Detroit’s minority contractors, developers combat high supply costs to avoid getting priced out

The COVID-19 pandemic created a record housing boom in the United States but the cost of building materials is forcing minority developers in Detroit to become more resourceful than ever. Prices for materials have risen steadily throughout the pandemic and, despite a slowdown in November, are still far from their pre-pandemic rates.

Input costs for projects have risen 26 percent since the start of the pandemic, according to a report by the Association of General Contractors of America. The price index for steel has risen 87 percent and copper 61 percent. This increase has demolished the budgets for many smaller developers and contractors in the city.

Alisha Moss, founder and CEO of VM3 Consulting and Construction understands first-hand the difficulties of navigating the current business climate. “Originally [COVID] had completely shut me down,” she says. 

Moss comes from a long tradition of female builders, including her grandmother who built her family's homes. After 15 years in consulting and construction, Moss nearly lost everything during the pandemic. She was able to come back by being flexible with pricing and reaching out to new customers. While her tenacity has allowed her business to survive, the lack of alternatives in the supply chain is still causing havoc.

“We're trying to build, you know, five-, seven-, 10-, or whatever-story buildings. After story four you want to do stick builds because traditionally [that’s] what makes the most sense. But all of a sudden it doesn't, because the economics don't work.”

As a minority developer, Moss says there is a bigger burden on her.

“It's just a continuation of the state of our country. You’re expected to work three times as hard, and you're not guaranteed anything,” she says.

None of Metro Detroit’s five largest contractors are minority owned. The largest, Walbridge, had a $100 million increase in revenue from 2019 to 2020. 

Not only are prices higher, but materials are scarce. Developers are required to step away from projects and spend time seeking alternative materials. The result is a domino effect. The high cost of materials and limited access leads to delays. These delays push back the approval process and can cause a loss of subsidies required to fund the project. 

“Every year these projects can't be done without those subsidies," Moss says. "And when the processing time goes from eight months to 16 months, now you have to go back and include escalation for labor and materials. We consistently are seeing pricing increases every 90 days."


Pandemic challenges

As the rise in prices squeezes small contractors, they are also facing a host of other challenges brought about by the pandemic, mainly a shrinking job market where 40 percent of construction companies are now reporting layoffs.

Scott Collins, president of BDC consulting, a Michigan-based consulting firm, says before the pandemic it was easier to find a crew willing to work 50 to 60 hours aScott Collins week. Now it is a struggle to find workers who will work just 40 hours. Nationwide, only 28 percent of contractors are finishing jobs on time and on budget.

“It has thrown the construction space in a tailspin," says Collins, "which ultimately yields to development being difficult. Developers are driven on being able to deliver projects timely. When that struggles, we see a rise in construction costs.” 

Collins has worked in the field for over 20 years, and his company, BDC, often partners with minority contractors on projects like the recently completed Marygrove Conservancy. He believes that local and small developers enrich the city. They don’t just build buildings, they build communities. But the costs of new projects are starting to make him worried. 

“It’s a case by case," he says. "We’ve had to try and pivot to alternative materials. We’re finding ourselves, I think, in this constant flux of trying to find the right details to make projects move forward.”

Chase CantrellThe power of networking

The struggling labor market is also affecting agencies like the Michigan Economic Development Corporation, the City of Detroit Housing and the Office of Development and Grants. This means approvals and funds are getting to developers at a slower rate. 

Chase Cantrell, the executive director of Building Community Value (BCV) says that projects which normally took one to two months to get a permit are now taking twice as long to get approved. 

“You kind of get in the cycle where you're delayed," he says. "So the price goes up, but then you're also delayed more because you have to meet the costs.”

Lending is also a huge hurdle for minority developers, with funding often coming from private institutions who require a high level of developer confidence. An established reputation comes, in turn, from the previous completed jobs the developer has done. The lower the confidence, the higher the rate and fees for lending.

This leads to what Cantrell calls the three biggest challenges for minority developers: Access to capital, terms of capital, and the wealth gap.

“Can we get the funds at all? What is the interest rate? When does it have to be repaid? Oftentimes we see that those terms are different for white developers,” he says. 

Cantrell’s BCV program is designed to teach individuals about development in the city and how they can get involved. Over 300 Detroiters have already gone through the three-month program. With a one-time $100 fee, the program is incredibly accessible for individuals looking to get into development.

“The stronger your network, the better you're able to navigate these challenges,” Cantrell says.

One of BCV’s most successful participants is Abby Waterman. She wanted to rehab a single-family duplex and after the program, she moved on to several other homes. Eventually she attracted additional investors and became a mentor herself.

Cantrell, Collins, and Moss see the best way forward for small developers is to align themselves with larger groups and co-ops in the city.

“Building Community Value, I would say, is for the entry-level developer,” Cantrell says. “Capital Impact Partners is sort of the next level, so they're getting folks who have already done single family or small commercial. [And] there's another one called the Real Estate Association of Developers (READ).”

Moss, who founded READ three years ago to connect small and larger developers, believes the nonprofit has a lot to offer prospective members.

“We brought minority-owned businesses that are essential to the supply chain to ensure that we too have diverse supply chains. Because I can see nothing more offensive than to be upset that you're excluded,” she says.

Collins believes that technology can also be a powerful tool for smaller developers trying to adapt to the current business climate — and that remote meetings, in particular, hold a lot of potential.

“This doesn’t seem to be going back to normal,” he says. “I think we’ll continue to see projects and processes develop to where it’s much more remote. Leveraging technology is going to be more and more critical.” 

Changing how buildings are built is another emerging option. Moss, for example, is moving to modular design and partnering with an IT firm from Chicago to introduce smart infrastructure in her future projects. Modular design works by using smaller pieces to build. Instead of building a whole building on-site, modular designs allow for pre-built pieces to be brought in and adjusted to reflect a wide range of designs.

“I think that a lot of people should be investigating and looking into what we can do in order to build smarter developments that may protect us better from threats like a pandemic,” says Moss.

As material prices continue to soar, small contractors and developers will need to continue to evolve. Although their small size allows them to adapt to new technology quicker, lack of access to capital will remain a big hurdle. 

Moss believes this will only widen the gap for minority developers, so they'll have to stay on their toes. 

“Be good at what you're doing because at some point you will be across the table from someone who understands value, regardless of what their face looks like,” she says.

This is part of the Block by Block series, supported by FHLBank Indianapolis, that follows minority-driven development in Detroit.