Commercial construction costs are going up, what does it mean for developers?
2020 Has been a wild year. We’ve seen massive market fluctuations across the board and it’s been harder than ever to predict what will happen next. One trend that seems to be continuing from previous years is the rise in commercial construction prices. 2019 Saw a roughly 2% increase in commercial construction prices, and 2020 is trending upward as well. The main reason is shortages of labor and materials, but what else is affecting commercial construction this year?
Demand is going up
Essentially, the increase in demand is driving up costs across the board. This boils down to basic economics – as demand rises, costs increase appropriately as the market finds its new equilibrium. Demand has especially driven up the prices of materials. Nails and steel made products, and other key pieces of construction equipment has gone up by about 4% in the last year. Lumber has also increased in price commensurately. The increases in prices have made it harder for construction contractors to have profitable margins, and of course this becomes a burden for businesses wishing to build as well.
Materials prices are increasing
Prices of materials have been increasing since the mid 2010s, and don’t seem to be relenting any time soon. In 2018 prices were about 10% higher than they were in 2017 for materials. Crude oil went up by almost 50%, iron and steel was up 14%, and lumber was up by 23%. That was two years ago. Those costs have continued to rise, but not as quickly. The costs are still rising faster than most of the industry can keep up with.
2008 Saw the famous Great Recession. During this period of economic stagnation, many skilled construction workers started to look at careers in other fields. The fallout of this industry change is still felt today, as construction demand has reached pre-recession levels, but the workers simply aren’t there.
Another factor in the labor shortage is the US perception of blue collar work. What was once viewed as a profitable industry is now not favored by college graduates. Less people are going into construction, which prevents the amount of workers from matching demand. This has been a gradual cultural shift in the United States over second half of the last century, and no real solution is in site.
No doubt the defining aspect of 2020 for most Americans is the ongoing COVID-19 pandemic. Fortunately, most construction is outdoors, which seems to be safer for working, but the disease’s effects are still being felt. COVID related lockdowns, shutdowns, and slowdowns are only making materials harder to get and more rare, thus driving up prices even further.
How do these price changes effect the market?
So the changes in construction pricing boil down to basic economics: rising demand and lower supply mean higher prices. That much is simple. But in what ways are consumers effected? Besides dealing with higher prices from commercial contractors, there are a few sings in the market that are telling.
More importantly, what can your business do to offset these increased costs?
Turn to technology
One of the best ways to offset increased construction costs is to use more technology. The very nature of technology is to automate processes that were once manpower intensive. Although historically, this has hurt workers, in a market with a labor shortage, it’s extremely beneficial.
BIM is one of the many ways to offset your costs. BIM stands for Building Information Modeling. It is the process of generating a digital representation of a construction project. This enables architects, engineers, designers, and developers to all collaborate on said project without physically having to be there. A project can be 3D designed down to the most minute details without ever having a shovel hit the soil. BIM software can also be created with all kinds of metadata, for example, materials costs can be factored into the design. Time/labor can also be factored into the BIM data, so a single 3d model can give a builder a great idea of how much time, money, and labor a construction project will require from start to finish. BIM also helps negate market fluctuations, as super accurate building predictions can be made accounting for costs and time.
The rise of personal drones has been one of the defining aspects of the 21st century. Drones can provide numerous benefits to a construction project. They can inspect difficult to reach places, scout out terrain for development, and much more. What once took days of skilled labor can now be accomplished in minutes with a drone.
Modular construction is the process of building off-site, under controlled circumstances. The finished project is then moved to the construction site. This strategy can help control the variable costs that are inevitable associated with construction. Modular construction is faster, cheaper, and more environmentally friendly than traditional building.
How can you build efficiently in this current climate?
If you are considering a construction project, there are a few things you can do to make sure your costs don’t spiral out of control.
- Use a trusted commercial contractor. Employ a contractor who is clear on costs, labor, and has the know how/experience to get your job done.
- Have a clear idea of what you need for your project. Go into the project with clear goals: when will you start to see returns on your investment? How long will the project take? What materials will be needed? What is the project completion timeline?
If you’re struggling to make your project a reality, Reliable Commercial can help. With over 35 years of experience, and a team of over 200, no project is beyond our reach. We provide a full range of construction services, and we stay on the cutting edge of efficient building. Contact us today and find out why we are one of the most trusted commercial contractors in the Texas area.