Construction Costs Are Taking a Toll on Real Estate Investors
Builders have survived the rising cost of building materials and labor for a while, but are now feeling the need as builders are increasingly passing on the higher costs.
The cost of building materials, including lumber and steel, has been volatile, with some steep peaks over the past two years. Soaring prices spread like wildfire as the pandemic closed factories and disrupted shipments for a long list of items.
But many housing investors were still able to find relatively low prices from building contractors. These contractors increased the prices they asked for in their bids only slightly, even though their bills were much higher.
“For a year, the cost increases exceeded the asking prices. This put significant pressure on contractors’ bottom line, ”said Ken Simonson, Associated General Contractors of America’s chief economist.
These contractors’ bid prices are now rising rapidly, according to government survey data.
“Now it is the contractor’s turn to increase its prices,” says Simonson. “I am sure that the contractors did not voluntarily accept these prices … the resistance to price increases by developers is now subsiding.”
Contractors are finally raising their prices
The cost of building materials contractors pay to build homes rose very rapidly during the pandemic. It grew by 13.2 percent in the 12 months to October 2021, according to the producer price index (PPI) for inputs for multi-family construction, which is managed by the Federal Office for Labor Statistics (BLS).
However, many home investors did not have to pay these high prices to build their projects. The contractors building multi-family and commercial buildings have largely kept their asking prices low in an attempt to win business during the pandemic. This is how they absorbed the fluctuating material costs, says Simonson. The prices contractors charge for building most types of property rose relatively slowly for most of 2021.
The contractors are finally starting to raise their prices. The government doesn’t keep precise dates on the prices contractors charge to build apartments, Simonson says, but the price increases that all types of contractors charge are visible in the bid prices that contractors charge for the construction of new office buildings rose by 5.8 percent from September to October, according to the BLS.
That’s one of the biggest month-long asking price hikes of all time, or at least since the government began to keep track of it a dozen years ago, says Simonson.
Contractors can further increase their prices. The higher prices contractors are now charging still don’t reflect all of the cost increases they have absorbed since the pandemic began, Simonson says.
Material prices are still volatile
The prices for building materials companies who have to build new apartments are now increasing inexorably month after month. But these prices are still unpredictable.
“The prices for building materials have leveled off,” says Simonson. “It cannot go on like this forever. But expect volatility, even if we no longer see record prices. “
For example, the price of wood is a key component for new low and medium-high apartment buildings.
“Some of the most dramatic increases in the past year have been in wood prices,” said Paul Emrath, vice president of surveys and housing policy for the Washington, DC-based National Association of Home Builders.
According to futures contracts, the price rose to more than $ 1,000 per 1,000 board feet during the pandemic. That’s more than double the price before the pandemic, which never rose above $ 400. So far this year wood prices have fallen back to $ 400 and were back above $ 700 at the end of November.
The prices for a long list of materials are also completely unpredictable – from plaster of paris to plastic to factory-made metal products. Some factories are still closed or partially closed because of the pandemic. Other materials or components are delayed because huge ports like Long Beach, California are overwhelmed.
“There is no space at the terminals to stack more containers and there aren’t enough truck drivers to get the containers out,” says Simonson. “The number of ships waiting to be unloaded off the coast is still at a record level.”
All of this will make the most diverse materials more expensive and harder to find for a long time. “Don’t think that if the price goes down,” says Simonson.
Labor costs also continue to rise
The high wage costs are also driving up construction prices. “The building contractors actually say that they cannot attract skilled workers,” says Simonson.
According to the BLS job and turnover survey, there were more job vacancies in the construction industry in September than ever before. Building contractors are offering higher wages – and according to BLS, average wages rose by 3.0 percent in September compared to the previous year. So far, the additional money has not been enough to attract enough new workers to the construction – wages for other types of work are rising, which makes them more attractive. “Construction is outside and it’s early,” says Simonson.
All of these factors will further increase development costs – and potentially lead to project delays.
“If it were just a bottleneck, it would be plausible to say that the end of these price increases is near … but there are no guarantees,” says Simonson.