A Construction Boom is Coming Despite Skyrocketing Material Prices
While rising costs have canceled some construction projects, CBRE says 2021 will still see a boom in new commercial real estate development.
This is not to discount surging prices, which have resulted in domestic steel and lumber prices tripling since last year, according to SteelBenchmarker and TradingEconomics.
Things have moderated some in May. After peaking at $1,686 per thousand board feet on May 7, lumber prices dropped by 23% to $1,306 on May 19. However, CBRE says they are still up by 260% from late last year.
The pandemic thwarted some of the steel and lumber supply last year when it temporarily closed some mills. With restrictions easing and commercial real estate demand increasing, mills were unable to keep up with demand.
In response, some developers have canceled projects. Others have increased their construction budgets by as much as 20%.
“Material cost growth is expected to outpace all other elements of construction cost increases this year,” says Henry D’Esposito, JLL’s senior research analyst, construction, in a recent post. “Some developers who were already taking a wait-and-see approach to projects during the pandemic are hesitant to jump back in for fear of buying at the top of the market.”
Even with these obstacles, CBRE sees a boom in commercial construction in 2021. Citing Dodge Data & Analytics, it says projects costing more than $50 million each will increase by at least 40% year-over-year for total completions of 430 million square feet. Multifamily projects make up most of these projected projects at around 45% or 194 million square feet. Warehouse projects are following at 36% or 158 million square feet. Office projects constitute 17% of the pipeline, while retail projects are just under 2%.
Residential development spending is at 95% of commercial real estate development, according to CBRE. By comparison, in 2009, it was just 36% of commercial spending. “With thriving single-family home markets across the US seeing even more new development and permit authorizations in 2021 at a 10-year high, this trend shows no sign of reversing,” according to CBRE.
However, lumber prices are also causing issues for single-family builders. The National Association of Home Builders has said that lumber prices are triple what they were in April 2020, increasing average single-family home construction by nearly $36,000. With these cost pressures squeezing builders, the NAHB took aim at the US Commerce Department’s desire to double lumber tariffs on Canadian lumber shipments into the US from 9% to 18.32% with a statement on its website.
“At a time when soaring lumber prices have added nearly $36,000 to the price of a new home and priced millions of middle-class households out of the housing market, the Biden administration’s preliminary finding on Friday to double the tariffs on Canadian lumber shipments into the US shows the White House does not care about the plight of American home buyers and renters who have been forced to pay much higher costs for housing,” NAHB Chairman Chuck Fowke said in a statement on the site.