Like most business sectors, the US construction industry has undergone significant change in the past 18 months as the fallout of the pandemic impacts supply chains, the availability of workers, and virtually every aspect of the typical construction project.
The changing landscape will affect developers, borrowers, lenders, investors, and homebuyers alike. However, a little insight from a construction consultant into the latest construction costs and pricing trends goes a long way in helping you prepare for the proposals ahead. Here’s everything you need to know.
Will construction costs go down in 2021?
Every construction consultant will confirm that the cost to build properties, such as apartment buildings, senior living facilities, and more, has increased since the start of the pandemic. The construction industry is still performing well as a whole, representing 4.4% of the national GDP. However, it is clear that the supply chain of both materials and personnel has been harmed by the tumultuous climate. It has consequently resulted in a sharp increase in construction costs.
Labor supply has become scarce since the breakout of COVID as infections and related precautions caused projects and production facilities to shut down or throttle back manpower. Later, COVID stimulus relief payments to unemployed workers suppressed the labor supply across many sectors including construction as many junior workers and contractors opted for the financial relief. Attracting and retaining construction workers has understandably become more costly.
Meanwhile, material costs have soared as an indirect result of the pandemic. Redacted production capacities at mills and factories have pinched the supply of lumber, copper, and other materials, thus driving prices to increase. When coupled with the volatile post-COVID “re-opening” of the industry, businesses across the construction sectors have struggled. Likewise, the stress caused for mills and factories had a knock-on effect.
Sadly, then, with the added costs and challenges facing businesses in the post-COVID phase of transition, neither material costs nor personnel (staffing and contractor recruitment) are likely to fall.
A Construction Consultant Perspective: Will construction costs go down in 2022?
As far as materials are concerned, there is good news and bad news for developers and investors. Material prices will continue to be influenced by supply and demand. Homeowners have been buying lumber and other raw materials throughout the pandemic to complete home upgrades, which has indirectly impacted the market for commercial property developments. With people now returning to work, the demand will slowly fall, which should be reflected by material pricing models.
However, Forbes warns that it won’t be until 2023 that material sales drop to ‘normal’ levels. It’s still a seller’s market in America while low mortgage rates still exist. As the tide turns in 2022, material prices should even out. So, while normality may not occur until 2023, there should be positive signs by Q3 of 2022.
The situation regarding workers will improve steadily, which should bring the cost to build properties, such as apartment complexes, senior living facilities, and more down. Once the financial relief packages offered by the Rescue Plan end, construction workers will need to get back to work. Moreover, the rollout of the vaccine will enable workforces across all industries to enjoy a return to their former statuses. As a construction consultant, it is advised that the two concepts of material costs falling (or at least not rising) and increased supply of workers should have a positive influence on construction costs throughout next year.
A Construction Consultant Perspective: How much have commercial construction costs increased in 2021?
There has been a major increase in raw material costs with lumber, copper, steel, precast concrete, aluminum, and plastic construction products. In the case of lumber, construction material costs grew by over 50% within a 12-month period. While this naturally does not represent a 50% increase in overall project costs, the impacts are significant and should not be overlooked by any developer or party with a financial interest.
While residential construction projects have been hit by the pandemic, particularly in relation to supply and demand, commercial construction costs are where the biggest impacts are felt. Not least when looking at the cost to build an apartment complex and multi-unit buildings.
Construction activity has risen at a rapid pace as normality returns to life and the industry. In fact, the AGC reported a 12.8% increase in input costs for general contracts between 2020 and 2021. The Daily Construction Journal states that insulation materials have increased by up to 20% while reinforcements have risen 30%. While some of the other project factors are unaffected, it’s not hard to see how commercial developers like Joe Cordaro have seen project bids increase by over 10% in just three months. His example is far from an anomaly and is a fair reflection of the changing landscape seen throughout 2021.
At a time where people have been accustomed to accepting a new norm, this has been another example for commercial developers to deal with.
A Construction Consultant Perspective: How much do construction costs increase per year?
Unless you are a construction consultant yourself, the above statistics and trends may cause a little apprehension ahead of starting your next commercial project. However, the circumstances probably aren’t as bad as you fear. Firstly, the 2022 forecasts suggest that we are slowly leaving the worst behind. With a sense of normality returning, the supply of materials and builders should align closer to the demand levels. Secondly, you have to take in the natural rate of inflation.
The facts show that raw material costs have increased by 117% since 2000, which is a rate of 6% per year. Given that this figure is greater than general inflation costs, the need for organized financial planning is clear. The average builder wage is (excluding the impact of the pandemic) around $17.50. This has grown steadily over the past two decades too, which is another factor that must be considered prior to the project’s start.
It is a particularly important issue when negotiating new construction contracts to minimize exposure, particularly with the uncertain material prices in mind. When building a contingency fund, holding back 5% of the anticipated project fund is advised.
The construction industry has been fortunate since work continued despite the pandemic. Nonetheless, the strains caused by the situation, as well as general trends, have seen the average cost to build apartment complex properties, senior living facilities, and related projects, increase by a significant rate.
Ultimately it shouldn’t stop developers, lenders, borrowers, or investors from giving the green light on their proposals. But it is important to invest in careful preparations underpinned by relevant data. Working with a construction consultant is the perfect way to make it happen.
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