Cost inflation continues to be a hot topic and a “strategic challenge” in senior living construction, Tad Melton, managing director at Ziegler, said Wednesday at a webinar hosted by the specialty investment bank.
“With respect to projects, from a financial feasibility standpoint, we’re spending a lot of time with our clients because construction has inflated at a pretty good rate the past couple of years. It kind of preceded some of the general inflation that we have,” Melton said.
There is a significant amount of construction financing among the top 10 underwriters in the senior living and care sector, he said, adding that “new money” volume exceeds refunding volume.
General inflation is just one of the challenges to senior living construction, said Doug McMillian, president of Atlanta-based construction consulting firm zumBrunnen. Other factors include higher interest rates, rising diesel fuel costs, freight costs, supply chain issues, labor shortages and overtapped subcontractors.
“All of these issues are affecting pricing of contracts for new construction projects,” he said. “All of these factors are creating a perfect storm, if you will, of increased construction costs.”
Steel pricing continues to be volatile, according to Chris Harrison, executive vice president and general manager of The Weitz Co., a construction company, general contractor, design-builder and construction manager. Steel has nearly doubled in cost since the beginning of the pandemic, particularly for specialty items needed in construction, he said.
Lumber costs are twice what they were before the pandemic, Harrison added. The good news is that prices are coming down. Lumber was about three times pre-pandemic pricing six weeks ago, he said.
Freight costs still are rising due to a shortage of truckers and high diesel costs. Additionally, McMillan said, ocean shipping rates are four times more expensive than two years ago.
“The cost for shipping from overseas has increased exponentially over the past couple of years. …The cost of shipping containers has doubled in the last year. Now, the shipping companies are imposing summer surcharges and deliveries are delayed, McMillain said. “No longer do ships make a nonstop trip from Asia to the United States. They stop several times, which is impacting the delivery dates.”
Companies planning to build new facilities need to build in long lead times, he said.
“Having a plan B is important,” McMillan said.
Material lead times are getting longer, according to Harrison. For example, he said it is taking nine or more months to get steel decking; pre-pandemic, it took three months. Appliances, cabinets, flooring and other essentials have nearly doubled in lead time in the past couple of years. Switchgear is now up to a 14-month wait, compared with eight months previously.
“Ordering materials early and getting them coming is a huge deal,” Harrison said. “Work with your contractors to get these materials ordered earlier.”
Additionally, he advised, line up subcontractors as early as possible.
“We cannot solicit subcontractors too early ever … to help give them an idea of the project that’s coming. Make your project attractive, sharing that very early,” Harrison said. “I’m talking a year or two before you’re ever going to put the project out to bid so they know what’s coming.”
Labor is another challenge to the industry, with job openings exceeding available new hires. Some companies, Harrison said, are considering prefabrication as a possible mitigation strategy, because there is no scaffolding to build, and the windows already are installed.
“Anything you can do to get labor taken off the job site, that can be done in a factory or a warehouse somewhere, would save time,” Harrison said.
Weitz anticipates an average inflation rate of 1% to 1.5% per month for the remainder of 2022, which should taper off in 2023. So far this year, steel prices have increased by 10% and rebar cost has increased 5%, with prices for other materials following suit.