Developers adjust to price hikes and shortages

Listen to this article

Editor’s note: Business content from The New York Times will now be included with your subscription to Finance & Commerce. Not a subscriber? Start your subscription here. 

Like many development projects in the pandemic, construction of the Applied Research Center at Florida Polytechnic University was burdened by delays. Skanska, the general contractor responsible for the building, struggled to find materials.

But it wasn’t steel, glass or concrete that set back the completion of the 95,000-square-foot research facility in Lakeland, Florida. The problem was card readers.

A global shortage of semiconductors had made security access systems impossible to get. So a team of a half-dozen supply chain specialists at Skanska had to unwind a tangle of contractors and subcontractors and persuade a manufacturer to send unfinished doors, with high-tech lock sets to follow, saving months of delays over a simple yet crucial part.

“There hasn’t been a project we’ve worked on in recent years that hasn’t been challenged in some fashion,” said Steve Stouthamer, Skanska’s executive vice president of project planning services, who helped found the company’s strategic supply chain team.

The crash in activity in the pandemic and the subsequent whiplash as halted projects simultaneously restarted was “two lanes collapsing into one, plus constrained manufacturing,” said Nicolas McNamara, director of project management at CBRE, a commercial brokerage firm. “It was a perfect storm.”

After nearly 2 1/2 years of struggling with a taxed supply chain, developers have learned to become more adept at responding to a seemingly endless series of price spikes, delays and shortages. Supply chain woes are expected to begin receding in coming months, but the lack of essential and specialized materials has had a deep impact on the industry.

Construction activity has soared since the outset of the pandemic, spurred by demand for industrial buildings and multifamily housing. A record 689 million square feet of warehouse space is under construction in the United States, said Lisa DeNight, ​​managing director of industrial research at real estate services firm Newmark.

And material costs continue to eat into profits. The cost of building is expected to increase 14% in 2022 from the year before, according to the Construction Cost Index from CBRE. The firm predicts costs will remain volatile, potentially rising 5.4% in 2023, before they eventually cool, even though long lead times and material shortages will continue in the short term.

Backlogs, supply shocks and a weakening financial environment have squeezed the bottom line and driven pessimism higher, convincing most contractors that their margins will shrink through the winter, Anirban Basu, chief economist for the Associated Builders and Contractors, said in a news release.

And spending will increase 6% in 2023, largely because of the increasing cost of goods, according to a Consensus Construction Forecast panel of the American Institute of Architects.

“Construction inflation is so bad that we can’t even get people to quote us prices for more than a week,” said Jennifer Luoni, director of architectural operations at Dacon, a construction firm in Massachusetts focused on industrial and life science facilities.

The list of hard-to-find materials has been all-encompassing: roofing, steel, plastics, furniture, lumber, drainage pipes, even specific types of screws to fasten insulation. Prices for prefabricated steel rose 45% from April 2021 to April 2022, and timber shot up 30%, according to Kojo, a construction procurement platform. And CBRE reported that $16.1 billion in iron and steel orders had been unfulfilled since the pandemic’s outset.

The reasons for delays vary. For example, switchgear, the electronics control systems at the center of every building, requires the same chips used in auto production, leading to shortages as the two industries competed for them. And the supply of resins, which are key ingredients in paints, flooring and sealants, was knocked out by the winter storm that hit Texas and its refinery regions hard in early 2021.

Continued challenges suggest little moderation in coming years. Sixty-five percent of contractors in heavy industry are experiencing bigger backlogs than they had a year ago, with three-quarters expecting the situation to stay the same or get worse this fall, according to a survey from FMI, a consulting and investment banking firm focused on construction.

The estimated $1.7 trillion in national construction spending for this year is sizable, but in the next few years, demand will only increase, said Barry B. LePatner, a real estate lawyer and advocate for more efficiencies in the construction industry. Continued labor shortages in construction and trucking, coupled with an expected increase in prices for petroleum products — especially diesel, which soared 444% from May 2020 to May 2022 — will only make plastics and transportation more expensive, and LePatner feels the nation is unprepared.

“There is no Plan B to expedite our way out of the current situation,” he said. “To me, that’s a huge problem.”

In the pandemic, shifts to the development of data centers, life science labs, warehouses and distribution centers put a strain on the supply of components such as steel joists and roofing materials. Large companies with an eye on expansion scooped up specialty gear in bulk, further constraining the market. The cost of building data centers, for example, rose 15% last year, according to Turner & Townsend, a global professional services company.

“​​Amazon expanded rapidly to create new fulfillment centers and sortation centers, and they did put a hold on a lot of materials around the Americas and around the globe,” said Ryan Caffyn-Parsons, CEO for Americas at Unispace, a global workplace design, strategy and construction firm. “The market was concerned, but it didn’t actually have the effect of shorting supplies because of Amazon. They just sort of triggered everyone else’s thinking, and a fundamental shift happened.”

The resulting race to order ahead of time and create more flexible methods of sourcing often was not fast enough to get around material shortages and inflation, said Luoni of Dacon. Steel decking and joists have gone up 50% since the beginning of the pandemic, and even with pent-up global demand, starting up a steel plant is not a “jump on the bandwagon” endeavor, she said. That means no real alternatives outside of being more deliberate and forward-thinking.

Even the smallest delay in obtaining certain materials for a job site means adjustments to work flows, a disruptive and costly risk for projects that can run into the millions.

The solutions have been an increased scrutiny on efficiency, rather than a wholesale change of operations. The focus remains on supply chains and rethinking fragile links and reevaluating partners, McNamara of CBRE said. There is a push to move manufacturing closer to the United States, but with roughly half of American construction material coming from overseas, setting up factories is a timely process.

In the meantime, contractors and developers have turned to more integrated “design-build” work processes to become more streamlined. They’re also investing in construction technology to improve efficiency and get rid of waste, as well as ordering components and materials early and even stockpiling, creating storage called attic stocks near job sites.

“I do think the lessons learned over the last two years is that companies are unlikely to return to the lean, just-in-time systems of the past,” said DeNight of Newmark. “The model was already stressed, and then kicked to the point that when systemic disruption happened at a grand scale, there was absolute tumult.”

This article originally appeared in The New York Times.