To build or not to build — that’s a question on many business owners’ minds. That’s because they’ve heard about how some building material prices have risen in the past year, making them think twice about that new facility or expansion project.
Prices for lumber, steel, and some other building materials have sent residential building costs skyward, but is commercial construction feeling an impact in the same way? What can project owners expect in the coming months, and should they wait to start their commercial building project until markets settle?
Not necessarily; there’s more to consider than material costs.
Building Material Market Insights
Lumber prices are up 171% since the start of the pandemic, despite production hitting a 13-year high. Raw, bare steel surged about 75% since last summer due to shortages resulting from pandemic-driven supply chain issues. Nearly three out of four contractors say they’re facing at least one building material shortage.
These increases and challenges are cause for concern, yet it’s important for business owners to consider the types of materials that their project will require. While commercial construction material costs have risen as well, it’s not to the extent that residential construction costs rose due to its heavy reliance on softwood lumber. For commercial construction, steel prices generally have a greater impact.
Business owners may want to consider changing the type of structure or material types used in their commercial construction project to minimize the impact of higher steel prices. Precast concrete walls may be an alternative to steel structures. Some of our projects here at The Samuels Group decided to shift over to concrete masonry units (CMUs). While both precast and CMUs are made of concrete, are structurally sound, and can be aesthetically pleasing, there are cost differences.
With that said, several of our suppliers say that indicators show steel material prices may start to come down in Q3 and Q4 of this year. While they’ll likely still be priced slightly higher than pre-pandemic levels, it will be easier to stomach. It’s important to note that for someone who is just starting to scope out a building project, the bidding process likely won’t happen for several months, at which time material costs may come down.
The best advice is to keep your project moving through the planning and design phase and keep an eye on markets along the way.
Commercial Construction Labor Cost Comparisons
Residential construction starts have increased significantly despite the high cost to build, and residential contractors are in high demand. In fact, many are experiencing an extremely tight labor market, driving housing market costs even higher as general contractors try to attract skilled labor.
Conversely, nonresidential construction slowed as business owners faced uncertainty and put expansion plans on hold. Unlike residential construction, some commercial builders have available workforces that are eager to ramp back up and fill capacity. Business owners need to consider this contrast in available labor and understand how it may help offset material costs. Remember that labor and materials each make up about half of a project’s overall costs.
Low Interest Rate Considerations
For homeowners, the lure of the lowest mortgage rates in decades is helping to offset the high price to build residential properties. Likewise, business owners need to consider historically low lending rates as part of their building strategy. Borrowing is very inexpensive right now, and even a slight increase in lending rates down the road could add hundreds of thousands of dollars in overall costs, depending on the length of the loan agreement.
Project owners need to weigh the risks of waiting for material prices to come down against the probability of rising inflation and interest rates. Likewise, if waiting means you can’t expand your production capacity, grow your business, or address the needs of those you serve because of your facility’s limitations, the long-term implications could negate and even overshadow any potential savings.
As you assess your building project, keep these three things in mind: material costs, labor availability, and the cost to borrow money. When considering the entire scope of a project, you’ll likely discover that waiting may not be the best option.
Want more insights into building costs and all the factors that need consideration? Download our Commercial Building Construction Checklist to learn about the factors to consider when deciding whether or not now is the time to build.