One analyst cautions builders to avoid locking in any long- or medium-term prices at current levels.
Construction firms should stockpile a supply of critical materials like lumber and steel they’ll need for projects in the second half of the year, as experts predict shortages will continue to plague the building industry.
Materials shortages have hamstrung builders over the course of the pandemic, leading to unprecedented price spikes and long lead times for key construction components. The latest Bureau of Labor Statistics figures show that lumber prices grew 86% year over year in April 2021, while prices for steel products increased 67%. The highest year-over-year increase previously for either material was 20%. “Material cost growth is expected to outpace all other elements of construction cost increases this year,” says Henry D’Esposito, JLL’s senior research analyst, Construction, in a new post. “Some developers who were already taking a wait-and-see approach to projects during the pandemic are hesitant to jump back in for fear of buying at the top of the market.”
Most of the steel and lumber used in the US is produced domestically, and pandemic-related shutdowns led to a major hiccup in supply chains. But many expected demand would go down due to a pandemic-fueled recession, D’Esposito says, and for a while, it did—steel producers idled roughly one third of their capacity. But that slowdown was followed by an economic recovery that “caught the supply side by surprise.”
Demand for lumber did not dip at all, rising 15% over the height of lockdowns.
Esposito also cautions that builders should avoid locking in any long- or medium-term prices at current levels. JLL notes in a recent analysis that major commodities firms predict steel prices will peak during this quarter and will begin declining over the second half of 2021.
Another question? Whether to build at all. According to JLL data, the average commercial project is now 4 to 7% more expensive than pre-pandemic, and a shortage of skilled labor is also adding another 2 to 5% to costs.
The average commercial building project now costs 4 to 7% more due to the shortages. Skilled labor shortages are compounding the impact, increasing building costs an additional 2 to 5%. These costs are more visible in the retail sector, but activity has not slowed in the industrial space, where an active market shows demand outstripping supply.
“Construction costs are not inhibiting industrial,” says Eric Enloe, Managing Director, Valuation and & Advisory Services, JLL. “The sector is fascinating right now because the existing product is so expensive that many are open to the greater risk and greater reward of new development. There are buildings selling empty at a price you would expect leased, with the buyer taking on the leasing risks.”