’m not sure we would start,” Santini said. “We would probably do a little bit of a wait and see. We are hoping the supply chain will start to work itself out this year. I think every multifamily developer is starting to give a pause.”

COVID-related production slowdowns and snarls in the global supply chain have delayed building projects, added costs and increased risk. There is disagreement among some Connecticut residential developers — both apartment and single-family homebuilders — as to the impact on project volume.

Santini said developers who have launched projects are finishing them. But he expects some will hold off on new ventures, waiting to see if supply chain problems ease in 2022.

“It’s hard to determine what the margin is going to be when prices are changing so frequently in the construction process,” Santini said. “On the multifamily side, I don’t know anyone starting a new project right now given this environment.”

Some industry experts believe builders are willing, and able, to roll with the punches given continued robust housing demand.

The number of permits issued for single-family houses in Connecticut has continued a steady rise over the past three years, according to estimates by the U.S. Census Bureau.

However, permits for multifamily developments in Connecticut fell sharply year-over-year, according to Census data.

At the end of November, Connecticut builders pulled permits for 1,308 housing units in multifamily developments (five or more units) during 2021.

That’s roughly half the 2,613 multifamily units permitted in the same period for 2020, according to Census estimates.

In the same 11-month period of 2019, builders pulled permits for 2,679 multifamily units in Connecticut.

Last year’s sudden shift downward, however, didn’t occur nationwide.

Permits for multifamily housing of five or more units were up 26.4% nationally in 2021, according to the Census.

Dealing with headaches

Michael Freimuth, executive director of the Capital Region Development Authority, said he’s seen no hint of slacking interest in multifamily development in Hartford, even as supply chain difficulties have brought challenges.

He mused any drop in multifamily development is likely attributable to interruption in the pre-development planning and vetting processes during the COVID-19 lockdowns of 2020.

Still, Freimuth described supply chain problems as “increasingly brutal,” hitting developers on multiple fronts.

“One is price, of course,” said Freimuth, whose agency is helping finance hundreds of new Hartford apartments currently under construction and set to debut this year, including 270 units in the first phase of the North Crossing development near Dunkin’ Donuts Park. “Two is time, which is money, extending the time it takes to build a project, which increases its cost. Third is predictability, risk analysis. If you don’t know when, or if, or at what price, it’s kind of hard to sift through the pieces and see if the deal makes sense.”

So far, developers have proven adaptable and willing to put up with headaches, Freimuth said.

Material costs rising

Meanwhile, homebuilder confidence slipped slightly in December following three months of increases, according to an analysis by the National Association of Home Builders (NAHB) and Wells Fargo.

The NAHB attributes the slip to growing inflation concerns and ongoing supply chain disruptions.

“Higher material costs and lack of availability are adding weeks to typical single-family construction times,” NAHB Chairman Chuck Fowke said. “NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2020. Policymakers need to take action to fix supply chains. Obtaining a new softwood lumber agreement with Canada and reducing tariffs is an excellent place to start.”

Costs for steel mill products rose 125% between August 2020 and August 2021, according to a recent Hinckley Allen analysis of construction material supply chain problems, produced for the Connecticut Construction Industries Association.

Milled copper and brass products were up 45% in the same period, while lumber spiked precipitously and then tapered, ending at 16% up year over year as of August.

“We are not surprised when you see a 5% or 10% increase, but when you see a 40% increase in a product that you bought two months ago, that began to alarm us,” said Anthony Valenti, a managing member of Newport Realty Group, which recently put a roof on a 16-apartment building along Farmington Avenue in Berlin. “And it continues.”

Newport’s three-story property will have 7,000 square feet of retail on the first floor. When complete, the “Steele Center” development will have five buildings and 76 apartments.

Windows began going into the building in mid-January. The sign out front reads “Available FOR OCCUPANCY FALL 2021.”

Work began last March. By July material prices were rising quickly, Valenti said.

“Wood has probably been the biggest expense,” Valenti said. “Now we are seeing everything else [increase], there is not one thing that is immune from the increases.”

Design changes and aggressive shopping helped keep the overall increase to the first building’s $4 million budget under 10%.

Instead of shopping through one or two product vendors, Newport now seeks material bids from five or six.

“We are more diligent than ever,” Valenti said. “We are spending an awful lot of time doing that.”

Building materials aren’t just more expensive, they are harder to find. There was a three-week delay in framing due to a behind-schedule delivery of 1,800 steel bolts.

Despite challenges, Newport is pressing ahead with Steele Center. In fact, Mark Lovley, Valenti’s business partner, said high demand is keeping the company as busy as ever.

Newport is building 61 houses in a 55-plus development on the Farmington-Plainville line. Forty-nine sold in 12 weeks. Newport is seeking local approvals for another 12 houses in a separate Plainville location.

Newport is also partnered with Manafort Brothers on a 175-apartment mixed-use development in downtown Plainville. Valenti said he hopes to begin construction in the third quarter of 2022.

Valenti said supply chain woes are probably suppressing development activity. Veteran builders will still launch projects, he said, but they must work harder and be more selective about what they take on.

Valenti said Newport is running multiple pro forma statements on prospective projects these days.

“If it is a good project, we are going to launch,” Valenti said. “But if it is a marginal project, we are going to pass. It has to be a good project to launch today.”

Valenti said he doesn’t expect material prices to ever sink back to 2019 levels, but he predicts an end to price and supply volatility around midyear.

Anticipated interest rate hikes and a tapering of COVID-related federal stimulus will see cash tighten and demand taper, Valenti predicts. He also believes that housing supply will begin to catch up with demand.

Unclogging ports

Tao Lu, an assistant professor at the UConn School of Business who researches the global supply chain, said there is hope for a gradual improvement leading to tangible changes midyear.

COVID-19 has resulted in production slowdowns and labor shortages that have clogged ports, Lu said. That’s translated into shipping costs from China tripling year over year. But vendors are beginning to find new routes and use new ports, he said.

Some larger companies are chartering their own vessels to ship containers, Lu added.

“According to my research, people in the shipping industry believe this will remain for the first half of 2022,” Lu said of the clogged supply chain. “We do see some progress, but it will still take some time to get back to the real normal situation before the pandemic.”