Construction Costs: Price Increases are Already Here

The much ballyhooed threats of price increases for construction materials are finally arriving. We’ve seen two price increases on steel in the last 4 weeks – and we’re being told to expect at least one more within a short period.

For example, steel studs for light gauge framing has gone up 10% in the last 30 days.

Other costs are going up as well:

• Copper pipe and wiring, rental equipment, diesel fuel and gasoline. 
• Lumber is up 3.4%.
• Ceramic tile 2.3%.
• Diesel 2.3%.
• Structural steel 2.1%. 
• Concrete, on the other hand, seems to be holding.

What’s happening? Well, several things appear to be finally coming home to roost:

• Steel prices are going up due to increase costs of iron ore as well as coking coal (affected by the floods in Australia of all things.)
• Crude oil is approaching $100 per barrel is affecting everything. From the cost of production to the cost of delivery. Get ready: $4.00 per gallon gasoline is going to be here before you know it, and some are predicting $5.00 per gallon sometime within the next 12 months.
• Rapid inflation is an ongoing and now an ever-looming threat. According to Reed Construction Data, the Construction Materials Price Index jumped by 9% in December. This represented a 5.4% increase from a year ago. It appears that everyone is predicting this for the near and foreseeable future. This inflation is being driven by (1) higher world demand, (2) raw materials costing more (see above); (3) delayed response by the suppliers to this stronger demand. We’ve talked about inventories being depleted – this is a reflection of that.

• Shrinking contractor margins which have pretty much absorbed construction cost increases for the last year are now coming to an end. The contractors (that remain) are now beginning to raise margins and demand better payment terms.

All this being said – now what? We’re not seeing many inquiries to look at new construction. We are beginning to see an increased interest for remodels and reconstruction. Older retail centers and commercial buildings in established neighborhoods are starting to get more interest. The cost of gasoline is going to start putting a lot of pressure on the cost to commute – from the far, far new neighborhoods (which there are fewer of currently) back to the established business centers.

While this may give you a negative impression, the reality is that even with these cost increases coming, we’re seeing an increase in interest from developers and property owners. We’re hearing optimism from the leasing agents. There is money and interest in rebuild/remodel projects. Interest and money for the newest center out in the newest mega neighborhood is out there but not at the feverish pitch we all grew to love. A fresh face on an older center in a close-in neighborhood to attract those cherished new tenants seems to be the focus right now.

Well, that’s what we’re seeing. How about you? I’d like to hear your opinion on this. Call me or email me. Let me know what you think.

Be Blessed.

Dave and the Sykes Team