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Thursday, Feb 9, 2023
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From Steel to Lumber, Material Prices Skyrocket

Construction costs are skyrocketing in San Diego, mirroring a national trend that shows no sign of letting up – a trend that may seem contrary to expectations during a pandemic that has dragged on for more than a year.

While it’s true that some commercial real estate projects slowed or were postponed – especially during the early days of the pandemic.

That’ more then been made up by a surge of residential housing construction – apartments and single-family homes, and experts said material costs are likely to keep rising through 2021 and into 2022.

Life science construction – new projects and renovation work – also has picked up some of the slack.

No Letup

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Jim Roherty, president and CEO of Pacific Building Group based in Mira Mesa, said he’s never seen material prices rise so high so fast.

“Lumber, concrete, steel are all up dramatically, especially in the last three months,” Roherty said. “We just have this counterintuitive world we’re living in that everybody thinks everything is slowing down and we keep getting hits with price increases.”

Roherty in January received letters from several steel companies notifying him of upcoming price increases.

In one case, the company wrote that steel prices would rise by 20% effective March 1 with an additional 10% increase to take effect April 1.

Year over year, lumber costs have risen 73% from January 2020 to January 2021, with a 14% increase in January alone.

“We continue to be a little surprised by the rate and the amount of the increase in material costs that we’ve seen over the last four or five months. It’s really accelerated,” Roherty said. “Some people are believing we hit a peak but I don’t think anybody’s saying they’ll come down because we’re expecting demand to increase over the rest of the year.”

Rising Demand

Dominica Correia, vice president and market lead for the commercial brokerage JLL in San Diego, said Roherty’s experience is typical.

“It’s a supply and demand issue,” Correia said.

Production of construction materials slowed early on.

“Now that things are kind of picking up, they can’t get it manufactured fast enough,” Correia said.

Roherty said tariff’s imposed on steel imports also continue to put upward pressure on steel prices, which drives up overall construction costs.

“Steel goes into so many things on a construction project – the reinforcing steel in concrete, the metal studs in framing,” Roherty said.

Added to that, Roherty said concrete prices also have skyrocketed from $105 a yard in January to $212 a yard in February.

Like steel, concrete is a major component of construction projects.

“It’s used for all the concrete foundations, all the concrete walls, concrete decks. It’s used on sidewalks, parking lots, curbs and gutters,” Roherty said.

Recovery

JLL, in a February report on the construction outlook for 2021, wrote that the market for construction materials was volatile in 2020 “and that volatility is expected to remain elevated in the coming year.”

“Demand for materials will continue to grow throughout the year as the economy reopens, and all signs point to continued high material cost inflation,” according to JLL. “Moving into 2021, steady cost inflation will return and look more like the growth years from 2012-2019, even if the underlying economic growth underperforms.”

Despite the rising costs of materials, Correia said that the overall construction market is lagging behind other sectors in recovering from the early ravages of the pandemic.

“It will take the construction industry longer to recover from this pandemic,” Correia said, following the pattern set in past economic recessions.

“Things are picking up, which is a good sign, but they will not be back on target probably until 2022,” Correia said. “In terms of different sectors, I think the general office environment is still working through what their needs are and now they’re going to either make changes or not make changes in the future.”

Correia said she’s just starting to work on new projects.

“I do see more down the pipeline in terms of construction starts. We’re in the planning stage now and the construction starts will be in the latter half of the year,” Correia said. “People might feel more comfortable going back to work in person and we won’t see that until the latter half when more vaccines become available to more people.”

Along with housing, life science was the other sector that kept going during the pandemic and even exceeded pre-pandemic expectations –“the shining star in San Diego that is keeping employers and employees and everyone related to it busy.”

”Life sciences is in a growth year,” Correia said.

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