Construction-cost spikes may prompt some developers to consider delaying, canceling projects

Construction-cost spikes may prompt some developers to consider delaying, canceling projects

 
Article Originally Posted By Phoenix Business Journal On October 15, 2021
 
 

There's no question construction material shortages and subsequent price increases have created new headwinds for real estate projects in 2021.

But just how much are spikes in steel prices or weeks-long delays in delivery timelines affecting the industry? In some cases, and within specific sectors, quite a bit.

A recent report by Jones Lang Lasalle Inc. (NYSE: JLL) found, through August, average final construction costs for a commercial project had increased 4.5%. Total cost growth by year-end is likely to surpass 6% and, in 2022, cost increases between 4% to 7% are projected.

Henry D'Esposito, JLL's construction research manager, said pent-up demand after projects were delayed in 2020 has generally overpowered hesitation developers may've had over cost or scheduling impacts to their projects. Projects today are sometimes slower to kick off but it doesn't change real demand, D'Esposito said.

But once the pandemic backlog catches up, and if construction costs continue to escalate at, say, double-digit percentage increases, projects could start to not pencil out.

"That may begin to become more of an issue going into next year," D'Esposito said.

One of the biggest challenges that has faced general contractors and, as a result, developers and tenants has been trying to predict which material is facing a shortage or pricing issue at any given time. For months in the first half of 2021, lumber was seeing price surges. More recently, pricing has moderated for lumber, but steel has become a bigger headache.