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Why Industrial Development Costs Have Continued to Spike

Lingering supply chain issues from the pandemic, plus the war in Ukraine might continue to impact industrial construction for a while.

Everyone is still feeling the effects of inflation caused by shortages of all types of consumer goods, from groceries to gasoline. Shortages of certain products and high inflation have been the lingering effects of pandemic-induced supply-chain disruptions that are not only slowing the delivery of finished goods, but also parts and raw materials needed to manufacture a variety of products, from automobiles to semiconductor chips. These forces are also affecting raw materials and other products used in construction projects.

In a vicious cycle, shortages in construction materials that are delaying new deliveries of industrial space to the market are compounding supply-chain issues as the lack of necessary storage space for arriving products has created port bottlenecks and slowed down the process further.

With demand for industrial space outpacing supply, nation-wide industrial vacancy at year-end 2021 hit a record low of 3.2 percent, reported commercial real estate services firm CBRE.

“In-flight or planned projects have been hit hard by significant lead-time issues and availability woes since late 2020 due to myriad reasons,” says Dan Richardson, director, cost consultancy, with CBRE | Global Workplace Solutions. For example, the cost for commodities such as concrete and steel, has seen double and triple digit increases respectively over the last two years. This pattern will likely be further compounded by the passage of the Biden Administration’s infrastructure bill, which will create more competition for these products.

According to global industrial giant Prologis, the cost of building materials, which spiked by 40 percent last year, combined with a 50 percent jump in the cost of developable land and the rising costs of skilled labor, have made new industrial projects more expensive to develop than ever.

In the fourth quarter of 2021, industrial construction deliveries did rise by 7.9 percent compared to the quarter prior to 81.0 million sq. ft., according to CBRE data. But that amount of space was still 10.3 percent down from the previous year. Another 513.9 million sq. ft. of new industrial space was under construction as of year-end 2021.

In Southern California, overall construction costs rose by 50 percent last year, according to Orange County, Calif.-based Stephen Batcheller, regional partner—West, with the logistics group of the Transwestern Development Company. Construction delays associated with supply-chain issues added to the higher cost of new development, he notes, as lead times for delivery of some materials can now take anywhere from six months to more than a year. For example, the lead-time for electrical switch gears is 50 to 60 weeks; for overhead doors 20 to 22 weeks; for dock seals 30 to 40 weeks; for dock levelers 35 to 42 weeks and for main electrical panels 22 to 26 weeks.

According to CBRE’s Richardson, material scarcities have led to manufacturer substitutions or changes in design to make do with available goods and keep projects moving forward when possible. Other projects, however, have been forced to push out delivery schedules or be canceled altogether due to rising costs and limited materials.

Meanwhile, giant e-commerce companies like Amazon, which have almost unlimited resources and are building their own warehouses, are “adding fuel to the fire,” by stockpiling a year’s supply of building materials in advance, notes Batcheller. That further limits the supply of materials and building products needed by smaller developers.

When might things get better?

Material shortages are happening not just because of international supply-chain issues, notes Richardson. For example, the cost of lumber harvested domestically or imported from Canada has spiked, as has the cost of both American- and foreign-produced steel.

Reduced imports from Europe and Asia, coupled with increased demand, have caused lead times for open web-bar joists to skyrocket, as American mills struggle to meet the demand, Richardson adds. He also notes that roofing insulation and related materials are currently experiencing some of the longest lead times in the entire construction industry.

With the pandemic winding down in most regions around the globe, there is some optimism about a supply-chain correction and markets returning to pre-pandemic normalcy. But Cheryl A. Tyndall, vice president of enterprise project management occupier services | Americas with real estate services firm Colliers International, warns that the U.S. and world economies and manufacturing operations do not work like a light switch. For example, she notes that parts made by many different companies around the globe often go into one finished product.

“The industry needs time,” Tyndall says. “There needs to be a new normal and expectation set.”

While products made in the U.S. make up a substantial percentage of the total volume of construction materials needed, many of these products have imported components that are significantly affected by supply-chain issues, agrees Richardson. This includes mechanical equipment and controls, doors and hardware, switchgear, generators, electrical wiring and lighting. He notes that in 2021, the largest volume of imported construction materials, consisting primarily of steel, aluminum, glass, stone slabs and lumber, came from China, Europe, Mexico and Canada.

“Supply chains are complex, so fixing the current issues will require a multi-faceted approach and patience,” says Brad Wright, CEO of Chunker, an online real estate listing service focused on providing users access to temporary industrial storage space. He notes that the Biden-Harris Plan, which is focused on increasing manufacturing of critical products domestically and improving supply-chain resiliency, is providing a mix of solutions aimed at having an immediate impact on port operations.

These include funding to update port facilities and technology to streamline operations such as inspections and customs; around the clock services by working longshoremen; and funding for temporary solutions, like pop-up container yards to clear shipping containers out of ports, among other measures.

But while these solutions may help move cargo domestically, Batcheller notes that the war in the Ukraine has dashed hopes of a return to normalcy anytime soon. The most supply chain impact might be hunger in some poorer nations as both Russia and Ukraine are among the world’s most important grain producers. And when it comes to construction, sanctions on Russian oil exports will hurt the supply chain, driving up transportation costs for ships, planes, trains and trucks worldwide, for example. Additionally, many semiconductor manufacturers rely on raw materials like neon and palladium that are imported from Russia and Ukraine and a further semiconductor shortage would affect everyone.

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