This past year has
proved difficult to complete major building repairs.
Construction costs are up — significantly. Contractors are
hard to come by. Materials may not be available or may have
significant lead time prior to delivery.
Cost increases are a significant concern if a condominium
needs to complete work in the next year or so. They may not
have sufficient funds available or may deplete their reserve
fund to a greater extent than planned for the project. But
it’s not just the here and now that condominiums should be
worried about.
StatsCan reports that the construction price index for
residential buildings, which reflects the cost of new
residential construction, has increased by 56 per cent
between Q1 2020, the start of COVID, and Q2 2022. While this
index is not entirely predictive of cost increases related
to repairing existing residential condominiums, it is likely
the best available proxy. Over the same period, most
condominium reserve fund studies likely incorporated a
predicted cost inflation of 5 to 8 per cent, a difference of
almost 50 per cent.
Reserve fund providers typically maintain cost databases for
the key unit prices that underpin reserve fund studies.
These are being updated as soon as possible based on
recently tendered work. Fortunately, in some cases, we are
finding the actual cost increases to have increased less
than this 56 per cent.
However, for some projects, particularly material-heavy
projects like window replacement, we have seen very
significant price increases. As reserve fund study updates
are completed on their three-year schedule, these new prices
will be reflected, resulting in large increases in the
required annual contribution and the related condo
maintenance fees. Making matters worse, the projects with
the largest cost increases are generally also the largest
projects covered by a reserve fund and, as such, have an
overweight impact on the overall contributions.
But what is underpinning the chaos? It seems easy to blame “COVID”,
but it is less clear what is really going on. There is a
series of unfortunate events combining to contribute to the
chaos.
Labour Shortage
There seems to be a shortage of labour in almost every
industry. Is this because young people can’t be bothered to
work after COVID? Seems unlikely. Ongoing impacts of
self-isolation during infection? Probably part of the
problem but can’t be the whole thing. Employees changed
industries due to layoffs due to COVID? Possibly, but every
industry seems to be short people, so probably not.
Inefficiencies due to new operating procedures such as
physically distancing of workers? Probably a contributor.
Fewer immigrants? Net migration was down about 1.5 per cent
a year for 2020 and 2021, but has come roaring back in Q1
2022, with the highest immigration numbers into Canada since
1946, so that doesn’t seem to be the cause.
Perhaps, like most trends in the last fifty years, the
labour shortage also relates to the baby boomers. The
average baby boomer reached age 63 in 2019. And many who
were approaching retirement advanced their retirement due to
COVID. Now there is pressure to return to the office after
two years of working at home, which may trigger further
retirements.
Many industries rely heavily on these seasoned workers, from
elevator mechanics to carpenters. Their experience makes
them efficient. They are knowledgeable and train the next
generation. And the next generations are simply smaller.
Given the demographics, the labour shortage is likely a
trend that will continue to haunt us for many years to come.
Shortage of Construction Materials
Material shortages are also having a significant impact.
Sometimes the key components of the construction are not
available. Early in COVID, it was a shortage of lumber. More
recently, it is sealants, fasteners, sheet metal, aluminum,
etc. We have become so used to the world operating
efficiently on a just-in-time basis that we are not coping
well when minor components become unavailable.
The initial reduction in global demand forced some suppliers
to go out of business. As demand returned, there were fewer
suppliers globally struggling to meet high demand.
Many construction products require multiple raw materials to
manufacture. Some chemical ingredients might make up less
than 1 per cent of the overall formula of a given product,
such as an elastomeric waterproofing membrane, but might
still be essential. Manufacturers typically source
ingredients from a global range of suppliers. Closures and
delays at international factories dramatically decreased the
availability of some products.
Unfortunately, it isn’t necessarily a simple matter of
substituting one ingredient for another with similar
characteristics. Systems undergo rigorous testing to achieve
performance ratings. Changing the chemistry of a product
could require new testing to be completed in accordance with
CSA and ASTM standards, which can be a long and costly
process.
China’s zero-COVID policy, with mandated government
lockdowns, has led to long lockdowns in major cities and
suspended operations in many factories which are still
contributing to challenges related to material availability.
Supply Chain Challenges
North America imports many construction products and raw
materials from overseas, particularly from China and India,
primarily by container ship. The strict COVID-19
restrictions in Asia also caused widespread closures of port
facilities in 2020, 2021 and 2022, resulting in shipping
bottlenecks.
Labour shortages at Canadian and U.S. ports continue to
delay unloading of the shipping containers. This has been
compounded by the increased use of larger shipping vessels,
meaning that more volume is being directed to the few ports
that can handle these larger ships. Today in the U.S., 40
per cent of all containerized cargo goes through just two
ports – Los Angeles and Long Beach. The limited capacity of
these ports contributes to the bottleneck.
The rise of e-commerce during COVID has also had an impact.
Our global transportation systems were not built for a world
where anyone can order anything to be delivered to their
door with a couple of taps on their phone. The rapid rise in
direct-to-consumer transportation has increased congestion
at rail yards and warehouses.
Adding to the chaos, there is a global shortage of truck
drivers. According to industry associations, the industry
has failed to remain attractive to young employees and is
struggling to fill thousands of open positions in every
country.
Combined, these factors result in sluggish and expensive
movement of goods around the world.
Lack of Availability of Contractors
Lots of construction projects were postponed at the start of
the pandemic. Contractors are now working through a large
backlog of projects, effectively completing more than one
year’s worth of work in a year. This should work itself out
over time.
Other Global Impacts
As if COVID were not enough, there has been a confluence of
other global impacts that have also contributed to our
challenges. These include Brexit, which created major
changes in trade rules, the 2021 Suez Canal obstruction,
which froze more than $10B in trade a day, the 2021 “Big
Freeze” in Texas, which knocked out many chemical
manufacturing plants and refining operations for many
months, the 2021 Xinjiang Western Hesheng Silicone plant
fire which was large enough to impact production of many
products globally, the 2021 extreme weather events in B.C.
which impacted cross Canada rail and trucking transport, the
drought in Europe which has restricted shipping capacity
along Europe’s rivers, and the ongoing Russia-Ukraine war.
Our systems are holding up remarkably well considering these
shocks but are creaking under the load.
What Can a Condominium Board Do?
Plan ahead. Secure contracts and have the contractor order
construction materials immediately afterward because there
are long lead times that can easily consume our short
construction season.
Take possession of materials as soon as possible. This
approach helps manage a schedule, but also helps mitigate
the risk of costs rising further between the time of the
contractor bidding the project and securing the materials.
Contractors can typically store these materials in their
facilities or onsite to ensure they have them available when
needed.
Deferral of projects may not be the best plan because there
are no guarantees that inflation won’t continue to race
ahead of a condominium’s ability to earn interest on their
fund balances.
Manufacturers are optimistic that many of the bottlenecks
will clear in the near term. There are some underlying
demographic trends and climate change- induced weather
phenomena that will continue to drive prices upward.
Condominiums must prepare themselves to face significant
reserve fund contribution increases at the time of their
next update.