Commercial Real Estate, Capital, Insurance, Leasing & Management

How to Navigate Today’s Volatile Commodities Market as a CRE Developer

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By Nick Sanfilippo, Senior Vice President, Project Management

The construction commodities market has been seeing extreme volatility in recent months, impacting virtually every sector of commercial real estate development. Essential building materials – including lumber, steel, cement, wallboard, insulation, copper, paint, PVC and others – are all experiencing some degree of inflation and supply shortages.

Part of this volatility is the result of pent-up demand for development after the COVID-19 pandemic put many projects on hold. The strong economic fundamentals that existed before the pandemic were already contributing to a high demand for building materials, as investors were eager to develop. Now, the market is essentially facing a year-long backlog of demand. This environment is not only increasing construction costs, but significantly dragging out development schedules across the board.

As a third-party manager of construction projects nationwide, Franklin Street’s Project Management Team knows first-hand the challenges builders of all types of commercial properties are facing. Below are some of our tips for navigating the ups and downs of today’s unpredictable construction commodities market:

1. Prepare to be flexible on construction budgets and schedules.

Prices are up for nearly all essential building products. Lumber, although off its record highs, is still more than double its pre-pandemic pricing, and copper remains around its highest price in years.  

We expect this rate of inflation to continue for at least the next nine to twelve months, so it is important to factor these increased costs into the budgets for any new or ongoing projects.

In addition to costs, the long lead time for materials being caused by supply shortages is perhaps an even bigger hurdle for developers today. Precast cement wall panels, for example, currently have at least a nine-month lead time, as opposed to the usual seven to eight weeks.  

Steel building materials are taking ten months for delivery, and wallboard, which is normally readily available, is taking two months to get on site. Mechanical systems and equipment are also experiencing delays. Expect HVAC systems to take up to six months for delivery, compared to the typical six weeks.

The ability to remain flexible and nimble will be key to success for any party involved in commercial development over the next year.

2. Explore alternative building materials and design options.

The volatility in the commodities market will also lead to changes in design and construction means and methods. Developers should be prepared to thoroughly research alternatives and explore all their options before beginning a new project.

In some cases, it may be more budget- and schedule-friendly to seek existing properties that can be retrofitted for a new intended use rather than building from the ground up.

There are also a number of alternative building materials to consider that can help builders save money, time, or both. For example, we are beginning to see Quick Service Restaurants (QSRs) rely on metal gauge framing for new construction over lumber. While the price of lumber has started to come down, it is still significantly inflated and harder to come by than aluminum.

Another example, especially pertaining to industrial projects, is the switch from web joists to steel I-beams for the building structure and roof support. Although both are steel products, I-beams can support more weight than steel joists so fewer are needed, and they have a much more attractive lead time versus web joists.

3. Engage a third-party project manager.

The construction commodities market is challenging right now, but that does not mean it’s impossible to navigate. The construction pipeline is extremely robust, and although supply and demand discrepancies are likely to continue for some time, development budgets and schedules can be met with the right strategy in place.

Franklin Street’s experienced Project Management Team is here to help every step of the way.  Learn more about our capabilities here.

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