Construction companies in New Mexico are facing issues, and looking for solutions, in a market still ensnared by the economic forces of the COVID-19 pandemic.
“They have the trifecta of problems, because not only is it inflation and supply chain, but there’s a workforce shortage, and that has been the case since before inflation or supply chain (issues),” said Carla Kugler, president of the New Mexico chapter of Associated Builders and Contractors.
Supply chain issues took off in February of 2020, when factories in China and Italy shut down in response to the spread of COVID-19, according to Kelly Roepke-Orth, CEO of the Associated General Contractors of America’s New Mexico Chapter. Sporadic shutdowns continue to affect manufacturing.
“Adding to the pandemic-induced problems is a series of unusual mishaps that also interfered,” Roepke-Orth said. “The biggest impact being, for construction, … came from the severe freeze in Texas in February 2021, because that damaged all the petrochemical plants that produce resins for a host of construction plastics. And now the war in Ukraine, right?”
These supply chain complications can cost buyers and builders, as the price of construction material can increase while contractors look for a source.
“I think we have a pretty good idea of what it would cost on the day that the bid is asked for,” said Lawrence Peterson, executive vice president of Bradbury Stamm Construction, an Albuquerque-based regional commercial builder. “The problem is, it’s not going to be that price for very long, so owners are going to have to make decisions to go or not go really quickly – or expect prices to rise shortly thereafter.”
Price increases can affect even the most well planned construction job, Peterson said.
“I think it’s kind of a good time not to be in the prediction business,” he said. “Every time you kind of think that you’re at the top and it continues to rise. It sort of changed the dynamic of what construction inflation is.”
The search for solutions
Local governments can help mitigate inflationary concerns during construction of a project by giving the go-ahead to builders earlier, according to Danielle Casey, president of the Albuquerque Regional Economic Alliance.
“Something they priced out today might cost three times as much in three months, so the faster we can get their permits through, the faster we can get their approvals and the faster we can get inspections done on those developments,” she said.
Supply chain issues are leading some companies to order material earlier than usual and stockpile it to insure access when it is needed.
“The biggest difference when you walk on a job site is the amount of stored materials that you have because you just didn’t trust the supply chain,” Peterson said. “So you have all these shipping containers or covered storage of these various materials, or you have it in offsite facilities because you just can’t depend on the supply chain, the way you used to.”
Ed Zarenski, a construction industry analyst based in Rhode Island, said that this is a new behavior for most companies. It has costs, he said, but not as much as months of delays would add up to.
“When you get nine months into a project and you need materials and you don’t have them in a stockpile and it takes you two to three months to get it, it slows the entire project down,” he said. “That adds costs to the project, because you got to keep your people doing something and they don’t have the materials to complete the job. Stockpiling is a new piece of the puzzle in contracting these days.”
Finding sources of materials closer to home could help alleviate supply chain concerns, Zarenski said, but the feasibility of that depends on the item.
“Concrete is always local. We don’t import a lot of structural steel for construction. So most of the demands for those types of things are local anyway,” he said. “It’s the rest of the building. It’s the doors, windows, roofing materials, appliances, wall and floor coverings, those types of things. Those are the ones that the contractors are having a hard time sourcing and are starting to look for local suppliers.”
The shortage in the construction workforce is also causing problems. The industry has a deficit of 650,000 workers nationally, according to Associated Builders and Contractors.
“The really unique thing is that it used to kind of seem to be a construction problem,” Peterson said. “Now it just feels like it’s a problem across all of our kind of ancillary construction-related issues like suppliers, supply chains and trucking and just some of these things that are not traditionally construction related, but sort of touch our industry. They’re having labor issues too, which I think makes it even more of a compounding problem.”
Construction associations and companies have programs to attract and train new workers to fill the gaps. Both the ABC and AGC run apprenticeship programs for a variety of construction trades.
“Our apprenticeship numbers are strong, which means the contractors are understanding the value of training, and they’re putting people into training because our apprenticeship numbers haven’t wavered, they’re increasing,” Kugler said.
Residential builders are facing the same issues, with added challenges. Details can add months to the timeline of completing a house.
“Windows for example, prior to the pandemic it was a two to three week lead time. It’s now at roughly 16 weeks,” said Brian Mills, vice president of sales at Twilight Homes, an Albuquerque homebuilder.
“Cabinets were five or six weeks,” he said. “Depending on the manufacturer and what’s being ordered, it can be as many as 26 weeks.”
Now, he said, Twilight Homes puts in orders for windows and cabinets as soon as they break ground on a new house. That is not the only thing that Mills needs to keep in mind. The cost of raw materials for those houses, like lumber, are still going up.
“It’s been huge over the course of the pandemic, it’s massive numbers. It’s lumber packages more than doubling in price,” he said.
“We’ve taken it on the chin, a lot of this increase, on homes that went under contract and then between the time that it went under contract and when we actually ordered lumber, that three month time period you sometimes you had these huge spikes, but we honor our price and we move forward,” he said.
Another factor that homebuilders are contending with is the Federal Reserve’s interest rate increase, which is expected to cool off a hot housing market as mortgage rates follow suit.
“Residential is booming and even without looking at New Mexico data, it’s booming everywhere. It’s booming even greater in locations where people are moving to,” Zarenski said. “So if you’re moving out of New York City and you’re moving to Albuquerque, New Mexico, Albuquerque is a place where growth is expanding. Anywhere where growth is expanding, residential construction is booming and residential inflation is greater than the national average.”
Twilight Homes is preparing for this cooling off by capitalizing on more affordable parts of the housing market.
“Unfortunately it does not reduce the pool of people who need a home, but it reduces their ability to get one, so we started exploring – we’ve got a separate division of our company we’ll be launching in Rio Rancho,” Mills said. “We have a starting price below the median home price in the Albuquerque market to try to offset some of that.”
Regardless of the impact of the rate increase, Mills said there will still be more of a demand for housing than builders can meet.
“We’ve got the largest generation since the boomers are entering prime home buying age and to a certain extent, the housing industry nationally has … known it was coming, but we’ve done nothing to prepare for it,” he said.