Sky Rocketing Construction Prices Affecting Real Estate Developments

May 5, 2021

Successful investments in the real estate development market result from efficient construction expenses on one side, and a healthy demand for the finished units on the other. Fluctuations in materials costing can radically alter the bottom line, usually for worse.

 

So, why have commodities risen so much in the last year?
How are developers and builders adjusting to these rising expenses?
Is the bottom line going to change for the development fund investor?

 

Find out all about these issues and the main reasons for the commodity increases in today’s 2021 development build article.

 

Real estate construction prices increases in 2020-2021

Let’s take a look at how construction commodities have increase since January 2020.

Lumber
up 188% since the beginning of the pandemic.

As of the week of March 11, the price of lumber per thousand board feet is at $1,044, according to Random Lengths. That’s an all-time high, and up 188% since the onset of the pandemic. The National Association of Home Builders calculates that current lumber prices are adding at least $24,000 to the price tag of a typical new single-family home.

Steel
is up 22% from Feb 20 to Feb 21.

Gypsum
The PPI for all gypsum products has increased 6.3% over the past 12 months while the index for gypsum building materials (e.g., drywall) is up 6.6%.

Glass
up 5% from March 2020 – March 2021.

Overall, construction materials are up 16.5% year over year.

Follow this link for 5 charts outlining the changes of the last 18 months:
Construction employment, architecture billings, material price changes, construction backlog, and contractor optimism.

 

Factors leading to construction costing increases

Since the onset of the Coronavirus pandemic in late 2019, we can see that certain segments of construction commodities have risen steadily, at times dramatically.
But are the rises in costing solely attributable to COVID?

Some of the contributing factors to the current climate are:

  1. COVID-19-related mill and factory closures
  2. West Coast fires decimating lumber inventory
  3. Low supply of property
  4. Continued high demand from builders

As we’ve written previously, the housing market is one of the few market sectors that has been booming throughout the pandemic.

Read more here >>>>
https://baicapital.com/the-2021-us-real-estate-market-outlook/

With high demand for housing combined with low inventory, we see an amplification in the increase in build costs when mixed with the disrupted materials pipeline.

 

Builder/ Developer Costing Strategies

There are a range of methods applied to counter increases in construction costs including:

  • Including price escalation clauses in sales/ construction contracts
  • Pre-ordering lumber / materials
  • Obtaining lumber price guarantees from supplier
  • Delaying building or sales when costs spike
  • Laying foundation, but delaying framing
  • Including shared price clauses in contracts
  • Using lumber options or futures to hedge against future price changes

 

Real Estate Developments | Investor Outcomes

Planning for contingencies as an investor in real estate developments and funds.

The relationship and financial contract between the investor, fund manager and developer dictates the investment outcomes, taking into account contingencies and costing variables, for better or worse. The details make or break the bottom line in the world of property development funds. All the same, successful investors like you already are well aware of this.

As a real estate equity fund partner, the contract must account for, and safeguard against, variables such as commodity fluctuation. The track record of successful fund general managers in these matters speaks volumes of what you can expect in future endeavors. Taking the time to look into the BP details of the development you are interested in will only help your bottom line. The contract must at minimum show price escalation clauses, shared price clauses or the like to prevent these unforeseens eating into your ROI.

To consider, is that the rising construction costs of the last year may just be an unwelcome introduction to other unexpected fluctuations in the future.

BAI Capital has a new project on the ground in construction in Gainesville Florida. Archer Place, a mixed used condominium and luxury student housing development and equity fund, already has land and materials secured for the build, reducing the complexity of dealing with alternative and updated costing.

>>> Learn more about ARCHER PLACE here >>>>

 

Today’s Takeaways

Today we learned about some of the various strategies to deal with the increased property development costs related to the COVID-19 Pandemic. Although material prices- especially lumber – have risen drastically in the last 14 months, associated costs for the most part are being passed on to the end buyer. At the end of the day, this is just one more reason to hope for the quick resolution and recovery from the Coronavirus Crisis. Moving ahead, we can expect construction costs to stabilize accordingly.

As a development or property fund investor, we can encourage the same kind of jurisprudence you bring to each part of your portfolio.

 

To discuss Florida real estate equity funds and or your best already built BAI property ownership options, feel free to book an appointment with a BAI investment expert today.

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