How Inflation is Hurting Multifamily Construction

In this April 15 issue of the Multifamily Edge newsletter, we explore how inflation is impacting the construction industry.


In this week’s issue, we explore how inflation is impacting the construction industry.

This Week’s Top Headlines

We start off with the week’s multifamily insights and then dig deeper into inflation and construction. Let’s start with the top multifamily stories from this week.

  • Rents: The top 3 markets for projected rent growth in 2022 are Tampa (+6.6%), Raleigh (+6.5%), and San Francisco (+6.5%) — WMRE
  • Rents: Average U.S. rent growth dropped 50 basis points to 14.8% year-over-year, bringing average rent to an all-time high of $1,642 — MHN
  • Sentiment: Only 24% of consumers think it’s a good time to buy a home, the lowest level ever recorded by Fannie Mae — Inman 
  • Slowdown: More expensive coastal real estate markets show the first signs of housing slowdown — Redfin
  • Still Robust: Early indications are that multifamily deal volume continued to flow during a busy Q1 2022 — WM 
  • Busy Summer: New multifamily lease pricing is likely to continue to increase throughout the summer after increasing 20% since August 2021 — Globe St

Impact of Inflation on Construction

Main Takeaway: Investors need to immediately look at their construction budgets in anticipation of future inflationary pressures. Preparing, and building in clauses to contracts will help multifamily investors better weather the ongoing inflationary storm.

The Story

Price pressures are worsening for builders amid higher energy and commodity costs due to inflation and supply chain disruptions. The Fed has plans to combat this rapid inflation, but in the medium-term the construction industry will suffer as they rapidly try and keep up with surging demand for all types of housing.

As multifamily owners, we must be prepared for higher construction costs, delays, and decreasing NOIs as rent growth eases. Here are a few key points to consider when thinking about the impact of inflation on the construction industry.

1. Inflation Hits Hard

Inflation is already here in the construction industry, and by the end of 2021, average construction costs went up 7.42% in the U.S. Here’s a broader map of construction cost increases in 2021 across the U.S.

Source: BDC Network

Price inflation is hurting both contractors and builders alike, with input prices for construction continuing to rise by 24.4% year-over-year in February 2022. This is partly why the average hourly earnings for construction workers hit $28.66 in February 2022, up 6% year-over-year.

2. Development Cycle

Given that the lifecycle of multifamily development takes time, the potential for cost overruns is significant. If investors are planning projects now, or in the past two years, take a reassessment of your budgets and overrun projections.

3. More Fuel to (Inflation) Fire

The producer price index for diesel fuel has now more than tripled, jumping 237%. This will increase the cost of deliveries significantly over the short term.

4. Building is Increasing

According to CoreLogic, construction “permit authorizations in December 2021 were at 13% total growth when compared to December 2020. All regions have seen an increase in permit authorizations besides the West.”

Expert Take

“Investors who have mandates to put capital to work have pressured developers to at least start outlining projects. But once they get to the bid phase, inflationary cost overruns have forced them back to the sidelines.” — Anirban Basu, Construction Dive

“Owners and bidders may want to consider price-adjustment clauses that would protect both parties from unanticipated swings in materials prices. Such contract terms can enable the contractor to include a smaller contingency in its bid, while providing the owner an opportunity to share in any savings from downward price movements (which are likely at some point, particularly for long-duration projects).” — Associated General Contractors of America

Deal Corner

Excelsa, owned by Bassam Yammine, former co-CEO of Credit Suisse, closed its second U.S. multifamily fund after raising $153 million. The fundraising began in January, and investors are primarily family offices and HNIs from the Middle East and Gulf States.

Weekly Chart: Highest Paid in Construction

According to NAHB, the highest paid professionals in construction for 2021 were…

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