Aftershocks from the pandemic have rocked Boston condo developers with new hurdles to breaking ground on residential properties. The main culprits: a shortage of skilled labor, skyrocketing costs of building materials and a disrupted supply chain. On the upside for Boston condo sellers, demand is exceeding the supply of existing Boston condos for sale, according to the National Association of Homebuilders, and that leaves a void developers are ready to fill. With a keen ability to provide the right product, at the right price, in the right market, developers are flexing their creative problem-solving skills and making it to the finish line.
While nobody can predict the future, Boston real estate developers and industry advisors have a good idea where new construction is headed in the new year. Optimistic that 2022 will be a good year, they weigh in on everything from troubleshooting delays caused by supply chain issues; innovative options for first-time Boston condo buyers otherwise squeezed out of the marketplace; the pandemic’s cabin-fever-fueled impact on design and layout; and the rise in pet ownership, making luxe amenities for furry friends a must-have.
According to the Bureau of Labor Statistics’ latest producer price index (PPI) report, building material prices have increased 12.2% year-to-date, after climbing 4.5% during the same period of time in 2020. Everything continues to rise in cost, from the softwood lumber used to frame homes to the ready-mix concrete poured in foundations, as well as gypsum products like drywall and vital steel mill items, such as nails and screws, that hold it all together. The National Association of Home Builders on its website breaks down the big rise in costs into smaller parts:
Softwood lumber increased 9.1% in October (seasonally adjusted) — its first monthly increase since May.
Ready-mix concrete rose 0.6% in October after dropping 0.5% in September, and is up 4.8% year-to-date — its largest such increase in October since 2006.
Gypsum products increased 2.1% in October — its eighth consecutive monthly increase. Prices have increased 19% year-to-date.
Steel Mill products increased 4.8% in October, a smaller rise than in the previous two months, but prices are still up 116.9% year-to-date.
The numbers are particularly problematic for Boston condominium developers because the sale price of a home needs to support the cost to build it, or it won’t work out, said Heather Gustafson, managing director of Compass Development Marketing Group in Chicago. “On projects we looked at a year ago, the pricing we provided might not make sense in today’s environment,” she explained. “To that extent, we have to be open-minded about pricing and strike a fine balance between what the market is willing to pay and where it needs to be priced in order to make sense … I think our developer clients are having to get creative and value engineer …”
Demand for new single-family and townhome properties has exceeded supply, and that has put Jeff Benach, principle of Lexington Homes in Chicago, in an uncomfortable position: He just sold out of properties. All of the projects he has been working on the last few years, mostly townhome communities, moved quickly. “I’ve got six communities I’m trying to get off the ground,” he said. “All of these municipalities are handling entitlement via Zoom meetings. It’s taking longer to get projects entitled, approved and opened. I sold out of everything else.” Between January and June, he sporadically raised the price of townhomes in Warrenville by $50,000, and the community, which has 106 properties, still sold out. Sales began in 2020.
What’s more, the unpredictable rise in the price of materials recently forced him to take three single-family homes off the market in a Glenview development, which would have sold out, because he cannot start building if he doesn’t know what his costs will be. For that reason alone, he has chosen to wait until midsummer to put those properties back on the market. In the meantime, he waits, anxiously, for municipalities to do their part so he can meet the unwavering demand of buyers.
Certain materials, from appliances to lighting fixtures to air-conditioning equipment, are still taking a long time to arrive, putting Adam Mopsick, CEO of Amicon in Miami, and his team in a precarious situation. “We’re having to make decisions on what to buy and what to place in certain projects based on when we receive things and put in temporary materials, if necessary,” Mopsick said. “Everything takes longer.” He is seeing it happen industrywide, too. “People are putting in [temporary] appliances to get through inspections and when the appliances show up, they’ll change them out,” he said. “It’s putting pressure on the industry to make decisions based on what’s available.”
Mopsick anticipates supply chain issues will taper off by next summer, but really there is no way of knowing, he said. “We cannot just wait. We have to manage projects in a way that is most efficient and best for clients with materials that are readily available and cost-effective.”
Still, there is a labor shortage to combat. Benach said Lexington used to deliver more than 1,000 homes a year. Right now, even if he had the sales, he could only deliver one property a month because of the labor shortage, whereas pre-pandemic, he was delivering three or four.
With low interest rates and prices rising, it’s become very difficult for Boston condo first-time buyers to enter the market, Mopsick explained, noting that Miami has become a major metro area, similar to New York and San Francisco, making it less affordable for first-time homebuyers. “People are renting longer,” he said. At one point, developers would have been building luxury condos, he explained. Now those towers are rentals or other types of products, such as micro-units, which can span 200 to 300 square feet but at least give renters an opportunity to own a property. “If the building has great amenities, maybe it makes up for the smaller living space and the numbers still work for the developers to build that type of product,” Mopsick said. “It still comes down to dollars and cents for developers … It has to make sense financially and meet demand in the marketplace.”
D.R. Horton has its own version of affordable housing. With an average sales price of $268,000 as of the quarter ended June 30, 2021, its Express Homes brand appeals to first-time buyers and is currently offered in 66 markets across 21 states. It also accounts for nearly a third of the company’s homes closed, according to company spokesperson Jessica Hansen. The homes feature sought-after amenities, such as smart-home technology — remote door locking, video doorbells, and automation that streamlines daily tasks — outdoor spaces for entertaining and flexible rooms that easily adapt to suit the way buyers live.
With the work-from-home trend sparked by the pandemic, flexible spaces have become more important than ever. Not only do buyers want in-home offices, but they also want another niche for their computers, Benach said. “Obviously people want more space, more multi-use space. They want homes to be laid out in a way that is more conducive to being home longer, even though we’re all trying to get back out into the world.”
Luxury properties are moving comprising mostly luxury new-construction Boston high rise condo projects in downtown Boston
“Developers are very active and there is capital being deployed…”
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This is the time of year when everyone gets out their “crystal ball” and tries to predict what will happen in the Boston condo market. Let’s look at the forecast for a more detailed picture of what’s ahead.
Some good news for first-time buyers is single-family housing starts are expected to rise 9% in 2021. Typically, a large portion of single-family housing starts are in affordable Boston suburban real estate markets and beyond, not so much for the downtown Boston real estate market.
More than likely, rising mortgage rates will occur, adding more pressure for Boston condo buyers to qualify for homes in downtown Boston real estate markets. Sellers in the first half of the year will need to be more negotiable, but as the year progresses it will be a Boston condo seller’s market in 2021. Priced right move-in ready downtown condo will still command a premium selling quickly. If you’re a seller planning on buying another home expect to move fast from accepting an offer to purchasing your next property in 2021.
As long as work from home remains or even a hybrid expect the Boston suburbs to continue to be in-demand. According to the forecast, “if companies commit long-term to remote work, demand for these homes could see an additional boost in 2021.”
Boston condo buyers can consider waiting until later in the year for more inventory to go on the market. Though they most likely will pay a higher interest rate. Here’s some advice from Hale.
“If you are a buyer in the first quarter you still need to be persistent. If you are struggling don’t lose hope because you will likely see more options later in the year.”
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