CONTACT US
Share: Share on Facebook Share on Twitter Share on LinkedIn I recommend visiting cushmanwakefield.com to read:%0A%0A {0} %0A%0A {1}
062021ConstructionCommoditieshero750x480 062021ConstructionCommoditiesherolarge

Insights

Commodities Volatility - Impacts on CRE & Construction

Increasing demand for construction materials, limited product inventory and supply chain disruptions are driving up construction costs and resulting in longer lead times for obtaining materials

Pricing and supply chains for commodities are incredibly fluid coming out of the pandemic. Increasing demand for construction materials, limited product inventory and supply chain disruptions are driving up construction costs and resulting in longer lead times for obtaining materials. 

The following article and report provide an overview of commodity volatility and its impacts on construction, and why it’s important to engage a project manager early in the construction planning process. Our Project & Development Services professionals provide insights into alternative construction solutions and how to prepare for potential delays.

What’s causing price increases

Commodity prices are skyrocketing as corporate and consumer demand returns and supply struggles to catch up. In Q2 2021, lumber prices are up 101% and copper prices are up 77% from a year ago. Diesel fuel prices have more than doubled (+148% YoY) and steel prices are up over 30%. 

During the pandemic, price increases were largely absorbed by general contractors who were struggling to win the limited number of projects in the market. But now that the economy is reopening, project opportunities are growing and causing contractors to pass the cost increases directly through to clients, impacting both occupiers and investors alike.

commodities_webpage-charts1_sept_1380x764

While demand has increased during the pandemic, the supply side has not been able to ramp back up as quickly. When the U.S. economy slowed down in March and April of 2020, capacity utilization also dropped significantly. Mills, processing plants and manufacturing operations slowed and/or stopped due to health concerns, supply chain freezes and/or lack of demand. Commodities critical to real estate construction have seen substantial increases over the past year: 

  • Diesel fuel: +148% 
  • Lumber: +101% 
  • Copper: +77% 
  • Steel: +30% 

March 2021 was the first month where capacity utilization for all three of these commodities was as high as it had been in February 2020. Capacity remains below prior expansion peak levels and long-term averages.

092021ConstructionCommoditiesGraph1_1380x740

Transportation issues and a scarcity of shipping containers are contributing to longer lead times with many forms of transportation experiencing delays (some intermittently), including ocean freight, air freight, trucking and rail.

Soaring freight rates for 40-foot containers from Asia are compounding the cost increases for construction. Year-over-year, spot rates from Asia to northern Europe jumped from $1,405 to $8,248 and from Asia to the east coast of North America rates went from $2,709 to $6,604. Ocean shipping services struggled to meet demand for imported goods from Asia. Many ports struggled to unload ships in a timely manner due to pandemic impacts on the port workforce.

Download the report to learn more

How to mitigate construction risk in a volatile market

Commodities do not discriminate by property types (office, industrial, retail or multi-family). Risk reduction/mitigation may be slightly different based on the specific property type, yet these considerations should be evaluated for all project types:

ENGAGE A PROJECT MANAGER EARLY

Given the volatility of the commodities markets, engage early, and as soon as possible, with a professional project management firm that will provide the following value-added services:

  • Specific advice based on market conditions for the anticipated type of construction;
  • Valuable industry expertise with respect to budgeting, scheduling, procurement strategies, suppliers and effective design scope; and
  • Procurement leverage advantage with contractors, subcontractors and suppliers based on their buying activity within a market and/or larger geographic area.

PREPARE FOR ALTERNATIVE SOLUTIONS & EXTENDED SCHEDULES

The Project Team should create and vet all possible project solutions including developing an accurate customized Master Project Budget and Master Schedule, as well as conducting value engineering studies.

  • Consider alternatives to traditional in-demand building materials such as precast concrete panels, PEX plumbing, lumber, CMU, concrete, or steel depending on the material availability, cost and local construction capabilities/techniques.
  • Specify locally produced materials and suppliers with optimal inventory, location and transportation cost.
  • Pre-purchase materials such as steel joists for industrial buildings and steel studs for interior tenant improvement buildouts.
  • Evaluate the use of prefabrication and/or modular construction to expedite the off-site construction, reduce waste and improve field labor productivity.

Commodity risk mitigation examples by property type

Office

  • For high-rise office construction, owners should consider a concrete structure in lieu of a steel structure.
  • Low- and mid-rise construction may benefit from modular construction to reduce waste and improve labor efficiency.
  • Procurement process for interior materials will need to start as early as possible to mitigate supply chain disruptions/delays.

Industrial

  • Design to maximize bay width to minimize steel joist infrastructure.
  • Maximize tilt-up and/or precast construction to reduce structural steel.
  • Consider prefabrication wherever possible.
  • Start the procurement of steel joists as early as possible to mitigate supply chain disruptions or delays.

Retail

  • Embrace prefabrication wherever possible. Modularize key building elements—up to the entire structure, if possible—via a centralized hub to minimize transportation costs of raw materials.
  • Maximize tilt-up and/or precast construction to reduce structural steel.
  • Employ “lean construction” principles, particularly just-in-time delivery, to reduce raw materials stored on site.

Multifamily

  • Low- and mid-rise multifamily may benefit from modular construction.
  • Consider alternatives to copper piping, such as PEX plumbing, where permitted by code.
  • Consider concrete structure in lieu of a steel structure.
  • Fully embrace prefabrication for key building components.
  • Source locally produced finishes to minimize transportation costs.

Impact on commercial real estate market dynamics

  • Increased material costs drive replacement costs higher, which supports the value of existing assets.
  • The faster rents are growing now, the greater the margin of safety developers have to absorb the cost of higher materials prices and supply chain uncertainty.
  • From the occupier developer/build-to-suit perspective, the question is how confident one can be that functional space can be secured in the right locations in order to meet projected needs. The greater level of product specificity will tend to mean greater ability to absorb development cost increases because existing assets are less substitutable.
  • Supply-demand imbalances will likely keep cost growth rates high, but improvements in supply chains should moderate increases.

With these points in mind, now is the time to place value on your partnerships. Developing stronger partnerships earlier on in the construction or procurement process helps diminish risks while providing guidance on how to navigate the shortages and inflation of commodities in the construction industry. Cushman and Wakefield's Project and Development Services team recommends bringing in a contractor at the beginning of your project to advise on reasonable timelines, lock in material pricing, and help with your overall procurement process.

Download Full Report to Learn More

Related Industries & Specialties

Retail Mall
Insights

Main Streets Across the World 2024

Discover Cushman & Wakefield’s annual analysis of the world’s leading retail streets, with a special focus on France and its commercial real estate market.
Christian Dubois • 11/20/2024
CommoditiesShortagesandInflationWebCard
Article • Economy

Commodities, Shortages and Inflation: What’s the Impact on Industrial Real Estate?

In this article, we examine the current commodities market and how it may impact industrial real estate going forward.
Brian Ungles • 5/14/2021

Related Industries & Services

Retail Mall
Insights

Main Streets Across the World 2024

Discover Cushman & Wakefield’s annual analysis of the world’s leading retail streets, with a special focus on France and its commercial real estate market.
Christian Dubois • 11/20/2024
Project & Development Services
Our Project & Development advisors bring a long-term perspective that minimizes risk and drives value throughout design and construction.
Learn More
Global Occupier Services

Future-proof your portfolio. Create inspiring on-site experiences. Unlock the potential of your real estate.

Learn More

Interested in learning more?

Get in touch and we can assist with any additional information you need.

With your permission we and our partners would like to use cookies in order to access and record information and process personal data, such as unique identifiers and standard information sent by a device to ensure our website performs as expected, to develop and improve our products, and for advertising and insight purposes.

Alternatively click on More Options and select your preferences before providing or refusing consent. Some processing of your personal data may not require your consent, but you have a right to object to such processing.

You can change your preferences at any time by returning to this site or clicking on  Cookies

More Options
Agree and Close
These cookies ensure that our website performs as expected,for example website traffic load is balanced across our servers to prevent our website from crashing during particularly high usage.
These cookies allow our website to remember choices you make (such as your user name, language or the region you are in) and provide enhanced features. These cookies do not gather any information about you that could be used for advertising or remember where you have been on the internet.
These cookies allow us to work with our marketing partners to understand which ads or links you have clicked on before arriving on our website or to help us make our advertising more relevant to you.
Agree All
Reject All
SAVE SETTINGS