Aftershocks from the pandemic have rocked 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, demand is exceeding supply of existing homes, 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, the developers and industry advisors we spoke with 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 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.

Obstacles in the way

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 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 …”

Economics 101

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 town home 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 town homes 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.

Getting it done

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 the 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.

Innovative solutions for first-time buyers

With low interest rates and prices rising, it’s become very difficult for 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.”

A robust luxury market

Luxury properties are moving. The Compass portfolio, comprising mostly luxury new-construction projects in Chicago, Florida, Georgia, Los Angeles, Nashville, New York, San Francisco and Texas, includes 103 projects within an estimated total sell-out value of $20 billion.

“Developers are very active and there is capital being deployed,” Gustafson said. Of those 103 projects, eight are in Chicago: three currently selling, three in the planning and design phase, and two fully sold-out.

“Our traffic and inquiries have been up and climbing week by week in our portfolio, nationally,” Gustafson said. Recently Compass had a combo penthouse — two penthouses made into one — under contract for $66.5 million at The Belmont on Manhattan’s Upper East side.

When the team at Compass is advising clients, Gustafson said they look at what is going to be the most marketable product, at a specific price point, in a specific location. She added that the luxury condominium market is quite healthy, but Compass is finding that largely, across the country, there is a lack of supply and demand is high. “That is no different in Chicago than it is in other markets,” she explained. In the last six months, Compass had 120 closings of luxury condominiums ranging in price from $2 million to $11.25 million in the Near North area, which encompasses the Gold Coast, River North and Streeterville. “It is very healthy to see that many condos trading over the course of six months.”

Sweet home Chicago

Gustafson said the great majority of Chicago buyers are already local. “We’re not seeing a tremendous influx of people relocating and feeding into Chicago as we are in some other cities, like Austin or Nashville,” she explained. “People who are buying know Chicago. They love Chicago. They want to live in Chicago and want it to be the backdrop of their life.” Their tastes are very neighborhood-specific, she explained. “People find their corner of the world within Chicago and they want to stay there. For example, people love Fulton Market. If they want a move-up apartment, in many cases, they will stay in Fulton Market. That is not always the case in other cities.”

South Florida market looks bright

Consider South Florida. Different categories of buyers, from wealthy individuals to people in the market for second homes, continue to move to the South Florida market, where Amicon is based. Mopsick said there are plenty of product types available to meet their needs. At the top of their list: luxury condominiums and short-term-stay units built for people wanting a second home into which they put a rental pool.

With so many people moving to South Florida every day, demanding services like private schools, country clubs, restaurants and hotels, the area is booming, Mopsick said. “I cannot imagine another market as busy as we are. You can almost touch on every sector of the market, and you’re seeing growth and expansion. It’s going to be a busy year for construction and development.”

In terms of growth, based on the number of requests from clients for new projects, Amicon is up 70% year over year, Mopsick said. It helps that the company’s client base is made up of many different market sectors: nonprofit organizations, residential, multifamily development, condo/HOA and luxury residential single-family.

Exciting new features

Facets of new construction that Gustafson says buyers are really excited about include technology within buildings; air filtration systems; greener materials that reduce landfill and groundwater contaminants; low-VOC paint, which contains a reduced amount of volatile organic compounds that don’t give off as much harmful gas as traditional paint; and anti-microbial surfaces in response to COVID. “It’s less about the color of the cabinet and more about what the cabinet is covered in,” Gustafson said. Buyers are also interested in amenities that are focused on health and wellness.

In Nashville, Compass is working on a Himalayan salt cave and spa — there are potential health benefits to salt-infused air — for a luxury high-rise. “The newest, shiniest and best can really only be found in new-construction projects being built,” Gustafson said. While pet ownership increased during the pandemic — the American Veterinary Medical Association reported an increase in both new pets and new pet owners seen at veterinary hospitals beginning in late March 2020 — dog runs and doggy spas with wash stations are nothing new. They were already included in the planning and design phase of luxury high-rises. “People have always worried about the well-being of their dogs and have taken animals into consideration when making homebuying decisions,” Gustafson said. “Pets are part of people’s families now more than ever, so being responsive and thinking through what buyers are going to envision for pets is important.”

What buyers want

When Compass advises developers in the design and planning phase, they have a lot to consider, especially when it comes to high-rise buildings. “It’s critical we hit the market on amenity programming because people are looking for a lifestyle experience,” she said. “It’s not just an apartment; it’s the sense of arrival. It’s the amenities they’ll be able to use during the week and on weekends.” She said buyers are looking for abundant outdoor space off of residences, as well as off of common amenity spaces — a private dining experience within an amenity, a bar, a resident’s lounge leading to outdoor space where you have this open flow between interior and exterior and the ability to entertain outside during COVID. Plus, fitness centers with smaller breakout areas for private sessions with personal trainers.

COVID’s influence on lifestyle

“COVID has led people to evaluate their home environment,” Mopsick said. “So, we’re seeing much more of a focus on home offices, home gyms, larger lots, places where people want to spend more time. I think one of the positives of COVID, if there are any, is people are more flexible, more comfortable with a flexible work environment and working remotely.” He is seeing a lot of home renovations, people wanting to make their homes as comfortable as possible by adding square footage, maximizing the use of their property because they’re spending more time there now.

2022 outlook

Despite robust housing market conditions, building material and labor shortages remain significant challenges, D.R. Horton’s Hansen said. “We continue to work through the challenges and expect to ultimately increase our production capacity. Although we have not yet seen supply chain improvements, we expect the current constraints to ultimately moderate at some point during 2022.”

Mopsick expects 2022 to be one of the busiest years Amicon has seen. “The construction industry takes a long time to get going. Projects need to be acquired, financed, designed, permitted and started. 2022 projects that are actually breaking ground were conceived in 2021.”

If Benach can break ground on his communities, he projects Lexington will build 75 homes in 2022 and 100 in 2023. “There is still big demand at different price levels,” he said. “We’ll keep riding it until the road changes.”

Nationally and in Chicago, Gustafson and her team say development is very strong, and they anticipate demand will continue through 2022. “People love new,” Gustafson said. “They love to, whatever extent they’re able to, have a say in their home being built and what’s going into it. It comes down to selections, light cabinets, dark cabinets, light floors, dark floors. People love that. It’s something that buying a resale, unless you want to do the work, doesn’t really allow for.”