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Continued Supply Chain Issues Roil Real Estate

For over a year, manufacturers and builders of all kinds have scrambled to get their hands on raw materials needed for production. Supply chain issues compounded by crisis after crisis, all in the shadow of COVID-19, have persisted. Promised help by the fall, prices have yet to come down as issues in global shipping pile on, each creating ripple effects felt on the other side of the globe. A full economic recovery will require supply chain issues to be resolved quickly.   

As one of the largest users of raw materials for construction and maintenance, the property industry is feeling the pinch of supply chain issues more than most. Demand for new residential construction is at all-time highs, but supply shortages and delays are putting pressure on contractors to delay or cancel projects altogether. It’s just not single-family construction, a survey by the National Multifamily Housing Council found 40 percent of respondents cited significant price increases for their most used materials. A US Chamber of Commerce survey found 70 percent of contractors are facing material shortages. Lumber, steel, and electrical components, key to building construction, have been some of the hardest-hit sectors. 

“Material shortages and cost increases will lead to development cost increases and potential project delays” Caitlin Walter, vice president of research at the National Multifamily Housing Council, said. “Longer term, these disruptions could challenge the already supply-constrained market and threaten to derail housing affordability efforts. New units need to be built at a variety of price points, and cost increases only make building those units more difficult.”

Earlier this year, the Biden Administration launched a 100-day review of supply chains critical to national security, convening meetings at the White House with industry leaders. In June the Biden Administration releases the findings, recommending several actions to iron out supply chain issues. A new Supply Chain Disruption Task Force is being established to address near-term shortages hindering economic recovery. Beyond fair trade practice enforcement and further study, most of Biden’s plans address shortages in batteries, pharmaceuticals, drugs, and food. The White House appears to be making dealing with shortages and spiking prices for construction materials a lower priority. Builders need help now. 

“Prices are getting incredibly higher every month,” National Association of Home Builders CEO Jerry Howard explained on Fox Business. “Builders are now starting to say, ‘We can’t build the house we promised you.’” 

The National Association of Homebuilder’s/Wells Fargo Housing Market Index, a measure of builder confidence, decline by 5 points in August, a 13-month low. Howard cited the cost of lumber as a major supply chain disruption, stating “nothing has been done to correct” supply chain issues hurting builder sentiment. Still, at 75, sentiment remains high, considering anything over 50 is positive. More than anything, shortages and supply chain problems are causing builders to miss their moment to lean into a red hot market. Dodge Data research expects construction starts to rebound throughout the year from a 9 percent decline in 2020. The construction industry in the United States is expected to grow by 15.6 percent to reach $1.5 trillion in 2021, according to the Q4 2020 Global Construction Survey.

Struggles in the construction industry have reflected struggles in the broader real estate sector. Warehouse and data center construction continues to be up, while new office and manufacturing starts are down by double digits, according to Dodge. The Commercial Construction Index (CCI), a quarterly economic index designed to gauge the outlook of commercial construction, increased three points to 65 in the second quarter, up from 62 in Q1. Finding lumber and skilled workers will be the biggest challenge in meeting expectations for growth. Lumber shortages are up 11 percent this quarter, with a third of commercial contractors now experiencing shortages. Nine of ten contractors report issues finding skilled workers. 

The good news is lumber prices continue to come down, just not fast enough. September futures in Chicago fell as much as 4.4 percent to $482.90 per thousand board feet, the lowest for since last October, according to Bloomberg reports. Overall, spot prices are down 70 percent off peaks just three months ago. But, this hasn’t translated to a corresponding drop in prices at the lumber yards across the country. 

“While most of the wood out there today is pegged for a job site, the slowdown keeps it all backed up,” Brian Leonard, an analyst with RCM Alternatives told Bloomberg. “The industry has to work through that issue before it goes back to the mills to buy. That is forcing the mills to lower prices daily to get rid of prompt wood.”

With an end to the pandemic (hopefully) approaching, the construction industry looks to be on a solid footing to build momentum. If lumber prices continue their downward trajectory, builders of all types will be able to seize the opportunities presented by recovery. After a tumultuous 2020, the roller coaster may finally be pulling in to stop.

Associate Editor
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