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.