The rising cost of many material prices and increased sourcing headaches have project owners rethinking their return to normalcy and threaten to derail construction’s expected resurgence.
The road to recovery may be longer than you think with the rising cost of many material prices
As the second quarter of 2021 kicks off, contractor confidence is high, with plenty of optimism that the coming resurgence of re-started projects will lift construction firms from the abyss of COVID-19 to go even beyond their pre-pandemic heights. Just look at the Associated Builders and Contractors’ Confidence Index, which is now positive for sales, profit and staffing level expectations for the next six months.
The only problem is, to build things, contractors need willing owners to finance them. They may become more scarce in the coming months, as continued kinks in the global supply chain drive material prices higher, extend delivery times and make already anxious developers more skittish.
“People are starting to become a lot more buoyant and confident around things,” said Chris Bailey, senior vice president of integrated solutions at San Francisco Bay Area-based general contractor XL Construction, who recently authored a report to clients about supply chain hurdles. “But there needs to be some degree of caution as to how we re-engage with all of this, because we can’t just do what we did in 2019. Product is not coming online as quickly as projects are.”
Cold feet, again
That juxtaposition is causing owners who want to get back to work to reconsider if now is the best time to do so. At Fort Worth, Texas-based Century Mechanical Contractors, secretary and treasurer Diane Mills said the recent explosion in material costs is inducing sticker shock in her clients, especially those who priced their projects before the pandemic, but then hit the pause button at its outset.
As those owners re-enter the market, they’ve had to adjust their expectations or re-consider their projects all over again, she said.
“Owners are coming back and saying they want to build, but they set their budgets two years ago,” Mills said. “What might have cost $100,000 if they started last June is now probably closer to $160,000. So they’re even having to pull back again and rethink what they’re doing, because it’s out of budget.”
Finance professionals are also witnessing a second round of cold feet among developers trying to resuscitate deals in the current environment.
“I had a developer come back to the table with a deal he mothballed last year, but now it was going to cost him 20% more,” said Jake Clopton, founder of Chicago-based commercial mortgage broker Clopton Capital. “He said he couldn’t do it, that it didn’t make sense to build right now. I mean, in the end, it’s really all just a math problem.”
Clopton said he’s had several developers with land carrying costs approach him to kickstart projects, but with old GC bids. When they’ve re-priced them, and evaluated the current state of the lending market, where bank loans can be non-existent for some project sectors and private money loans can have 10% interest rates, their deals are no longer penciling out.
“They’re just uneconomical at these levels,” Clopton said.
There’s even evidence that a recent increase in construction spending above pre-pandemic levels isn’t due to more projects coming online, as much as it is the need to absorb higher costs. Construction spending climbed 5.3% from February 2020 to a seasonally adjusted annual rate of $1.52 trillion, the Census Bureau reported April 1.
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