It is no news that commercial real estate development construction materials have increased in price. The COVID-19 pandemic has thrown various obstacles at the retail real estate industry; some product types are experiencing record activity while others are coming out of a challenging slowdown.
One hurdle all asset types are grappling with is rising construction costs. A combination of raw material shortages, lack of skilled labor, and supply chain issues have contributed to the recent run-up in pricing, particularly for raw materials.
The current material shortage began at the start of the pandemic as factories worldwide halted production amid fears of a prolonged economic downturn. Yet, demand for residential real estate and specific segments of the commercial markets flourished throughout much of the pandemic. This robust demand, combined with supply chain disruptions, natural disasters, and labor shortages, caused the recent pricing surge.
Lumber and steel are two commodities facing steep upward pressure on pricing, which is particularly concerning for industrial development. Increased demand for warehouse/distribution space throughout the U.S. is driving developers to bring record levels of new products online, with a particular focus on major logistics hubs such as Dallas-Fort Worth, Chicago, Atlanta, and the Inland Empire in Southern California. Consequently, steel prices have skyrocketed by approximately 160% since last August.
With rising material costs, developers will be compelled to increase prices as construction materials account for about two-thirds share in the total cost of construction.
A supply-demand imbalance within both the residential and commercial markets, coupled with pandemic-related material shortages, has led to a dramatic increase in pricing. Instability persists in the commodities market and continued upward pressure on pricing may give some developers pause, causing projects to be canceled or postponed. Other developers will likely need to increase their construction budgets to accommodate for higher material pricing, and in some cases, budgets for projects that were established prior to the pandemic will need to be reassessed.
With the cost to build reaching new heights and market fundamentals remaining favorable, industrial users will likely continue to face rising lease rates for new, modern distribution space.
The U.S. construction industry continues to grapple with numerous interconnected challenges that have led to unprecedented spikes in construction costs over the past two years. Total construction costs are the sum of three major cost components: materials, labor, and margins. Materials costs likely won’t rise next year as supply pressures ease, but labor costs likely will increase.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
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How is the price increase affecting the commercial real estate development industry?
The price increase is affecting the commercial real estate development industry by increasing costs, delaying projects, and reducing profits. It is also making commercial real estate development less affordable for potential buyers.
What is causing the increase in construction materials prices?
The increase in construction materials prices is due to several factors, including global demand, natural disasters, and trade tariffs.
