Without a doubt, 2020 has been a tumultuous year. The whole planet has gone from crisis to crisis, with the defining emergency being the COVID-19 pandemic. This is especially true in the United States, with over 5 million current cases. For many, life has been completely upended, and will not return to pre-pandemic normalcy for a year or more.
Before the coronavirus epidemic, construction costs were already on the rise. It seems that the virus has only exacerbated rising costs. In general, the pandemic has affected the already rising cost of construction by making it worse.
Why Were Construction Prices Rising Before COVID-19?
Labor Costs Have Increased
Construction prices have been on an upward trend since the 1960s. Evidence of this increase in price exists across the board, and has hit home buyers especially hard. According to the US Census consumer price index for new single-family houses, prices have been going up for generations. As the post-WWII generation sent more young people to college, more people were moving into white collar industries. This created a shortage of skilled labor that still exists today.
Additionally, construction contractors often require skilled labor to accomplish more difficult and/or complex jobs. Without skilled and experienced builders, it is impossible to accept certain contracts. Commercial contractors have one reliable way to get the best skilled labor: higher salary.
Construction Materials Costs Have Increased
General construction materials prices have been on a steady rise since the early 2000s. Specific construction materials, like lumber, concrete, and gypsum have also seen a n increase. Goods prices used for residential construction have fallen only 3 times since 2000.
Materials have gone up in price for several reasons. One is the new demand from emerging markets. Countries like India and China, with their high GDP and large populations, are building at enormous rates. China uses 60% of the world’s cement. According to this Forbes Article, between 2011 and 2013, China used 6.6 gigatons of concrete. That was more than the US used in the entire 20th century. With demand of that nature coming from two of the world’s most populous nations, it’s no wonder that materials prices are getting more competitive.
Steel has been another construction material hit hard by the increased demand. A collapse of several large Chinese steel mills in the mid 2010s led to a further decrease in steel’s availability.
Building codes and regulations in the US are also becoming more strict. In order for buildings to meet these requirements, they need to use more specialized materials. Sprinkler systems, emergency electrical wiring, and ramps for ADA accessibility require things like concrete, steel, aluminum, copper, gypsum, and more.
COVID-19-Related Construction Price Changes
The novel coronavirus strain has made an already unpredictable year even worse. COVID-19 will amplify existing trends and start a few of its own. Expect a recovery starting in early 2021 that makes construction costs go higher.
Labor Costs Will Continue To Go Up, With Some Turbulence
They may even go up faster. Thanks to-newly jittery workers who are afraid of catching the virus and bringing it home to their families, it is often harder to find labor than before. Fortunately, it is much harder to contract the virus for those who work outside. Nonetheless, builders are much less confident, and many companies have taken measures for their safety. There are also mental health considerations for contractors, as virus-based anxiety is high. With some new buildings being canceled due to investor anxiety, decrease in demand is causing a slight decrease in costs. As the world recovers and construction resumes, expect costs to continue upward.
Material Costs Will Increase And The Market Will Become More Unstable
The global supply chain took a huge hit from coronavirus. Lockdowns and quarantine measures in various nations at different times can cause months of delays. Lockdowns in Chinese factories could halt steel production. A mining stoppage in Australia can seriously stymie the flow of rare minerals.
Nearly 30% of all US buildings come from China. If China is going to see sporadic lockdowns, then the US could temporarily lose access to large swaths of material.
General uncertainty has been a huge decider in the cancellation of new buildings. Several areas of the market are most affected by uncertainty. These all effect the market, but in specific and notable ways.
Millions have lost their jobs thanks to the virus. As unemployment numbers go up, so do delinquencies on payments. It is harder for developers and owners make a accurate predictions about when their building’s costs will be recouped.
Another huge factor is working from home. Some businesses are making remote positions permanent, thus the building of new offices isn’t required at all. Along with workplaces goes parking facilities and other commercial facilities for workers.
Another effect of lower employment is lower tax revenue. This means that local governments will have less money for construction on educational buildings and infrastructure. The lack of demand currently helps keep prices from rising too quickly. However the market is on a general trend for construction to be more expensive.
Quarantines And Lockdowns
Thanks to the new normal of sporadic lockdowns, materials will be harder to reliably source. This leads to anxiety among investors who may have to pay for lockdown-related delays. Lenders face a similar problem of not knowing when a quarantine-related delay might halt payments for a time.
Travel bans also take their toll. Getting skilled labor from another country, or even state, could be difficult. The bans might also slow or stop the global shipping of goods, further increasing materials prices.
What’s The Conclusion?
Lower demand and high materials costs have led construction prices in June 2020 to fall for the first time since 2010. Don’t assume it will last. Construction costs are still on an overall upward trend. Prices as a whole for the industry are expected to go up by about 4% by 2021.
If you are looking to build, but want to keep your costs reasonable, then get in contact with us. Reliable Commercial is a full-service construction company with over 35 years of experience. We will be happy to consult regarding costs, building times, materials, and more.