Riding The Wave 2022

Local builder and developer professionals anticipate another wild year for 2022.

Predicting the future is always a gamble. The past two years have certainly shown that is true. After months of lockdown and inactivity, the wave of record high building activity and home sales has been a wild ride for most in the residential construction industry in Iowa.

Conversations with several local builders and developers indicate that they expect more of the same in the year to come.

Kevin Johnson
Accurate Development

A custom builder as well as developer, Accurate Development has not faced the same challenges with land as some other builders.

“We actually have enough ground right now to develop and stay on plan,” says Johnson. “We’ve had some challenges with development, but not as a result of labor or pandemic issues really. It was a result of the storms in Texas, where our pipe supplier is based. They had to shut down for a while, and that held up work for a time.”

Like everyone else in the industry, Accurate has battled supply chain issues that Johnson anticipates will continue through 2022. “It doesn’t matter whether the product is international or domestic,” he says. “It’s all entwined. You might be buying windows from a local or domestic company, but if they get hardware from China, you’ve got that extra delay on top of the distribution and labor issues everyone seems to be dealing with.”

Johnson says being a local custom builder and developer has brought advantages and disadvantages during the erratic months since the pandemic began. “We’ve been able to stay on plan for the most part because we aren’t building on 20 or 30 lots at a time,” he explains. “Our labor and supply needs have remained fairly consistent with our projections. On the other hand, we’re not buying 20 sets of cabinetry or the same windows for every house we build. Every house we do is different, so that can make it harder to get what we need and to get it on time.”

Accurate Development is seeing the same concerns, just different pieces, on the commercial side of the business, with material prices rising as much as 50% on some items. “Steel is the biggest issue for commercial,” Johnson says. “Everything starts with steel, and right now our orders are six months out. It’s a huge issue.”

Those factors all play into Johnson’s predictions for 2022.

“Supply issues are going to remain a key factor, and you just can’t predict which products or materials are going to be delayed or for how long,” he says. “Right now, windows have a four-month lead time, and when we get a signed purchase agreement from a home buyer, we need windows in two months. That means everything else gets delayed because so much is contingent on having the exterior sealed.”

In addition to supply chain issues and ongoing concerns with the scarcity of skilled labor, Johnson believes interest rates may be the real key to any change in the pace of business. “Costs have gone up on everything with demand being so high, and the only thing that might slow things down is if interest rates go up,” he says.

Accurate has been building more spec homes over the last year or so because inventory has been selling so quickly, but Johnson says the company would scale back the spec projects if interest rates begin climbing. “Increased interest rates will actually have less effect on a home’s price than the increases in supply and land costs. But rising interest rates typically give home buyers pause, and that can start to slow demand,” he says.

Overall, Johnson anticipates 2022 to look a great deal like 2021, with no significant slowdown in sight. “So much depends on interest rates,” he says. “And with inflation on the rise, I expect interest rates to do the same.”

Wade Hiner
Destiny Homes & Genesis Custom Homes

“We might see a slight slowdown in 2022,” says Wade Hiner of Destiny Homes and Genesis Custom Homes. “But for the most part, I expect we’ll see more of the same.”

That slight downturn, according to Hiner, will occur if mortgage rates rise. “All indications are that mortgage rates will begin creeping up, hitting anywhere from 3.75% to 4.25%,” Hiner says. “That’s up from current rates but still incredibly low. In the 1980s interest rates were as high as 19%. A bit of an increase now is not going to be catastrophic.”

Rising interest rates are often perceived as a roadblock by builders and others in the construction industry, but Hiner says that doesn’t have to be the case. “Our job as builders and developers is to educate potential buyers on how the market is changing and how to work with those changes before any rate changes occur.”

Any fluctuation in interest rates could have a moderate effect on home sales. Hiner anticipates that other factors will have bigger consequences for builders, issues such as ongoing supply chain problems, labor shortages, and municipal regulations.

“Supply chain problems are not going to be changing any time soon,” he says. “It changes from day to day, and there’s really no predicting it. Last week it was black downspouts. Right now it’s garage door panels. Next week it will be something else.” Although it’s possible in some situations to find a replacement option for a delayed item, that’s not always the case. Hiner says sometimes there just aren’t suitable alternatives. The only option is to wait.

In addition to waiting for materials and finished goods, Hiner says delays are not uncommon on the development side.“The Des Moines metro market is hot already, and it’s gotten very, very competitive over the past 12 to 18 months. More players are driving up costs, and more land in development means longer approval times. Our success as builders dominoes directly back to the local cities, and growth in permits affects the speed they can process them.”

Rising home prices haven’t slowed demand, but that has placed an added burden on the market for first-time homes. “More builders are putting in multifamily projects, and they’re selling really well,” Hiner says. “That’s been good news for the entire chain of price points. First-time buyers are able to build equity and move up sooner, which creates buyers for the step-up market.” In fact, Hiner says 65% to 70% of Destiny’s business is homeowners looking to move up from multifamily homes. “Destiny’s volume of homes built and sold has tripled since 2018.”

That situation is affected by an aging workforce. For every five carpenters retiring, the situation is compounded by fewer candidates to replace them. “We’ve seen progress with programs like the Skilled Trades Initiative, but we need to be educating high school students and educators on the opportunities available in the construction industry,” he believes.

Educating buyers on the market, training new hires before experienced team members retire, and educating young people on the opportunities available are all crucial to maintaining a strong industry. But they add to the challenges local builders and developers will be facing in 2022.

Kalen Ludwig
Groundbreaker Homes & Diligent Development

According to Kalen Ludwig of Groundbreaker Homes and Diligent Development, “2021 was a record year, but it was harder to maneuver with supply chain issues coupled with strong demand. I don’t see that changing in 2022.”

She says, “Having strong relationships with vendors and subcontractors has been crucial throughout the past 12 to 18 months. Our loyalty to our vendors and subs has been key.”

Even so, addressing supply chain issues has required some creativity in scheduling projects. “Because of the unpredictability of things, we implemented an ‘expectation letter’ with our new-construction clients to explain time line and supply issues. Our typical time line used to be about four and a half months,” she says. “It’s now six to seven months, and we have to keep that fairly open-ended since we don’t know what the issues will be at any given time.”

Affordability had already been a concern. High demand, rising material and land costs, and potentially increasing interest rates make affordability an even greater concern. “If interest rates go up, material costs and inflation will be even more of an issue. It’s important for everyone at every level to be working on the affordability issue because interest rates are bound to increase,” Ludwig says.

The record pace of business the past year or so has been great for the local industry. But it has also exacerbated some existing problems, such as labor shortages and land prices. The labor shortage seems to have gotten worse over the past year. “The deteriorating labor situation is more a result of pace than anything else,” according to Ludwig. “There was already a shortage, but with everyone being busier, there just isn’t enough skilled labor to keep up.”

Being able to achieve expectations, whether it’s deadlines or profit margins, is especially challenging with all these unpredictable factors changing from day to day. Ludwig says 2022 will see more of that.

On the commercial side, Ludwig says supply chain issues are creating similar delays and cost challenges, but the effects have not been as dramatic as in the residential market. “Projects don’t seem to be as backlogged as with the residential market. We have been able to pull a few commercial crews over to our multifamily and single-family builds. Land prices continue to rise, but plats are selling at a quicker velocity than anticipated. That pace has motivated us to develop property a little sooner than we had planned.”

That demand also means inventory levels are an issue at every price point, but Ludwig says one of the most challenging actually seems to be the move-up home buyer level. “Entry-level townhomes are selling well, in part because there’s a larger inventory of those properties for first-time buyers. But all the rising costs will continue to make it even more difficult to hit that move-up price range.”

Ludwig says all metro communities will continue strong throughout 2022. Some may see a slight decrease in permits pulled, however. “Communities that have been growing exceptionally fast may see a slight slowdown. The demand is still there, but the lead times and labor shortages are going to make it harder and harder to build at the pace to match the demand. Ultimately, it’s going to be another really busy year throughout the metro.”

Rick Tollakson
Hubbell Homes

Most of the challenges facing the local construction industry are issues that builders and developers can’t control or resolve on their own. Hubbell Homes’ Rick Tollakson says that’s no reason to get frustrated. “There are no easy solutions, but you can always find ways to adapt.”

Like any long-standing company, Hubbell has always approached business with that attitude, which has served Hubbell well throughout the pandemic situation and the rapidly changing market.

“We had already begun to focus more on entry-level and move-up homes, and that segment of the market is really strong,” Tollakson says. “The challenge now and as we go into 2022 is being able to get lots at that price point.”

One of the hardest-hit communities, although still growing at an impressive pace, is the downtown market, which has been impacted by COVID slowdowns. “Things really came to a stop with the shutdown in 2020. Because businesses were closed, no one was looking to buy downtown. That area is still a struggle. It hasn’t come back to pre-COVID pace,” he says.

The opposite seems to be true elsewhere, however. Tollakson says the largest hindrance to development can be the slowdown in the approval process. “Municipalities just aren’t as efficient as pre-COVID. We aren’t getting approvals fast enough, but it’s really a result of the increased applications. More projects going through the pipeline have delayed everything,” he says.

That added to the competitive market leads Tollakson to expect development to be where the real challenges lie in 2022. “We’re all searching for land because we sold so much over the past 18 months. We have about a dozen lots left out of the 400 we had developed, so that tells you how hot the market is. It takes a couple of years to get a development ready, which means this is going to be an issue moving forward.”

He says that developing land is really a manufacturing business. “Developing land is the raw materials side of manufacturing. If the materials aren’t supplied, the manufacturing can’t happen.”

The other key “raw materials” in this business are presenting similar challenges—skilled labor and supply chain delays, as everyone in the industry has said. “Supply chain affects timing, which affects pricing, and the 30% rise in Canadian tariffs just in the last month drives lumber prices even higher. For most of our other vendors, being a large customer has helped Hubbell because they do their best to meet our orders (although that doesn’t change the tariff situation),” Tollakson says.

Unfortunately, no matter how much a supplier or subcontractor would like to meet those Hubbell demands, sometimes that’s just not possible in the current market.“With the increased pace of construction, skilled labor is even more of an issue,” he says. “I don’t see it getting better any time soon. The community only has the capacity to build what we have the people to do the work, and we’re nearing capacity.”

Hubbell has been confronted with the reality over the past year and expects more of the same in 2022, when contracted subs are unable to find skilled laborers to meet contract deadlines. “That’s just one more factor adding to the costs,” says Tollakson. “If you can even find skilled laborers, the market is so competitive, you have to pay more, and our costs will keep going up.”

Bill Kimberley
Kimberley Development & Benchmark Builders

Business has been good for builders the past several years. Kimberley Development and Benchmark Builders’ Bill Kimberley expects 2022 to continue that trend.

But that doesn’t mean he expects it to be smooth sailing. “All the experts are indicating supply chain issues will continue at least the first half of 2022 if not longer,” he says. “All the pieces relate, from labor shortages to supply chain issues to material costs. And there’s no indication any of those will be changing any time soon.”

Those factors plus high demand are playing into rising home prices, which Kimberley says aren’t likely to level out this year. “I don’t expect they’ll be dropping in 2022,” Kimberley says. “Prices won’t see as big an increase, but they’re still likely to creep up some more from where they are today.”

In addition to continued high demand, he says the ongoing labor shortage and ever-expanding government regulations were already elevating home prices. And the pandemic-related challenges of the past couple years have just aggravated those conditions. “Unless something topples the economy, consumer demand and market conditions aren’t going to be changing in 2022.”

He doesn’t expect those issues to “topple the market.” However, Kimberley says he anticipates interest rates will rise modestly sometime during the next year. “Increases won’t be dramatic. That would slow the economy down too much,” he says. “No government wants to be the one to start an economic downturn, so they aren’t going to raise rates dramatically.”

The bigger concern, according to Kimberley, is to complete projects in a reasonable amount of time and within budget despite the numerous delaying factors and volatile market prices. “I can’t believe how long it takes to get land development approved. People not typically involved in land development are competing now, so land prices are skyrocketing, city officials are overwhelmed with plans to be approved, and there just aren’t enough people to process the paperwork,” he says.

Kimberley also says that city regulations are a factor, including lot size restriction. “In the late ’40s and ’50s, when the GI Bill made it possible for more people to buy homes, lot sizes were smaller. Fifty-foot-wide lots were much more common, which helped keep home prices affordable. In the ’70s, bigger lots became the norm, even for average-size homes. With costs the way they are now and lifestyles changing, home buyers are less focused on big lots and more concerned about price points. City regulations haven’t adjusted for that.

“All these things are playing into the higher home prices,” he says. “Contractors cannot get material. They don’t have enough labor to complete all the work they have. The only way to keep prices down as a developer is to put more lots on the same piece of ground. If we don’t do that, the cost ends up beyond people’s price point when things are changing as fast as they are.”

Adapting quickly to those unpredictable changes has been key for builders over the past two years, and that will remain true for 2022. “With nonstop supply chain issues, it’s taking two to three times longer to complete homes,” Kimberley says. “Most builders have adapted as much as they can to deal with that.”

As developer of the 2022 HomeShowExpo site, Kimberley had the development phase complete well ahead of the typical schedule, allowing builders to begin construction much earlier as well. “Everyone’s anticipating it’ll take longer to finish the home show houses, so they’re getting started earlier,” he says. “All you can do is adapt.”

Kirk Mickelsen
KRM Development
& Tanzanite Homes

In some ways, dealing with the results of the pandemic has been much like dealing with any other change in the construction industry. Builders and developers have to adapt quickly.

“We’ve really had to be proactive to keep our build times as close to normal as possible and to be as accurate with lead times as we can when we really don’t know from day to day what those will be,” says Kirk Mickelsen of KRM Development and Tanzanite Homes. “We’ve had to walk back our process more and identify trigger points earlier in the time line so we can adjust our ordering times to stay on track,” he says.

Items such as windows have such lengthy lead times, KRM has been ordering them much earlier so that interior work can continue on schedule. And that schedule has had to change, too.

“A typical build used to be four to five months,” Mickelsen says, “but it’s five to six months now. You can only control what you can control. The other things you just deal with as they come up. You have to be proactive, so we ask ourselves, ‘How do we adjust if other things happen that we can’t control?’”

More than ever before, Mickelsen says vendor and subcontractor relationships are crucial to dealing with the unpredictability of the supply and labor shortages. “We are having interactions almost weekly with some of our vendors because of the volatility issues. That’s something we’ve never had to do before. But we’re trying to anticipate those changes so we can give our customers the best information and the best prices possible. Hopefully some of that crazy volatility will ease in 2022.”

One thing that might help ease that volatility is a rise in interest rates, although Mickelsen says the Fed rate would need to climb dramatically to have a significant impact on housing.

“Mortgage rates might see a slight increase, but that probably won’t have a major effect on the pace of construction or home sales. It could even cause a short burst of panic buying if those home buyers who’ve been sitting on the sidelines rush to buy before rates climb further. There’s also a segment of the market that sold homes during the peak this past year who haven’t purchased a home yet. I’d expect to see those buyers come into the market in 2022 and 2023 if prices level out.”

So many factors are playing into that pricing structure, Mickelsen says it’s nearly impossible to predict, but leveling out is more likely than home prices dropping. He does see glimmers of hope in the skilled-labor situation. He believes that will continue to be a challenge for some time.“Contractors have taken the initiative and started bringing people on board and training them alongside their skilled workers,” he says. “The problem is there aren’t enough skilled workers to train the number needed, so it’s going to be an issue for a while.”

Another positive sign to Mickelsen is the lot availability for 2022. “It seems there’s a little more consistency in what’s available at each price point. There were some pieces missing for a while, and getting lots to meet that entry-level price point is difficult with all the added costs right now. But there’s definitely more consistency than in the past.”

In the end, like other local professionals, Mickelsen sees another strong year for the metro construction market. “Housing is going to stay strong in 2022,” he says. “There will be challenges, but there always are. You just adapt where you can and deal with the rest.”