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Construction Cost Spikes Wreak Havoc On Contractors, Developers

The cost of construction materials like lumber, steel, wood paneling, flooring, and joint- compound has collectively risen close to 13% over the last year, the largest annual spike since 2008.

The ripple effects for the real estate industry from such a sudden cost increase are vast: Projects are getting delayed and development timelines are lengthening, and developers are considering strategy shifts to avoid using the material most in-demand, lumber. Ultimately, the costs will lead to higher rents and higher prices for real estate.

Housing prices increased 12% in February alone

Know your business:

Lumber prices reached a record price of $1,400 per thousand board feet, rising 57% since January and more than 325% since last year. Last year, many lumber mills were forced to shutter during national lockdown measures and are struggling to catch up with demand. The pandemic caused a blockage in major U.S. ports, which has prevented suppliers from importing key construction materials. As well the deadly ice storm that hit Texas in February shuttered petroleum and petroleum-product processing plants denting the U.S. supply of plastics used in construction, as well as joint compound.

In March alone, year-over-year price changes ranged from a significant uptick to a seismic spike:

Diesel fuel rose 79.5%,

Lumber and plywood rose 62.9%,

Iron and steel scrap rose nearly 60%,

Copper scraps rose nearly 63%,

Copper and brass mill products rose 44.2%,

Prefabricated metal buildings jumped 21.8%

Plastic construction products rose 10.4%,

All statistics are according to the Bureau of Labor Statistics producer price index.

What this means for contractors is lower profit margins and for consumers higher prices down the line. Generally, prices for materials are pre-negotiated by general contractors with their subcontractors ahead of time, meaning large spikes will have dire consequences.

The decline in overall new commercial construction is helping to moderate some of the cost impacts at this point but that not the case for all markets.

For developers, this means they will need to keep a watchful eye on overall development cost. For consumers, the increased materials costs will mean they should expect to pay higher prices for the end product because of increased production costs as well as increased demand by the market.

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