By G. Michael Kelsen, Aspen Reserve Specialists
I am sure you have heard the expression,“If you don’t like the weather, wait ten minutes and it will change.” As scary as it may sound, we in the Reserve Study and Construction businesses have had a similar expression lately: “If you think the costs are high now, wait just one day and they will be more.” Yes, one day may be an exaggeration, but while we have seen product increases exponentially from last year, we have seen some costs increase month to month.
According to various publications, the current inflation rate for construction labor and goods is running between 5% - 6% in the Rocky Mountain Region. From what we have seen with contracts, we think the actual number is closer to 7% - 8%. The national core inflation rate, which does not include volatile oil prices, is running about 3.8% over the past 12 months. As of the writing of this article, even though wood prices have seen a decrease over the past week, a slight change in production or product availability will cause those prices to increase again.
As long as I have been in this business, there have always been outside forces that impact product costs. Believe it or not, a natural disaster in another part of the country will affect replacement costs here in Colorado. Why? Because those building materials are needed where the disaster occurred. Also, sub-contractors and labor tend to go where the work is. As the cost of precious metals soars, so do costs of assembling mechanical equipment. After fires raged in the Pacific Northwest and Canada, in forests where we get our wood for construction, the results were less product, higher demand, and (the basic principle of Economics 101): higher costs. Let’s not forget that with the increase of hourly wages, fuel costs, insurance premiums, commercial rent, etc., those additional costs to run a business will get passed down to the consumer. Bottom line, no matter how you look at it, things are only getting more expensive, and will continue to get more expensive in the coming years.
So how do we plan for these increases? In my 30 years of industry experience, I have never seen expenses decrease, and rarely have I seen them stay stagnant from the previous year. This is why if association assessments are not increased annually, then the financial strength of the association is ultimately falling behind and digging themselves a hole. We in the Reserve Study business see this all the time: budgets are established, and rather than following the recommendation of your professional and increasing the Reserve contribution, the budgeted Reserve contribution is actually decreased to prevent the board from having to raise the dues.
With a healthy Reserve balance, associations are able to have some wiggle room in their funds for projects that increased more than anticipated, or for additional labor caused by deferred maintenance. Take wood fence replacement for example: A few years ago, we were seeing replacement of a privacy fence cost around $30 per LF, depending on total area, location, and types of posts being installed. If you take the average inflation rate of 5% for construction related projects, the cost to replace the fence would be around $35 per LF today. However, because of factors beyond our control, the actual cost of a fence today is about $45 - $50 per LF. When an association follows the advice of their professionals and adequately contributes to the Reserve fund, then typically there are sufficient funds available to address the shortage.
Some associations also believe that spreading out an expense, or “phasing” a project as we refer to it, will save them money. In reality, phasing out a project is actually costing you more money for several reasons:
First off, the average interest earned on a Reserve account is ranging anywhere from 0.1% to 1.0% if you are lucky. As mentioned above, inflation rates are averaging about 7%. Therefore, for every year a project is deferred, it becomes more expensive. Another way to think of this is that your Reserve dollars are literally losing value while sitting in the bank.
Secondly, for projects that are phased over a period of time, the cost of that project will continue to increase for the duration of the phase period. So, rather than spending $150,000 in year one to address the entire project, the same project could cost about $161,000 by the time the project is completed three years down the road.
While we realize raising assessments is never a popular topic, it is a necessity in today’s world. If an association does not increase their annual assessments by at least 3% - 4% every year, then the financial strength of the association will surely fall behind. As a result, it will only get more difficult to get caught up and be able to address major projects when they need to be performed.
G. Michael Kelsen is celebrating 30 years of preparing Reserve Studies in 2021, as well as acknowledging the 20th anniversary of Aspen Reserve Specialties being in business. Personally being accountable for completing over 5,600 Reserve Studies, Michael has had his fair share of experience with condominium associations, large scale communities, townhome properties, high-rises, commercial properties, private schools, and worship centers throughout the United States.
