Rising Construction Demand Meets Continuing Challenges with Supply

Private construction was up 13% year-over-year in the second quarter, Cushman & Wakefield reports. That increase in demand has run headlong into constraints on supply. 

“Pricing and supply chains for commodities are incredibly fluid coming out of the pandemic,” according to a team led by Brian Ungles, Americas leader for project & development services. “Increasing demand for construction materials, limited product inventory and supply chain disruptions are driving up construction costs and resulting in longer lead times for obtaining materials.”  

As of Q2, lumber prices were up 101% and copper prices rose 77% from a year ago. Diesel fuel prices more than doubled (+148% Y-O-Y) and steel prices were up over 30%.  

During the pandemic, price increases were largely absorbed by general contractors who were struggling to win the limited number of projects in the market. However, Cushman & Wakefield reports, “now that the economy is reopening, project opportunities are growing and causing contractors to pass the cost increases directly through to clients, impacting both occupiers and investors alike. 

“While demand has increased during the pandemic, the supply side has not been able to ramp back up as quickly. When the U.S. economy slowed down in March and April of 2020, capacity utilization also dropped significantly. Mills, processing plants and manufacturing operations slowed and/or stopped due to health concerns, supply chain freezes and/or lack of demand. Commodities critical to real estate construction have seen substantial increases over the past year:  

• Diesel fuel: +148%  
   
• Lumber: +101%  
   
• Copper: +77%  
   
• Steel: +30%  

“March 2021 was the first month where capacity utilization for all three of these commodities was as high as it had been in February 2020. Capacity remains below prior expansion peak levels and long-term averages.” 

Compounding the supply limits has been transportation issues and a scarcity of shipping containers. These are contributing to longer lead times with many forms of transportation experiencing delays, including ocean freight, air freight, trucking and rail. 
 
Cushman & Wakefield says soaring freight rates for 40-foot containers from Asia are compounding the cost increases for construction. On a Y-O-Y basis, spot rates from Asia to northern Europe jumped from $1,405 to $8,248, while from Asia to the East Coast of North America rates went from $2,709 to $6,604.  

“Ocean shipping services struggled to meet demand for imported goods from Asia,” the report states. “Many ports struggled to unload ships in a timely manner due to pandemic impacts on the port workforce.” 

Cushman & Wakefield’s bottom-line advice: “Given the volatility of the commodities markets, engage early, and as soon as possible, with a professional project management firm.”