Construction Cost Surge Delivers Benefits to Commercial Real Estate Owners
NEW YORK–(BUSINESS WIRE) – Clarion Partners LLC, a leading US real estate investment manager and one of Franklin Templeton’s specialist investment managers, sees a possible silver lining in the impact of rising construction costs on the commercial real estate (CRE) industry since the beginning of the COVID-19 pandemic.
Clarion notes that while raw material prices have improved slightly in recent months, total construction costs have increased by around 35% since early 2020. Lumber and plywood rose 26% from March to August 2021, while other building materials rose faster – steel pipes and tubes, copper and brass mills, and plastic construction prices rose 63%, 61% and 32%, respectively.
Several factors can be attributed to the rapid rise in construction prices overall, including pandemic-induced disruptions in the supply chain, a synchronized recovery in global demand, a boom in the home and home improvement sector, commodity speculation, labor shortages and higher construction wages.
“This unprecedented increase in construction costs is having a profound impact on both new development projects and existing commercial real estate,” said Tim Wang, Clarion managing director and head of investment research. “On the positive side, rising replacement costs and, in some cases, more moderate development pipelines can further boost the value of existing assets in the future, provided that the framework conditions of strong supply and demand enable landlords to pass inflationary rent increases on to tenants.” We see the greatest investment opportunities in sectors with the highest demand and low vacancy rates, including rental apartments, first-class logistics properties in institutional quality and life science facilities. ”
Also significant, Wang said, is that rent is a small part of the total cost equation for tenants across the logistics chain, making it easier to enforce industrial rent increases, while housing is a necessity, resulting in the same dynamic for housing when housing is so scarce.
Clarion found that the higher construction prices combined with the significantly higher land costs resulted in lower profit margins on new developments and renovations, project budget overruns and delays, more moderate development pipelines and more scope for rent increases and increases in existing properties. Clarion believes recent government initiatives, such as the passing of the Biden government’s infrastructure plan, are likely to continue to drive construction costs higher.
“Over the next five to seven years, the Biden government’s $ 1.2 trillion infrastructure plan will channel billions of dollars into clean air, water and transportation infrastructure, which can impact both material and labor costs across the country. Construction costs could come down as production and supply chain disruptions wear off, but we have not yet seen any general improvement in global production and supply chains. We will closely monitor these and other risks such as new COVID variants, customs and trade policies, the pace of Chinese economic growth and new construction technologies, ”said Wang.
Find Clarion’s new report, Surging Construction Costs: Implications for Commercial Real Estate, here.
About Clarion Partners, LLC
Clarion Partners, LLC has been a leading real estate investment manager for more than 39 years. The company is headquartered in New York with strategically located offices in the United States and Europe. With over $ 65 billion in real estate and debt under management, Clarion Partners offers a broad range of real estate strategies across the risk-return spectrum to more than 500 institutional investors around the world. You can find more information about the firm at www.clarionpartners.com.
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