For more than a year, manufacturers and builders of all kinds have been scrambling to get their hands on the raw materials needed for production. Supply chain problems compounded by crisis after crisis, all in the shadow of COVID-19, have persisted. Aid promised by the fall, prices have yet to come down as global shipping problems mount, each creating ripple effects felt across the globe. A full economic recovery will require rapid resolution of supply chain issues.
As one of the largest users of construction and maintenance raw materials, the real estate industry feels supply chain issues more than most. Demand for new residential construction is reaching all-time highs, but supply shortages and delays are pushing contractors to delay or cancel projects altogether. It’s just not about single-family construction, a National Multifamily Housing Council survey found that 40% of respondents cited significant price increases for their most used materials. A survey by the United States Chamber of Commerce found that 70 percent of contractors face material shortages. Lumber, steel and electrical components, essential for building construction, were among the hardest hit sectors.
“Material shortages and cost increases will lead to increases in development costs and potential project delays,” said Caitlin Walter, vice president of research at the National Multifamily Housing Council. “In the longer term, these disruptions could call into question the market already limited by supply and threaten to derail efforts to provide housing. New units have to be built at different prices, 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, calling White House meetings with industry leaders. In June, the Biden administration released the results, recommending several actions to iron out supply chain issues. A new supply chain disruption task force is being created to address short-term shortages hampering economic recovery. Beyond the application of fair business practices and further study, most of Biden’s plans address shortages of batteries, pharmaceuticals, drugs and food. The White House appears to be making managing shortages and skyrocketing building material prices a lower priority. Builders need help now.
“Prices are increasing incredibly every month,” Jerry Howard, CEO of the National Association of Home Builders, explained on Fox Business. “The 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 homebuilder confidence, fell 5 points in August, a 13-month low. Howard cited the cost of lumber as a major supply chain disruption, saying “nothing has been done to correct” supply chain issues plaguing builders’ sentiment. Still, at age 75, sentiment remains high, given that anything over 50 is positive. More than anything, shortages and supply chain issues mean that automakers miss the moment to address a hot market. Dodge Data research expects construction starts to rebound throughout the year after dropping 9% in 2020. The US construction industry is expected to grow 15.6% % to reach $ 1.5 trillion in 2021, according to the Q4 2020 Global Construction Survey.
Struggles in the construction industry have mirrored struggles in the wider real estate industry. Warehouse and data center construction continues to rise, while new office and manufacturing starts are down double-digit, according to Dodge. The Commercial Construction Index (CCI), a quarterly economic index designed to gauge the outlook for commercial construction, rose three points to 65 in the second quarter, from 62 in the first quarter. Finding wood and skilled workers will be the biggest challenge in meeting growth expectations. Lumber shortages are up 11% this quarter, with a third of commercial contractors now experiencing shortages. Nine in ten entrepreneurs report problems finding skilled workers.
The good news is that lumber prices continue to fall, but not fast enough. Chicago September futures fell 4.4% to $ 482.90 per thousand board feet, the lowest since last October, according to Bloomberg reports. Overall, spot prices are down 70% from highs just three months ago. But that hasn’t translated into a corresponding drop in prices at lumber yards across the country.
“While most of the lumber available today is destined for a job site, the downturn keeps all lumber saved,” Brian Leonard, analyst at RCM Alternatives, told Bloomberg. “The industry needs to sort this out before they go back to the factories to buy. This forces factories to lower prices daily to get rid of the timber promptly. “
As the end of the pandemic approaches (hopefully), the construction industry appears to be on a solid footing to gain momentum. If lumber prices continue on their downward trajectory, builders of all types will be able to seize the opportunities offered by the recovery. After a tumultuous 2020, the roller coaster may finally come to a stop.