After a turbulent 2020, 2021 is promising to be a year of rebuilding and growth in the commercial real estate industry. Confidence is rising in the market and companies are eager to return to normalcy, challenging the construction industry to meet demands after a year of idled progress. The good news is that there are reasons to be optimistic for the future of construction, but not without lingering questions. How fast are costs escalating? What sectors are hot? Here’s what you can expect in the marketplace in Q2 in a quick and easy read.
What’s going on with costs?
This is quite literally the million-dollar question. Materials and labor notoriously drive rising costs in construction. Here are current factors to look out for that could affect your project.
The steel shortage is causing 4-6 week delays and elevated costs. These are the reasons why steel prices are not likely to decrease again:
Domestic steel mills are slow to ramp up production to keep up with the dramatic turnaround in business after record-breaking pandemic lows—even as factories run 7 days a week and with increased headcounts.
Scrap and iron ore prices are on the rise, impacting steel producers’ bottom line.
Tariffs enacted during the Trump Administration on foreign steel are still enforced, which means steel prices are not expected to decrease any time soon. The domestic steel industry is urging the Biden Administration to keep the tariffs in place, fearing losses to less expensive foreign steel.
This has bigger impacts on residential, but commercial construction should also be prepared for potential increases in cost and delays. A perfect storm of events contributed to this shortage:
A backlog was created when mills shut down following the halt in construction in some states.
COVID safety protocols stalled the productivity of lumber mills production line.
The shelter in place mandates ignited a residential remodeling boom that used up much of the existing lumber supply, during a time when production was low.
The massive wildfires of 2020 wiped out millions of acres of timberland.
Subcontractor Pricing Changes
Throughout the pandemic, the market experienced lower pricing without actual reductions in material costs or labor wages. Instead, subcontractors were discounting their margins on jobs in order to secure work and build a backlog amid an uncertain future. Pre-pandemic, a typical markup was 20-30% of a subcontractor’s bid. When COVID hit, markups dropped to 7-15% and has since stabilized at that range. However, as the market recovers and projects become less scarce, subcontractors will have less need to undercut their margins to win jobs. Our recommendation is to lock in your pricing now while the market is slowly recovering because labor and material prices will no longer decrease. We anticipate that by 2022, construction pricing will rise back up to the same levels we experienced pre-pandemic.
How to Mitigate Risks
Our recommendation is to lock in your pricing now while the market is slowly recovering because labor and material prices will no longer decrease. Work with your general contractor to purchase and store materials early. Once you have your partners (architect, engineer and general contractor) involved, you can lean on them to determine material delays and procure alternative solutions to meet your needs. We anticipate that by 2022, construction pricing will rise back up to the same levels we experienced pre-pandemic.
HOT BAY AREA MARKET SECTORS
We are currently seeing a few hot and trending market sectors. One is an increase in lease activity and demand for the Silicon Valley market in comparison to downtown San Francisco. The appeal of high-rise buildings is decreasing and people are moving out of San Francisco in to suburban areas, making urban business parks more attractive.
The second market sector that will make a dramatic comeback is hospitality, which is poised for growth in large part due to global pandemic-fatigue and a wide-spread pent-up demand for travel and socialization. A recent survey conducted by Forbes reveals travel is normalizing and industry professionals predict a full recovery by 2022, signaling those in hospitality to prepare for a surge in bookings now.
South San Francisco is also experiencing a boom as biotech companies saturate the area creating a life science hub in the Bay Area. The city of South San Francisco reports that it will invest over $300 million toward street, water and sewer upgrades and will be ramping up residential real estate to accommodate biotech growth.
recovery haS begun
After a year of uncertainty for the future of traditional office space, we are starting to see progress. Projects that were on hold have resumed with very little deviation from their original plans. Labor rates are on an uptick and material shortages are coming from rising demand, instead of the virus-induced supplier issues of 2020. Progress also means that businesses are demanding more transparency. It is important to partner with a general contractor that understands your goals and can meet your transparency expectations so you know where your dollars are being allocated.
DOWNLOADABLE COST GUIDE
Below is our Construction Cost Trends Guide which includes our 2021 market predictions and a list of project factors that can and cannot be controlled by the general contractor. This will give you insight into the areas where creative solutions can be implemented to save time and money on your project. If you need more customized help, I am happy to assist. Reach out to me here.
Complete this form to download our 2021 Construction Cost Trends Guide