Challenges in the Current Investment Market
Planning and Flexibility Can be the Keys to Success
By Bryan Lysikowski
As the market continues down the path of post-pandemic life, the single-family rental and investment sector continues to face unprecedented challenges. When looking at the current market challenges, it is easiest to break them down into three main categories:
» supply chain issues
» labor issues
» cost issues
At times, depending on the market, these issues can compound on one another to create delays and cost increases that can erode into your profitability.
As with any real estate project, extra planning and flexibility can help mitigate some of these issues. As you take a deeper dive into the core cause of some of these, it becomes clear investors today have increasing challenges coming at them from all directions.
Supply Chain Issues
The boom in post-pandemic construction, combined with the ongoing issues with manufacturing and transportation, has plagued almost all areas of construction with material shortages and availability issues. Even when able to source and secure materials for projects, contractors are still experiencing significant delays in lead times and delivery.
If you have been involved with any construction projects throughout this year and last, undoubtably they were plagued with material shortages and delays in everything from replacement windows to drywall to electrical supplies to cabinetry, just to name a few. In a recent conversation with Granite Creek Cabinetry’s Senior Vice President, Ryan Smith, he cited increased lead times due to labor shortages and continued pandemic shutdowns at the factories overseas combined with shipping delays as the number one cause of increased timeframes for their product line.
According to the National Association of Home Builders, the shortages of materials are more widespread than at any previous time since they began tracking the issues in the early 1990s.
Labor Force Issue
As investors continue forward trying to solve for supply chain shortages on materials, we are also faced with a domestic labor shortage. Everyone at this point has encountered workforce shortages in almost everything we do from grocery shopping to a family vacation, and the construction industry is not exempt from these issues. In the construction industry, the labor shortages are more heavily directed toward the skilled trades, however even entry level positions go unfilled.
Currently, the largest shortage of skilled tradesmen is electricians followed closely by plumbers. Data collected by the Associated Builders & Contractors Organization cites that the construction industry has an immediate need in excess of 650,000 workers over and above its normal pace of hiring in 2022.
This problem has been exacerbated post-pandemic by a generation of older skilled tradesmen that have opted for early retirement in the shadow of the pandemic. This, coupled with our societal push for a college degree and the reduced enrollment at trade schools, is only making the shortage worse. At the current pace, those skilled trades are retiring at a much faster pace than those being trained to replace them.
The need for a new generation of skilled tradesmen has never been higher than it is today. In an industry where you could count on renovation timelines of roughly one day for every $1,000 of spend, expectations have now dropped down to around one day for every $700 you spend. From an industry perspective there is no sign that this problem will be easing any time soon.
Cost Issues
The third major issue single family rental investors are facing in the post-pandemic market is the cost of materials and the effects of all time high inflation. According to a report released by the Bureau of Labor Statistics, there has been an increase of 8% for goods used in residential construction since the beginning of this year. Building materials have increased 20.4% year-over-year and have risen 33% since the start of the pandemic in 2021. This report also cites a 15.2% increase in services used in residential construction (tradesmen, transportation, and warehousing) since the beginning of 2022. Service costs have increased 18.5% year-over-year, and 39% since the beginning of the pandemic.
As the Federal Reserve continues to increase interest rates, demand for these materials will soften and should result in some pricing relief. Unfortunately, overall higher cost of goods and services are here to stay for the time being.
Identifying these core issues is only half the battle; implementing changes in how your organization manages these challenges is where some are missing out. A single-family rental investor ignoring these market challenges and continuing to follow their original model without any modification is a big mistake. These issues must start being addressed in your core investment model and accounted for during the due diligence phase of acquisition if you wish to remain profitable and successful. If these factors are overlooked in the foundation of an acquisition, you will certainly lose valuable margin or possibly even produce a loss.
Investors must account for the increases in material and labor cost, as well as increased carrying costs associated with a longer construction process. Those investors who have stuck to their original models, pricing lists, and material selection are the same investors who cannot get their properties market-ready and are plagued with sub-par quality of work. Investors who have adapted to the current market conditions by adjusting their repair budgets and allowed for alternate material selection are having the most success in getting their properties market ready in a timely manner.
Flexibility is another key component to overcoming these struggles. Having flexibility with your contractors in material and product selection and allowing them to be an integral part of the overall process, will pay tremendous dividends. If you have the right partners in place on the construction side, you will usually experience a seamless transition into material changes that will still add value and ultimately help curb delays that may be caused by material selection.
Even with all these challenges we are still in a hot real estate market throughout the country. As climbing interest rates may soften the markets to some degree, this may help single-family rental investors as retail demand softens. As we look to
the single-family rental sector, we must also remember that we have a sweltering demand for affordable housing.
Overall, the outlook is positive and single-family investments will continue to see sustainable growth for the foreseeable future.
