INFLATION AHEAD

Rising material costs, disrupted supply chains and higher wages all will impact association budgets. How can you help your community prepare for the increases? We have some suggestions.

By Scott Swinton and Rob Buffington

Association management has never been a boring job. Talk to any community manager who has been in the business for five years and they will have some good stories for you. But over the last 12 to 18 months, the entire industry has pivoted and the rules have gone out the window. Complaints are up, demands are getting higher and costs are rising across the board.

Tens of thousands of California common interest developments were not only built in the 1960s to 1980s, but their funding schemes were also designed in that same era. Just as we are discovering systemic inadequacies in the construction of those buildings, we are also realizing deficits in the funding programs intended to maintain those same communities.

The past two years have added energy to the tsunami of cost increases already headed for the shores of HOAs. CC-5551 “The Deck Law” and the 40-year problem of short-sighted reserve funding were already lifting tides higher than anticipated along those shores. Now, two years of inflationary pressure, material cost increases, and labor cost increases are really beginning to add up. Alas, if history is any indicator, the tragic collapse of the Champlain towers in Florida is almost certain to complicate things even more with additional waves of regulation.

Sorry, that was a bit negative, but if we’re honest, the forecast leaves a lot of space for negativity. And, unfortunately, there’s more.

Inflation is likely to be a real concern for homeowners associations. Just as financial managers encourage investors to, at a minimum, keep their money in an account that offsets the rise of inflation, so to HOAs must keep their bank accounts growing at or above the rate of inflation. This seems obvious, but experience has shown that especially in lower income areas, the opposite is very often the case.

And, inflation is almost certainly coming. Highest on the list of inflationary harbingers has been COVID-19 and the cascading legislative and monetary policy that followed. Bloated with free cash, low interest rates, and predictably skyrocketing home values, the U.S. economy is poised for inflationary strains. While homeowners love to see their home values increase, they are less excited about the rising cost of labor, materials and HOA assessments that will inevitably follow.

Rising material costs are driving construction contract prices up, projects are being delayed for lack of crews to work the jobs, and projects are taking longer than normal to complete as funding and procurement plague signatories on both sides of the contracts. Disrupted supply chains cause delays because basic staples cannot be guaranteed in time for a job to begin. Project uncertainties inevitably translate into increased contract costs.

Finally, as employees are demanding higher wages and more perks to return to work, vendors are being more selective about which jobs to take knowing that their capacity is limited. This leads to contractors turning down jobs and driving up the prices on the ones they do take.

So how can a community manager help an HOA prepare for the rising tide and stretch their budget?

The first steps, of course, are understanding the problem and communicating the needs between parties. HOA vendors are by and large reasonable and creative. An open channel of communication may reveal a surprising array of options available to their customers.

Often vendors have a slow season where they can give the manager better rates on a particular job. This happens frequently for many industries such as roofing and landscaping. Waiting a few months may be a simple solution.

While homeowners love to see their home values increase, they are less excited about the rising cost of labor, materials and HOA assessments that will inevitably follow.

Or possibly vendors can develop a cancelation queue for flexible projects so that the community pays less if the vendor can squeeze a job in at the last minute. Vendors need to keep their employees working, and a queue of jobs to send a couple technicians out to on a slow afternoon is valuable to both parties.

Also, preventative maintenance plans should also be created or re-assessed. Evaluate what components are most crucial to the safety and wellbeing of the community and which are cosmetic. Repainting the exterior can possibly wait a few years while a roof with multiple leaks needs to be tended to immediately.

Presenting homeowners with a proper paradigm has always been a challenge and will not only be helpful in this time, but also a key to getting through. It’s possible that the fallout from the pandemic will, in a way, force them into a new and helpful paradigm. Few homeowners balk at dropping money into an IRA or paying an insurance premium. In the same way, possibly, homeowners can begin to view their dues and reserve contributions as similar necessary investments. A paradigm of investing in their future, or insurance against future unpleasantries may be helpful for owners to adopt.

In the end, managers simply need to prepare their communities for the upcoming increases. Many HOAs are already operating on a shoestring budget. Small increases are not likely to push them past the deficit they already owe to the inflationary pressures of the last two decades. Managers should encourage their boards to raise dues regularly rather than assuming that special assessments will carry at the right time. Possibly, an immediate and drastic increase is advisable.

Whatever the correct solution for your communities, it’s important to take a moment and help them understand that there is a team of professionals that excels at solving these problems. You, the manager, are at the head of that team, and your vendors have your back. Help them remember that though previous generations may have made life difficult for them today, you have a plan and a team that will help them not only survive, but thrive.

Scott Swinton

Scott Swinton is General Contractor and a Certified Construction Manager at Unlimited Property Services, Inc.

Rob Buffington

Rob Buffington is the Owner of East West Building Works and President of Gordian Staffing, both of which are located in San Jose.