At one of several multifamily projects under construction, at 1000 North Ave. in Plainfield, N.J., Deugen strategically phased the framing and roughing of the building, sourcing materials in earlier phases of the project to avoid cost increases and lead times, helping maintain the budget and schedule.
By Kristian Cichon, ME, BE, Director of Acquisitions, and Meghan Crehan, Marketing Director
Deugen Development
As the United States tries to claw its way out of the COVID-19 pandemic, a long-discussed concern in the market has finally started to come to fruition and affect the economy globally. A disrupted supply chain, labor shortages and record government stimulus has begun to drive prices higher leaving nearly all industries uncertain of what the future holds. For the real estate and construction industry, an elevated inflation rate and the setbacks from the pandemic have resulted in what some call a perfect storm that is showing to have a magnified impact on the development costs and timelines of new projects.
The United States’ year-over-year inflation rate as of October 2021 stands at 6.2 percent and, according to JLL, construction material costs over the course of the year were up 23.1 percent, almost four times the market benchmark. Major construction materials such as steel mill products were up 123 percent year over year. Plastics, gypsum, copper and aluminum, all key elements in a project, also ranged from 16 to 45 percent increases. This type of volatility in materials has been unprecedented and has led to hesitations in scheduling in order to “time the market.”
Attracting labor has also proved a challenge with available talent demanding higher wages and nearly 350,000 unfilled positions nationwide. The expectation is that this trend will continue into 2022 with roughly 3 to 6 percent growth in wages. The job market also showed signs of volatility with new variants adding more uncertainty to an industry with a below average vaccination rate. The construction industry stands at 51 percent vaccinated and appeared to take a bigger hit with the emergence of the Delta variant and could potentially see another setback with the new Omicron variant. Furthermore, vaccine mandates have created additional barriers within the industry. OSHA recently rolled out mandates for companies with 100 or more employees, leading vaccine-hesitant workers to find employment with smaller companies and larger companies scrambling to finish projects. General contractors have also faced the extra hurdles facing mandates from project owners such as schools and hospitals, who often have more stringent policies in place.
Among these risks, the bright spot for the construction industry has been the accelerated recovery compared to the overall U.S. economy. Pent-up demand for new construction in the residential and industrial sectors as a result of the pandemic has outpaced the recovery levels of other major industries. New hospitality, office and health care demand has yet to reach pre-pandemic levels but still continues to rise with signs of resilience and adaptation to the “new normal” post-COVID. We have seen projects that were put on hold in 2019 finally picking back up and getting back on track. Developers also appear optimistic with a record amount of projects entering a planning phase, signaling that the one- to three-year outlook is expecting stabilization. Contractors who had to navigate longer lead times and tighter margins in 2021 will have the chance moving forward to instill contingency measures in the planning and estimating phases that mitigates risk. Measures that include a more thorough preconstruction phase, preordering materials with lead times and adding escalation clauses will help eliminate schedule uncertainties and provide a layer of protection when it comes to wild price swings.
The overall outlook for 2022 comes with several uncertainties amid a volatile U.S. economy. Contractors and developers alike will deal with rising costs, wages and scarce employment but the hope remains that the demand for new projects (and the financing for them) will continue to maintain or exceed the pace. Overall, construction and development spending should continue to see improvement in 2022, with about 3 percent growth in the forecast.
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