Rising Construction Costs and Impact on Affordable Housing Projects

Wednesday, May 26, 2021

Insight from Elyse D. Cherry, CEO of BlueHub Capital

A confluence of events—the pandemic, business shutdowns, wildfires and increased demand—have caused a shortage of building materials across the US. Since the onset of the pandemic, the price of lumber has skyrocketed 280% and the upward trend shows no signs of slowing. Steel mill product prices are at a record high, up nearly 18% in March year over year, and the prices fluctuate day to day, providing little visibility for builders.

The surge in lumber prices in the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the National Association of Home Builders (NAHB).

As a lender to affordable housing projects, particularly offering construction loans, BlueHub is closely watching what impact these soaring prices will have on the industry. Some builders are modifying plans or holding off on construction to see if market conditions improve, others are forging ahead and augmenting their budgets.

Two examples from the NAHB that illustrate the circumstances:

  • Six of 12 buildings in a 434-unit development in New Jersey are under construction and builders have incurred more than $1 million in addition costs. Builders stopped framing on the remainder of the buildings because they anticipate additional costs of $1.5 million based on current lumber prices.
  • Another developer of low-income housing tax credit (LIHTC) projects saw an increase of $4 million, or roughly $15,000/per unit, on a 289-unit senior affordable development in Florida.

BlueHub’s patient and flexible capital is designed for times like these. Over the past 35 years, we’ve built a solid financial base that allows us to continue to offer loans that fit our underwriting criteria and align with our mission of building healthy communities where low-income people live and work, despite market pressures. We are closely monitoring this trend and will adjust as needed.