Demand for new construction remains at record levels. Economic headwinds, however, are an obstacle, to say the least.
And developers? They’re working overtime to manage commodity and materials pricing, with input shortages countering their every move.
How does the commodities landscape impact industrial construction going into mid-year? A recent newsletter from Avison Young breaks it down.
Rising construction costs continue to be a challenge. Last year experienced record price increases for steel, lumber and aluminum, to name a few, but a surge in demand “allowed the market to absorb and pass through many of the added costs.”
Industrial is still breaking records. But inflation persists, and economic effects from Russia-Ukraine are not helping. And that’s not all. Cash has become the common means of exchange and price quotes can expire in days, according to Avison Young, leaving many to question if the rapid pace of deliveries is sustainable against rising costs.
It was also said that the cost of non-residential materials increased by 21% year-over-year in February 2022. Prices for all categories, including aluminum and copper—supplied largely by Russia—surged by double-digit rates year-over-year. The war is expected to drive these costs even higher.
In a Q4 2021 Commodity Report by Linesight cited by Avison Young, it was found that these higher costs slowed output to $1.63 trillion last year, which was lower than projections. Total construction spending across sectors is predicted to increase 4.5% to $1.701 trillion in 2022, but if rising prices continue to slow the construction process, those figures could be scaled back.
Diesel fuel costs have increased by 45.2% since October 2020 and, as we know, spiked again because of Russia-Ukraine. Avison Young says this is “worsening pressures on shipping costs for companies facing international supply chain disruptions and continued constraints from driver shortages.”
How’s the pipeline?
There was about 500 million square feet of industrial product at the end of last year. This sounds like a high number, but not nearly enough to meet demand.
It was found that there were 77 properties completed throughout 2021, totaling 17.4 million square feet. Build-to-suit development, pre-leasing and post spec leasing activity have already reached an occupancy rate of nearly 90%.
The impact of supply and demand imbalance has been significant. Because of this, rent prices will continue to increase, and equilibrium is being thrown, yet again, by material pricing and scarcity.