Forget About Construction Costs: Supply Availability is a Problem
Anyone paying attention to headlines this past year understands that inflation continues exerting a toll on commercial real estate construction efforts. For example, CBRE’s Construction Cost Index forecast a 14.1% year-over-year increase in costs “as labor and material costs continue to rise.” The index also forecast that increases should stabilize within the 2%-4% range in 2023 and 2024, in line with historical averages.
Increasing expenses are a concern. But JLL pointed out that a greater concern is a lack of materials. Likening the situation to a game of Whack-a-Mole, a recent JLL article indicated that the hidden “moles” are material shortages, like steel, timber – and sand. Sand “is needed for a range of materials, from concrete to flat glass,” the article said.
“Just getting your hand on stuff is almost more difficult than paying for it,” said Andrew Volz, JLL Project and Development Services Americas research lead, in the article.
The growing material shortages, combined with ongoing demand, continues impacting the construction industry, even as prices on some materials (think lumber) stabilize. The scarcity is not only impacting how much a project costs, but how a project is approached.
For example, materials purchasing has typically been the final step of the “design-bid-build” process. But the method is changing.
“Project managers are sitting in on the design phase with engineers, and once they have a general idea of spec, they are placing orders for materials,” Volz said. Even so, by the time the design process is complete, those materials are still on order, six months later.
Nor is the situation likely to change any time soon, the article noted. Rebuilding Ukraine will require materials and labor. Additionally, public works projects resulting from $1 trillion Infrastructure Investment and Jobs Act of 2021 could also require a majority of the steel and lumber produced in the United States, Volz said.
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