The commercial real estate and construction industries clearly have been hit hard with price increases and delays in the supply of products since the beginning of the pandemic. But a sigh of relief could be heard throughout the nation when lumber prices started falling back down in June, after hitting all-time highs. Although the price for lumber is inching closer to pre-pandemic prices, there are still plenty of other challenges.
Steel, for example, is now leading in price increases, as is the previously inexpensive oriented strand board (OSB) used to sheet walls, floors and roofs. Material costs have risen for just about everything used in construction, on top of also freight price hikes and staff shortages.
Several other building material products are showing price increases thus far in 2021 – and all are up at least 30% as reported by the National Association of Home Builders. Such products include: building paper and building board mill products; asphalt; plastic water pipe; fertilizer materials; laminated veneer lumber; thermoplastic resins and plastics materials; structural metal joists and concrete reinforcing bars; wood window and door frames; and copper pipe and tube. During the first seven months of 2021, the majority of these prices have increased many times more than they did in 2020.
Some pandemic-induced increases have created a slowdown that resulted in construction backlogs. Supplies are not only more expensive, but they are also harder to come by, with unusually long wait times for critical materials prolonging schedules and contributing to higher costs. Many suppliers do not appear to be able to pass the full cost of materials and freight increases on to the customer, tightening margins.
Nick Minoia, managing partner of Diversified Properties, says that while the COVID-19 pandemic has rattled the commercial real estate sector, necessity is the mother of invention, and developers by nature are creative people and companies are finding ways to get things done. – DIVERSIFIED PROPERTIES
What are developers to do under such circumstances? Nick Minoia, managing partner of Diversified Properties, says that while the COVID-19 pandemic has rattled the commercial real estate sector, necessity is the mother of invention, and developers by nature are creative people and companies are finding ways to get things done. “The development process and construction and development are full of roadblocks. Developers are used to hitting a wall, whatever it is, and try to find a way to go over it through it or around it.”
Everyone has learned to pivot but doing so can be difficult. “It’s crazy,” Minoia says. “For example, clearly, in the lumber world, alternative materials, whether it’s roof trusses, oriented strand board different types of beams, everybody’s looking at alternatives, not just for price, but because we need it now, or we need to keep the schedule.“
Forecasting further ahead has been one solution, especially with larger suppliers. Shortages have caused companies to place orders for the next year or 18 months out, but that still doesn’t guarantee delivery. Longer range forecasting can mitigate the issue, but it doesn’t solve it because there are still products and materials that companies cannot get for six or 12 months out.
“So, even if we wanted to pay a price increase, we can’t, because we need it sooner rather than when maybe the traditional materials are going to be delivered,” Minoia explains.
Kohler, a major supplier of plumbing fixtures, said it was increasing prices significantly effective September. “It’s tough to swallow these price increases when you’re already fully committed and you have projects underway that are already capitalized,” Minoia said. And you just continue to swallow these price increases because there’s not a whole lot you can do about it.”
Should developers seek alternatives? Yes, of course, Minoia says, if there are any. But in the case of the high standard of names such as Kohler, some alternatives won’t be acceptable to the consumer who was promised a name brand. “If you’re building high-end condominiums and you’re selling multi-million-dollar units, you can’t really go much below,” he stated.
Minoia did say that in other types of construction builders can get away with swapping out for something else of the same caliber if it has quality fit and finish. Waiting for costs to come back down is also not a sustainable option due to the gaps in buying up front.
All these challenges need to be faced with solutions that can keep projects moving forward while not breaking the bank. Minoia says he thinks most will be overcome over time, but right now meeting schedules is difficult, especially regarding labor. The labor supply where it should be due to wage issues, health concerns and the incentives people received to stay home.
“They can’t find enough people who are willing to come off unemployment and other government incentives to come back to work, “Minoia says. “So that’s a problem. Until that happens, we’re not going to get back to some sort of normalcy.”
Obviously, businesses are operating in a changed environment with new risks. These risks — associated with volatility in and pricing and supply of materials — pose serious threats to developers’ success.
