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Skilled Labor Shortages, Rising Costs Threaten Multifamily Deals

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Kyle Bach never figured on a bat cave being one of the things he’d have to deal with as an apartment and student housing developer. In 2018, the CEO and president of The Annex Group had closed financing on a new development in Bloomington, Ind., when groundbreaking was halted in deference to the Indiana bat, an endangered species extremely sensitive to hibernation disruptions. Once the bats woke up, torrential rains turned the site into a mud pit, and Bach was forced to again wait on construction, wondering all the while if he’d even be able to lock down reliable, affordable crews to work the project. “I’m from Indiana and didn’t even know we had a thing called the Indiana bat until it extended our construction time frame by seven months,” Bach says.

During the delay, construction costs marched on their inflationary way, and The Annex Group was lucky to get that project (and several other affordable housing and student communities) under development this year. “It’s going to end up being our biggest year ever, but we have critical concerns about construction costs. Tariffs are driving up material prices, and our No. 1 challenge in every single one of our markets is finding qualified labor.”

Construction costs in the U.S. rose 5.7% in 2018, according to the Rider Levett Bucknall North American Quarterly Construction Cost Report, with Chicago (7.6%), Portland, Ore. (7.1%), San Francisco (6.7%), Phoenix (6.7%), and Washington, D.C. (6.5%) experiencing the worst inflation. Escalations in the Canada–U.S. softwood lumber dispute and the U.S.–China trade war have material prices soaring, but developers fear the bigger, more looming challenge lies in finding skilled labor to get units out of the dirt.

“Material costs are one thing, but the labor scarcity is what’s making it a challenge to get more deals done right now,” says Richard Broder, founder and CEO of Broder & Sachse Real Estate, which has developed two multifamily mixed-use luxury properties in Midtown Detroit over the past two years. “There’s simply an absence of laborers, including labor that fled during the recession and labor that is retiring, and it could be an issue that we deal with for a generation. In the short term, what can be done to attract labor to our business when everyone in the country is already working? And what on top of that is going to lure them back to Detroit? Probably nothing.”

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