Build a little extra contingency into your commercial real estate construction budget. Worries and uncertainty about the new strain of coronavirus (COVID-19) have scrambled projections for materials’ prices in 2020.
“There is a lot more uncertainty surrounding construction activity, costs and completion times,” says Ken Simonson, chief economist for the Associated General Contractors of America (AGC). “But actual impacts on projects under way have been minimal so far.”
If the global economy tips into recession, prices would normally fall for all kinds of items, including construction materials. But as quarantines shut down factories and cut supply chains around the world, some materials might become difficult or impossible to get—and that could drive prices up for those materials, even in a potential recession.
So far, the average prices for construction materials have stayed relatively level over the last six months or so. “There has not been a noticeable uptick, according to our members,” says Caitlin Sugrue Walter, vice president of research for the National Multifamily Housing Council.
Expected Price Hikes May Not Come
The prices multifamily developers pay for materials were expected to rise in 2020 for the first time since 2018. However, the global market for materials now seems much more volatile.
“The rapidly spreading coronavirus has driven down futures prices, very sharply in some cases,” says Simonson.
Overall, the cost of materials used to build multifamily housing had been expected to rise somewhat more than the rate of inflation overall in 2020, after rising just 0.7% in 2019, according to the ACG’s analysis of the Producer Price Indexes kept by the Bureau of the Labor Statistics. That’s a slight rise compared to the 4.2% increase in 2018, as investors and contractors worried about a series of ongoing disputes between the United States and its largest trading partners.
Resilient So Far
Multifamily developers and contractors have already become used to coping with disruptions in the markets for the materials they use the most—like steel or concrete. Trade wars had already burdened goods to and from China and other sources of materials with heavy tariffs.
“Because of the tariffs, builders have already identified alternative sources in Asia,” says Walter.
Other contractors have been able to manage volatile prices by buying in bulk. “We have been able to secure vast amounts of product right here in the U.S.,” says Marc Padgett, president of Summit Contracting Group, based in Jacksonville, Florida. “That has enabled Summit to work around tariffs and other challenges that occur when crossing borders by simply leveraging large amounts of buying power.”
So far, the average prices for construction materials have stayed relatively level over the last six months or so. "We are not seeing any ‘above average’ increases right now," say Padgett. “Lumber has jumped up here recently but it is tracking fairly close to the same timing that it jumps up every year. It will typically drop back sometime during the summer months.”
Some Materials May Become Harder to Get
Many materials, fixtures, appliances and other items used in both residential and commercial construction are either imported or contain parts and components from abroad, particularly China (at least indirectly) and Italy.
“Even when factories in affected countries re-open, they may not be able to get all of the inputs or labor they need,” says Simonson. “In addition, disruptions to internal transport, ship loading and unloading at U.S. ports will add to delivery delays, possibly for many months after the virus itself subsides.”