Are Materials Prices Settling?
Some parts might be. That doesn’t mean your project will suddenly be rolling in extra profits.
Everyone in commercial real estate—whether someone building a new project or a person calculating replacement costs for financials—wants to hear that construction costs will be coming down.
Marcus & Millichap seemed to recently say that. The firm’s September 2022 look at housing said the following: “Material prices show signs of settling. In August, an index tracking construction costs across a variety of materials inched up less than 0.1 percent, about one-eighth of the average pace recorded from January through July. Lumber was the primary cause behind this weaker growth, with the cost index of this material falling 3 percent month-over-month and 30 percent from the 2022 peak back in March. This may aid development in some CRE sectors.”
It sounds good, but practically may mean less than it seems.
An index growing slowly is certainly better than one racing upward, like an old-style cartoon with a thermometer in which the mercury rises, pumps up the pressure in the bulb at the very top, and then explodes upward.
But what index and exactly what and how did it measure/? There are three aspects for most in CRE: price of materials, price of components, and price of labor. Then there is the question of how quickly any or all of them can be obtained.
Wood prices have come down significantly. As of Friday, the price for a thousand board feet was $445.60. That’s in the range of early July of 2020. Still not in the 300s of 2018, but much improved and good news for anyone in construction. But wood isn’t necessarily the primary component of all building, even if it is the significant driver in stick-and-frame house construction.
Steel is also down from the crazy heights of last summer and now pricing would fall in the middle of the ups and downs of 2018. But the PPI for the gypsum industry remains at all-time highs. Aluminum is still historically expensive. Copper, far more than you would have found from 2011 through 2020.
Transatlantic shipping prices have seen big drops from their recent heights, which means costs down from one aspect of importing construction materials and components from Asia. But the expense is still double what it was pre-pandemic. And oil, a proxy for energy, remains elevated and will as OPEC has cut production to help maintain higher prices.
So, yes, as Marcus & Millichap specifically said, “some CRE sectors” will see settling in some pricing areas, but hardly all.