Exploring the Most Transformative Trends in Commercial Real Estate | PROPMODO METATRENDS 2023→

How Commercial Real Estate Can Plan Around the Supply Chain Mess

Two years ago, the global economy hit a speed bump unlike anything in living memory. The COVID-19 pandemic forced people worldwide to be locked down, which caused stock markets to crash, put millions out of work, and forced millions more to work remotely. Luckily, thanks to life sciences companies creating several vaccines in record time, we are finally starting to see a return to a pre-pandemic normal.

However, there will still be some lingering effects of the pandemic. The United States saw the highest annual inflation rate in 40 years, hitting 7.5 percent in January. Many factors behind this jump in prices include soaring energy costs, labor shortages, supply chain disruptions, and strong demand. Many of these issues will likely continue for the foreseeable future and will impact commercial real estate companies for a sustained period. And, it will continue to hit companies looking to build new office parks and towers plus those looking to renovate spaces to their client’s specifications. These projects will likely cost significantly more than pre-pandemic and could take longer to complete.

It could be viewed as a full-blown crisis, but there are some actionable measures that commercial real estate companies can take to help mitigate higher costs and disruptions.

How bad is it?

There is no doubt that construction materials have surged in price since the pandemic started. There are several reasons, but let’s take a quick look at the major ones.

Both lumber and steel prices surged during the pandemic. Much of the increase had to do with supply chain issues in both cases. Wood production was disrupted when many sawmills were idled at the beginning of the pandemic for health concerns and the incorrect belief that demand would plunge. Steel, which is used in everything from cars and appliances to skyscrapers and bridges, continues to have a large production backlog while demand has only increased. In both cases, prices surged and peaked in July 2021. Lumber jumped 334 percent to hit $1,500 per thousand board feet, while hot-rolled steel hit $1,800, a 215 percent increase from pre-pandemic levels. While both have since declined, they are still well above 2019 prices, and economists and traders do not expect to see further decreases any time soon.

Like most other retail goods, shipping delays have impacted construction materials. The World Economic Forum shows that deliveries by cargo ship have jumped to 70 days, when that was under 40 days pre-pandemic.

The United States has seen a massive rebound in employment levels after shedding more than 21 million jobs during the first few months of the pandemic. Recently, the unemployment rate hit 4 percent, which the Federal Reserve considers full employment. This will likely translate into higher wages for construction crews and machine operators, and the genuine possibility of few labor shortages on job sites. All of this means that there are higher prices for materials and labor, while it might take twice as long for an order to be fulfilled.

What can be done?

Many large commercial real estate companies have various construction projects on the go at any given time. It could be renovating office space for a new client or building a new office park from the ground up. A majority of those projections will be inaccurate for projects that had budgets and timelines approved before the pandemic. For new projects, however, there are ways to mitigate the higher prices and delays, and it requires strict focus on planning right from the design phase and a willingness to do things differently.

The design team should include other members, like procurement specialists, project managers, and construction professionals, when planning new or renovated spaces. The procurement specialist can provide insight into the availability of materials and recommend alternatives that are either less expensive or easier to acquire. For example, a project could use bamboo instead of softwood lumber. It is a cheaper material with comparable properties, sustainable, and abundantly available.

The procurement specialist could also provide insight into lead times for specially fabricated materials or items, from order to delivery, that have no workable alternatives. The construction professional can discuss any potential issues, like renting heavy equipment or possible problems with various trades, or general labor issues. Having this knowledge in the early stages can help set a realistic timeline for project milestones and help ensure work is completed on time and within budget.

While it does appear that things are returning to normal, there is still much uncertainty out there. A few recent developments will likely disrupt the global supply chain, but it is unknown for how long. Since the beginning of March, China has announced thousands of new COVID-19 infections from the BA.2 subvariant commonly known as “stealth omicron.” This variant spreads even faster than omicron, but there are no reports of deaths. However, China imposed new lockdowns on a few of its provinces, which will trigger production delays. In late February, Russia launched an invasion of Ukraine, leading to severe sanctions on Russia’s economy. The immediate effect was record-high gas prices at the pump, raising shipping and construction costs. The sanctions also prevent more than 100 Russian cargo ships from docking, while industrial production has been disrupted across Ukraine. The country is a major producer of neon gas, which is an essential element for the production of computer chips, which could lead to shortages affecting many industries.

This is where the project manager can help. With deep knowledge and experience on job sites, plus being well versed in all aspects of the project, they can develop plans to mitigate any disruptions. For example, if vital materials do not arrive when expected, work could start on other areas until that is rectified. This can help a commercial real estate project stay on track and allow tenants to use the site as close to the expected completion date as possible. After all, the building or space isn’t making money unless tenants work in it.

Commercial real estate companies know the past two years may have been their most challenging on record. Lockdowns may have forced many retailers and other businesses to shutter, sometimes permanently. Not all companies will have a full staff return to the office, which could slash the amount of floor space they’ll need going forward. Costs and delays hammered the bottom line for construction projects that started before the pandemic. While there is no guarantee that things will remain on an upward trajectory over the next year, it is possible to mitigate some of the risks and delays by incorporating detailed planning for future projects. Being able to pivot to backup plans and keep projects moving forward will ensure new commercial space comes online when expected and within budget.

Image - Design