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Commercial Real Estate
Business Observer Friday, Jan. 15, 2021 3 months ago

Construction commodity prices rising

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Hikes in the cost of lumber, copper and other necessary materials could result in higher rents and prices in 2021
by: Kevin McQuaid Commercial Real Estate Editor

Construction largely survived and even thrived during the pandemic along the Gulf Coast last year, but rising construction commodity prices threaten to put a crimp on profit margins, hike rents and even postpone some projects in 2021.

The most notable commodity price increase has been for lumber, which surged more than 35% in the final weeks of 2020. That price hike, to more than $650 per thousand board, is especially worrisome to apartment developers because they rely increasingly on wood for so-called “stick-built” multifamily rental properties.

Current price increases could add thousands of dollars to the cost of a four-story, “garden-style” apartment complex — the type favored by most suburban multifamily rental developers, according to National Association of Home Builders data and projections.

The increased costs stem from a number of factors, including continued demand from builders, fires on the West Coast of the U.S. that have decimated inventory and COVID-19-related mill closures.

“In terms of lumber, there’s no question that the pricing is just going up, up, up,” says Craig Klingensmith, head of the Tampa office of Coastal Construction, a Miami-based general contractor that is working on the $3 billion Water Street Tampa and other area projects.

But while lumber has seen the largest gains coming into 2021, construction experts say other materials are also rising amid continued growth throughout the state and the U.S.

Metals like copper and steel for re-enforced concrete and steel cable have risen dramatically or are poised to do so with early 2021 orders, builders say.

“The cost of steel is up by 35% over the last 45 days,” Nick Sanfilippo, senior vice president of project management for Tampa-based Franklin Street, a commercial real estate and financial services firm, says during a mid-December webinar.

“It’s been a massive increase.”

Similar hikes are occurring for PVC piping, electric panels and other materials.

“It’s been a crazy year for commodities, we’re definitely seeing those spikes,” says John Bowden, senior vice president for the Mid-Florida division of Moss, a major general contractor building the Kolter Group’s luxury Ritz-Carlton Residences in Sarasota and other Gulf Coast projects.

Although some price increases are expected within the industry at the beginning of each year, Bowden and others say the 2021 hikes exceed the norm and could impact severely projects going forward.

“This is more than the normal inflation,” Bowden says. “This year feels different. Over the last five years, there have been price increases, naturally, but we’ve largely been able to mitigate the impact with conversions to other materials or through other means.

“What we’re seeing now in our planning and budgeting are some pretty significant jumps that could affect the overall projects.”

Like many economic changes that have taken place over the past year, Bowden and others blame COVID-19’s impact on domestic and international supply chains, the ability to distribute materials and a lack of workers for production.

“A lot of the increases we’re seeing now are COVID-19 related, with plants that had to shut down or decrease their workloads, and those things are just now coming to the surface,” Bowden says.

Earlier this month, the Associated General Contractors of America, a leading construction industry trade group, released its annual outlook for construction for 2021. In its forecast, AGC expects a more “pessimistic” 2021 in the U.S. as a shortage of materials, rising labor costs and other factors infringe on building.

Florida is likely to fair better than many states, the group projects from a comprehensive survey of firms nationwide, but the Sunshine State will also likely be negatively impacted.

“It will be interesting to see what happens in the second half of the new year,” Klingensmith says. “There are some folks who are bullish and believe construction will be status quo, but I’ve heard from others who say it’s going to depend largely on the supply chain. It’s definitely something that’s on our radar.”

COURTESY PHOTO — Craig Klingensmith leads the Tampa office of Coastal Construction.

Not all major construction commodities are poised to rise in cost, however.

Both glass and concrete prices have remained steady and are expected to continue that way well into 2021, a boon for high-rise and urban projects.

But the future of lumber costs remains a daunting question.

Beginning in April, when the pandemic took hold across the U.S., and continuing through August, lumber prices rose by 110%, according to National Association of Home Builders stats. In September, they rose again, by another 28%, according to some formulations, to $950 per thousand board before retreating below $600 per thousand.

“On a typically stick-built project, the hike absolutely could affect the overall pricing of an apartment project because the jump was so extreme in such a relatively short period of time,” Bowden says of lumber costs.

Franklin Street’s Sanfilippo agrees.

“I have stacks of letters on my desk from subcontractors about lumber cost increases,” he says.

Little wonder, then, that a National Multifamily Housing Council survey in mid-December found that many are concerned about materials.

In the survey, 82% of council respondents say they experienced price increases in necessary materials during 2020, and 58% say that their business was  being impacted by material shortages.

That reversed the findings of the group’s previous annual survey, in late 2019, when only 18% of those responding indicated that they were facing commodity price increases.

At least for now, that impact hasn’t trickled down to multifamily rental housing development or interest in the sector along the Gulf Coast.

But experts warn new apartment deals could be more difficult to complete because of material costs, availability of quality sites, labor, existing inventory and other factors.

“There’s no doubt that multifamily deals are getting harder, in part, because the costs associated with completing those projects are climbing at a high rate,” says Nancy Surak, head of commercial real estate brokerage Land Advisors Organization in Tampa and throughout Central Florida.

“That said, we’re still seeing a lot of demand, though.”

 

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