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Report: ‘Staggering’ Construction Costs Continue to Impact CRE Industry

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By Catherine Sweeney

The COVID-19 pandemic has had a major impact on the commercial real estate market, and while economies continue to reopen, one lingering ramification is the cost of construction. According to a recent report from Newmark, many sectors are continuing to struggle with the high cost of construction as a result of lacking materials, lack of labor and supply-chain issues caused by economic shutdowns. 

“It’s really having a tangible impact on the commercial real estate market,” Amy Binstein, a research manager with Newmark, said. “There’s a level of uncertainty everywhere, but then this adds to it.”

Throughout the commercial real estate industry, supply-chain imbalances as well as material shortages have led to increased pricing. According to Binstein, material shortages are a direct cause of factories closing down in the early months of the COVID-19 pandemic. However, as economies began to reopen and construction was allowed to continue, demand surged, causing a backlog in material and labor.

These shortages, along with the rise in demand, have led to a record high costs for materials. According to the report, over the past year, material costs have increased by 23.8 percent, the largest annual increase since the statistic was first tracked by the National Bureau of Labor Statistics in 1947. The cost of steel alone has increased by approximately 160 percent since August, while timber prices increased 320 percent since March of 2020.

While impacting every sector within the commercial real estate industry, Newmark suggests the industrial and residential sectors have struggled the most, as other sectors closed doors to meet federal and state health guidelines. 

“I think that [the office market] really hit pause on everything. Leases were not getting done…Retail was hit very hard, but it’s starting to come back. The economic growth that the U.S. is seeing is record breaking,” Binstein said. 

With more consumers turning to e-commerce amid the COVID-19 pandemic, the U.S. saw an increased demand for warehouse and distribution space. In the first quarter of 2021, demand in the industrial sector outpaced supply for the first time since the second quarter of 2019. According to a first quarter industrial market report from Cushman & Wakefield, 82.3 million square feet was absorbed in the U.S. In the first quarter of 2020, only 46.2 million square feet of warehouse and distribution space was absorbed, Cushman & Wakefield reported. 

The housing market also was hit hard from the surge in material prices, according to Newmark. Homes in the U.S. increased by an average of $35,000 since the start of the pandemic, with a shortage of 344,000 positions in the construction industry, the National Association of Home Builders reported. 

“I don’t think it’s just a pricing issue. I think it’s an all around issue. The lead times are longer, the return times are longer. On the residential side, the prices are staggering…and in the industrial world, that longer lead time is forcing people to lease existing space for either longer or a shorter period of time as a holdover until they can get into their new spaces, and that has ramifications across the board,” Binstein said. 

“We’re seeing rents, or the rents that landlords are actually signing the deals at, are higher right now than some of the asking rates are and that’s kind of a result I think of some of this, either a backlog of unfinished construction or the lead times being double what they used to be.”

However, Newmark suggests that increases in cost will not have long lasting effects on the commercial real estate industry. As economies continue to open, the report predicts high prices will eventually return to normal. 

“The pricing has kind of hit its plateau and will start coming down now particularly into the fall. We’re back up and producing, factories have reopened…The supply chain issues with stuff coming in and being clogged up and not being distributed, I think that is something we’re going to see over the next 12 months or so as both the logistics work themselves out and companies expand into more warehouses and have more room to stock their inventory,” Binstein said.