Talking Heads: Larry Kraemer, Harkins Builders, Is Affordable Housing Still Affordable?

6 min read

Larry Kraemer, executive vice president at Harkins Builders, can talk all day about budgets, preconstruction services and construction materials and labor – and why affordable housing is no longer affordable to build.

Headquartered in the Baltimore suburb of Columbia, MD, Harkins Builders ranks among the nation’s largest general contractors involved in the construction of affordable and market-rate housing, with annual revenues surpassing $225 million.

Kraemer joined Harkins in 1989 as a construction estimator, worked his way up the corporate ladder, and today plays a key management role.

His expertise comes from working on a wide variety of projects, managing design-build teams, working with for-profit and nonprofit clients and bringing both commercial and multifamily products through the preconstruction process.

In a recent interview with Tax Credit Advisor, Kraemer was frank and honest about why construction costs have skyrocketed and where things need to improve.

Tax Credit Advisor: Where have costs gone up the most? What are the causes? Are there any solutions?

Larry Kraemer: The biggest cost increases over the past two years have been mostly mechanical – HVAC, plumbing and electrical – as well as drywall and concrete. The root cause is capacity more than anything else. Residential subcontractors are busy with market-rate projects, which tend to be larger, and more desirable, than affordable deals. Market-rate projects typically don’t require wage scales, local hiring, or minority requirements either. So there’s greater competition for resources, which drives up costs.

TCA: Among the challenges faced by developers is a lack of skilled laborers, such as plumbers, electricians and welders, and increasing costs for construction materials. What steps are you taking to deal with these issues?

LK: Harkins is a member of Associated Builders and Contractors (ABC), a national construction industry trade association. We utilize what resources we can through that organization. We have reached out to more subcontractors and reinforced relationships with our core business partners. We notify subcontractors sooner about upcoming projects and have begun partnering directly with subcontractors, rather than bidding out deals.

TCA: What are ABC and other organizations doing to increase the skilled labor force?

LK: ABC and similar trade organizations provide job training. The construction industry has been reaching out to high schools and trade schools and reinforcing the message that not all construction jobs are digging ditches and pounding nails; that there are excellent career opportunities, particularly in electrical and mechanical. So there is an effort, but it’s nowhere near the level that it needs to be. Immigration policies could exacerbate the labor shortage. It’s not a big factor yet, but subcontractors rely heavily on foreign labor. If the workforce dwindles that will only create more challenges and lead to further price increases.

TCA: As a developer, you would think that President Trump would sympathize on this issue. Is Harkins politically active in ABC and is that group trying to educate the Administration and proposing policies that would help deal with this labor shortage?

LK: We are active and have testified at the local level on bills that would restrict competition. I am sure ABC and other trade associations have this issue on their radar.

TCA: What new design features and amenities are being requested most often from your developer clients? 

LK: Anything energy-related has been the biggest request. Making the buildings tighter, and more energy efficient with low operating costs. We are constructing buildings tighter than ever, which has its own issues and adds more steps in the construction process, which adds more time, which adds more cost. Skin materials have also become more complicated with material selections, weather barriers and rain screens.

TCA: If it were a perfect world and you could reinvent construction, where would the savings be? Are we, as an industry, providing too many amenities? Are renters’ expectations higher? Have communities demanded fancier buildings? 

LK: Whether it’s HUD requirements or tax credit financing requirements, affordable housing is no longer affordable from a construction standpoint. Affordable housing is more energy efficient than market-rate housing. So affordable units cost the same or more than market-rate units. If you go back to the 90s, you didn’t have all of these requirements and affordable housing projects contained more units. You could have vinyl siding, thru- wall heat pumps, and units of a certain size. Over the past decade, codes and tax credit allocating agencies have dictated requirements that mirror market-rate housing.

TCA: Interesting. So it’s not the renters who have higher expectations, but the states?

LK: It’s definitely not the renters. My mother lived in one of our tax credit projects. She was happy with basic amenities. Renters don’t know about blower-door tests, R ratings of walls or the difference between siding types. They want affordable housing. Maybe the states, or maybe even some developers, are trying to erase the stigma that affordable housing is cheap housing. And so we have to have better cabinets, finishes and greater energy efficiency. Every year the upgrades continue.

TCA: Has the growth of mixed-use made it more expensive to build affordable units? Do market-rate renters expect so much that you have to spend more on the affordable units so it feels like one project?

LK: I guess that’s an issue when you have affordable and market-rate units in the same building. The real costs in the structure, in the skin and the systems of the building are going to be the same whether it’s affordable or market-rate. But I don’t think that in a stand-alone building that market-rate is driving what needs to go into affordable.

TCA: But in a stand-alone affordable housing project are you still dealing with these higher construction costs?

LK: Yes, I think that market-rate has taken up so much of the workforce and labor that it’s impacting the affordable world. If I’m a subcontractor and have the ability to work on a 100-unit or 200-unit market-rate deal with no Davis-Bacon scales, no state requirements, no minority requirements versus being a subcontractor on a 40- to 50-unit affordable deal that has a lot of strings attached, I am going to focus my resources on the market-rate deal. That market hasn’t fallen off, there are plenty of market-rate deals out there.

TCA: Are there housing markets where high construction costs are more acute, or has this become a problem no matter where you work?

LK: I can only speak for the Mid-Atlantic region where we operate, but in the cities where we get the most work – Philadelphia, Baltimore and Washington, DC – it’s an issue, because there is a lot of market-rate housing being developed.

TCA: What advice are you giving to clients on ways to save money on construction costs given that LIHTC pricing has softened and HUD is facing dramatic budget cuts?

LK: Involve your team early, prior to committing amenities, skin materials, and systems and take the time to analyze all the affordable options available that can meet the end-users needs.

Story Contact:
Larry Kraemer, Executive Vice President
Harkins Builders, Inc. 

Darryl Hicks is vice president, communications for the National Reverse Mortgage Lenders Association and a 24-year veteran of associations managed by Dworbell, Inc., the management company of NH&RA.