How to Combat the Affordable Housing Development Cost Crisis

With a supply chain already in flux due to the pandemic now further exacerbated by the war in Ukraine and rising interest rates, construction material costs aren't going down anytime soon. For the affordable housing market, defined in New York City as housing rented for $1,500 or less, high construction costs are causing problems. 

While multifamily buildings are often viewed as a hedge against inflation due to the ability to adjust rents alongside rising interest rates, affordable housing doesn't have the same flexibility. Traditional multifamily buildings are even struggling to increase rent to keep up with growing costs. According to Realtor.com, the median asking rent rose to $1,827 in April, the highest rent on record, up 17% year-over-year.

In New York City especially, the need for affordable housing is dire. According to Bisnow, the city has an immediate need for 227,000 housing units to meet present demand, according to a report commissioned by the Real Estate Board of New York. By 2030, the city needs to build 560,000 units. 

Andrea Kretchmer, a founding principal of the affordable developer, Xenolith Partners, told Bisnow, "We have an emergency right now, which deals are struggling to complete because prices are out of control. Construction is getting so unbelievably expensive. Subsidy levels are not expanding along with the construction pricing, so now you're going to be able to build even fewer units.”

Those developing affordable housing are not likely to throw in the towel because of market conditions when there's a clear demand and importance to the work. So how can you move forward with your projects and still keep budgets within scope? The key is value engineering. 

What is Value Engineering? 

In simple terms, value engineering is redesigning buildings to cost less. SimonCRE defines value engineering as a process by which alternate means, methods, and materials are investigated and compared against initial construction costs. 

But it's not quite so easy. It requires efficient, detailed work to uncover every potential saving opportunity while keeping the overall scope, quality, and timeline in check. 

As a simple example, you may have wood cabinets in each of your apartment units. But the type of wood you originally budgeted has doubled in cost. Finding a substitute that maintains the original's aesthetic so as not to change the entire vision for the project while ensuring that it can be sourced quickly at a lower price is vital. You may replace it with faux wood or use a different material that still fits the apartment layout. 

Take the above example and apply it to every piece of your project, and you've got proper value engineering. Executing value engineering at a high level is one of the best paths forward for affordable housing developers. 

How to Value Engineer  at a High Level

With the current state of construction costs, the idea that value engineering will offset the pain may feel like a stretch. According to Bisnow, nationwide construction costs rose by 7% in Q1 2022 from a year prior. In the last ten years, construction costs have increased by 52.9%. 

And while affordable housing developers may not get the project margins they did before supply chain woes, value engineering can keep projects from becoming problems during this cost-sensitive period.  

So how do you scale value engineering to accommodate as much of your project as possible? Modern real estate development software can help. 

First, keeping track of which material costs are ballooning and which are remaining steady is critical. Teams need to make budget line adjustments as soon as they are trending up. Development platforms offer more visibility into project progress and cost data than you can get with just your accounting tools and spreadsheets. AI and automation work together to alert you of budget lines trending high and how you can reallocate funds to adjust. When you're alert to potential cost overages, you can formulate a plan ahead of time to solve the issue before it becomes one. 

Second, technology helps you see project progress and cost data in real-time dashboards so you always know how your project is trending, where the challenges lie and can adapt quickly instead of waiting to generate monthly cost reports and seeing what went wrong after the fact. Proactiveness is the key to keeping budgets low. 

Third, when much of your team's time is spent tracking costs instead of paying attention to the actual charges, you may be missing key opportunities to make adjustments. With modern real estate development software, you can relegate cost tracking to automation which removes manual data entry from your team's plate and adds accuracy to your data. 

With a renewed strategic focus, you can spend the necessary time researching alternative options to every skyrocketing cost, shift budgets, and ultimately engineer an affordable housing development that is still profitable, despite unfavorable market conditions. 

Real Estate Development Software Aids Affordable Housing Margins 

The pressure to keep affordable housing projects on track is high. Bringing in tools to aid project delivery can help you keep operations running in the right direction. Through increased cost visibility, aided by AI, automation, and data analytics, you can understand where your project challenges lie early, build strategies to circumvent budget overruns, and set your project up for success. 

Northspyre is the only real estate development software built for development teams facing issues like rising construction costs. The platform understands the pain points in the real estate development process and equips your team with the tools to proactively avoid them, leading to significant savings across each of your projects. 

Ready to get your affordable housing projects back on track? See how Northspyre can help today by booking a demo.