US Construction Costs Rise After Tariffs
But it's still not certain if this will have more than a short-term impact.
CHICAGO—Any company running a new distribution center faces a host of factors that have combined to push up costs. Recruiting enough labor to staff up warehouses and distribution facilities, for example, has become a challenge for operators. But even before getting to that point, developers now have to deal with rising construction costs, and it’s not clear whether this will eventually begin to moderate the pace of new projects in a today’s robust environment.
The construction industry began running low on skilled labor once the recession ended and construction boomed in many sectors. But recent moves by the Trump administration will likely add to the woes of many builders.
According to Adam Marshall, a Chicago-based senior managing director of Newmark Knight Frank, the new tariffs on foreign steel entering the US have pushed up prices for important building components. The cost of structured steel increased 20% this year, he says, and the price for steel studs went up between 10% and 15%. However, “these increases will likely be short-term,” he adds, and after a while “costs will level out.”
It’s still possible this rising cost environment will have a negative impact, but Marshall says other factors are in play. “There has been a construction boom all over the country, we’ve even seen surges in tertiary markets.” And that may eventually dampen new activity.
In the Chicago metro area, for example, developers since 2015 have either completed or currently have under construction a total of 39 buildings with more than 500,000 square feet. This level of activity in the big box sector made sense, as developers could fully practice economies of scale that helped deal with rising costs. But currently, 30% of this space remains vacant. Of course, it’s not the same everywhere. “Los Angeles has a low vacancy environment,” Marshall says.
Other cities are also seeing new space absorbed. And even though rising costs have helped make underwriting more stringent, which has put pressure on rental rates, “The market can support that right now.”
In the end, the sector’s health may depend more on changes in the economy’s overall demand. After all, “future impacts to user demand will bring down construction pricing as well,” Marshall says. “It will go hand in hand with the economic cycle.”