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Construction is Expensive. But Relief Could Be in Sight
“Construction Market Analysis: Understanding the Impact of Construction and Material Lead Times on Your Projects” doesn’t sugarcoat what’s going on in the construction industry. Released by Unispace, the report pointed out that development is expensive these days. High transportation costs and supply chain issues are generating uncertainties. Construction firms are attempting to beat the labor shortage by offering higher wages. Inflation keeps driving up material costs.
Adding insult to injury are the taxes. According to the report, the U.S. currently carries 25% tariffs on steel imports against many nations. Additionally, the U.S. Commerce Department increased import duties on Canadian softwood to an average of 17.9%. All of this – and more – means that the United States has the dubious honor of being among the top five most expensive countries in the world to build.
Yet there could be some relief coming sooner rather than later. Unispace Principal Richard Wilson told Connect CRE that some factors are in play that could reduce expenses over the next few months. For one thing, the increasing cost of borrowing has resulted in a construction slowdown in the residential sector. “The net effect of that will mean a deceleration on construction costs,” said Wilson, who is one of the report’s authors. Fuel costs are also declining, while a stronger dollar means a reduction in cost of imported materials, he noted.
While residential construction is slowing, non-residential building is not. The Investment and Jobs Act will ramp up construction demand, as will demand for more space in the life sciences industry. Wilson predicted that demand for office space could also increase, especially as COVID-19 restrictions continue to loosen. “Finally, corporate margins are still strong, allowing for continued construction activity,” Wilson commented.
Nor will a potential economic downturn grind everything to a halt. While a recession might lead to a slowdown, “backlog metrics remain positive,” Wilson said. “Construction businesses with a strong backlog of contract revenue will likely be able to weather the slowdown.”
Meanwhile, the report suggests the following strategies to minimize risk:
- Pinpoint materials with volatile prices and longest lead times as early as possible and buy them; it might be a good idea to buy materials for many projects if possible
- Engage preconstruction and construction teams early in the overall design-build process, even as early as the due diligence phase of a project
- Encourage subcontractors early on to identify materials that could be impacted by supply chain issues and determine comparable materials that might have higher availability and less pricing volatility
- ◦Development
- ◦Economy
