Special assessments foreseen as CPI rises

Special assessments foreseen as CPI rises

Confluence of inflationary pressures pushing construction costs upward
Monday, June 13, 2022
By Barbara Carss

A spate of special assessments is anticipated as condominium corporations update their reserve fund studies and adjust for inflation. Coming out of an extended period when the consumer price index (CPI) hovered in the 2 to 2.5 per cent range, many condo boards will confront shortfalls as the CPI now pushes up toward 7 per cent.

“That’s going to be a huge adjustment as to what you’ve actually got in the bank and what you are responsible under the (Condominium) Act to have in the bank,” observes Greg Moore, president of the construction management firm, Quantum Project Management Services. “There will be special assessments hitting all of these condo boards and people are going to freak out.”

The looming hit for some condo owners reflects a confluence of escalating construction costs for materials, labour and contractual or financing penalties tied to delayed delivery. Industry insiders outlined some of those pressures last week during a panel discussion at the REMI Show.

On one side, contractors and project managers are encountering daunting constraints on the supplies and services needed to keep projects moving. On the other, they’re beholden to developers and institutional clients with budgets and timelines that aren’t sympathetic to supply chain woes.

Jeff Murva, a construction management consultant and chair of the Toronto Construction Association’s board of directors, gave examples of “runaway material and equipment costs” as builders worldwide compete for the scarcity of everything from swimming pool components to the conduit that encases electrical cabling within poured concrete slabs. Turning to labour, he cited soaring wage scales in response to widespread shortages of almost every skilled and unskilled trade. That’s coupled with diminished productivity as employers scramble to fill out their ranks and meet developers’ demands.

“Their clients, the developers, are saying: ‘You better take on this additional project. We don’t care where you get the men; just get the men and take it on, or else we’re going to take all of our dozen projects and give them to someone else’,” Murva recounted.

“And the problem is, you’re getting the C-team — someone who is not performing,” added Craig Lesurf, president of the construction management company, the Gillam Group. “An A-team crew used to have a majority of As. An A-team now has one or two As and all the rest are Bs, Cs, Ds and below.”

Supply chain uncertainty spurs new storage practices and costs

The lingering disruptions of the COVID-19 pandemic are melding with more recent repercussions from Russia’s invasion of Ukraine to create new complications and further goad inflation. Lesurf noted that Ukraine is a prominent source for various construction materials and products, including steel, wood and electrical equipment, much of which is shipped from its beleaguered ports.

“If you want to get a certain birch for millwork. Ukraine is the principal place it comes from. You may have specified it two years ago, but you can’t get the material now,” he said. “I had some components of a building stuck in a container ship in Kyiv and we had to get it off-loaded from the container ship and shipped to Poland to get it out. We were nervous about having to find a replacement (elsewhere) because we ordered it 12 months ago.”

Such supply chain uncertainty is triggering new procurement practices as construction managers order products when the opportunity arises and hold them for the future. That comes with new costs and requirements for storage capacity, while exacerbating overall material and equipment shortages.

“Storage was never common in conversations or contracts three years ago. Now there are so many contracts where we’re having to prospect storage,” Murva reported.

Meanwhile, for in-progress development, it’s another cost that wasn’t contemplated when the budget was set. “If it’s available, we buy it now and store it. Those storage costs weren’t factored in, and it’s robbing the market of something that used to turn over every three months, but now we’re keeping it for nine months before we need it,” Lesurf confirmed.

Investors seek assurance against creeping project costs

There are also soaring transportation costs regardless of when products and material are obtained. It’s all filtering through to development pro formas — interjecting more caution and squeezing the margins even tighter in what Murva typifies as an already precarious pathway to profits for multi-residential high-rise projects. With institutional investors increasingly holding sway in the development space, contractors and project managers are getting the blowback from pension funds’ and insurance companies’ ingrained risk aversion.

“It’s becoming common now to ask for price certainty before the green light is given. What it means is that we are moving towards a stipulated price contract,” Murva said. “Ownership is becoming very nervous about the cost to actually build something, about the cost creeping or escalating on them over the course of the project.”

That appears to be a reasonable fear.

“People are saying: My price is good for 10 days. It’s no longer 30 or 60; it’s 10 days,” Moore underscored. “The notion of historical data is historical; it’s not relevant anymore. It makes it difficult to actually make a pro forma work. It makes investors nervous. It makes the banks nervous. It makes insurance companies reticent about getting involved.”

Condo developments face the added threat of sidelined purchasers.

“These condo buildings are 75 to 80 per cent investor-owned. Now they are all getting nervous about where interest rates are going,” Murva said. “It’s putting pressure on the residential high-rise industry in terms of whether or not future projects are going to be financially viable. So there’s this entire ripple effect.”

Barbara Carss is editor-in-chief of Canadian Property Management.

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