Pricing Pains: Construction Costs Cause Concern

Posted by Christina Alvino on May 31, 2022 12:00:00 AM

Widespread market volatility from the COVID-19 pandemic’s ongoing supply chain disruptions, the Russia-Ukraine war, and inflation are causing unwelcome ripples through much of the world.

The resulting increased costs for oil and all products derived from it—steel, fasteners, roll-up doors, and “every product that goes into our buildings”—are hitting self-storage hard, says Caesar Wright, executive chairman of MakoRabco, a self-storage construction company based in Carlsbad, Calif., with an eastern office in Winter Garden, Fla.

Price Hikes
For example, from September of 2020 through September of 2021, MakoRabco’s cost for steel rose 121 percent, according to Wright.

“Last year this time, we were in some very unknown, uncharted waters, with double-digit monthly increases coming from our steel mills,” says Wright. “In January of 2022, we saw some stabilization after a year of vertical pricing. (In late March) I received my first official price increase from any of our steel vendors since September 2021, right when we thought were getting a little bit stable with steel costs.”

The steel vendor attributes the price increase, which will take effect in early May and which Wright estimates will be between seven percent and nine percent, directly to the war between Russia and Ukraine.

Compounding the higher steel prices is higher fuel costs and freight surcharges from trucking companies. Wright says MakoRabco is concerned about that pressure continuing.

Tarik Williams, vice president of Gilbert, Ariz.-based TLW Construction Inc., says prices for light-gauge steel framing components have fallen about 10 percent to 12 percent from last year, but costs for everything else have increased.

Asphalt “is a big one,” Williams says, pointing out that prices have increased for “anything oil driven, which is all things because of transportation costs.”

This includes all plastics, underground wet and dry utilities, foam-based products such as stucco substrates, roofing material, HVAC components, plumbing, electrical, and earthworks because diesel fuel prices are increasing.

Wright notes that concrete costs rose “exponentially” in February and March, largely because of shipping costs, and costs for steel rebar used in concrete have risen as well.

Williams concurs, stating that concrete and cement availability is limited in TLW Construction’s market. Arizona is seeing “massive development,” exemplified by multibillion-dollar microchip manufacturing plants being built in the state. These bring heavy requirements for building materials.  

Nicholas Bergmann, chief operating officer and partner with San Antonio-based Capco Steel Inc. and its Capco General Contracting subsidiary, says Capco’s overall construction costs rose about 22 percent from May 2021 to December 2021 or January 2022. The steel costs the company bids for all components it provides, including siding, insulation, and roofing, rose about 40 percent in January compared to a year earlier. Capco is seeing the most price stability in ready-mix concrete; those prices are rising only slightly, probably because of the availability of limestone quarries in San Antonio.

“The trend I was seeing was that through the summer, it was the most volatile in my 20 years of doing construction,” says Bergmann. “We had weekly price increases from our steel provider and subcontractors, such as electrical and mechanical, because they faced price increases from their suppliers. The markets—it was just crazy. I would turn in the turn-key number, and a month later I’d have to reprice the project.”

According to Bergmann, this happened all last summer and into the third quarter. It started to slow down in the fourth quarter and steel markets started leveling off in January, but then with the Russia-Ukraine war, inflation, and rising gas and steel prices kicked in again. He received word in late-March that Capco should expect probably a 20 percent to 25 percent steel materials price increase toward the end of the second quarter.

“When people pay $4 and $5 a gallon at the pump, it hurts everything,” says Bergmann. “Construction relies heavily on drivers and fuel, day in and day out. For big site work, we burn hundreds of gallons of diesel a day. It matters. It has a big, big impact on contractors and subcontractors and also our customer base and the end user.”

The labor shortage, material shortages, and ongoing supply chain disruptions are contributing to higher construction and materials costs too. The labor shortage has been underway “for a long time in construction and it’s getting worse,” says Bergmann. “That labor for us is much more expensive because there’s not as much of it in the industry. Manufacturers can’t produce materials as fast as needed. The availability of raw materials is lower. Supply chain disruptions are also affecting it. We’ve relied on global supplies, and things are shifting fast with what’s going on in the world.”

Despite these conditions, almost all Capco’s customers are choosing to proceed with their projects, Bergmann says. Some of them must review their numbers and add in contingencies, but self-storage development continues “because to me it’s the newest, hottest product type that is gaining national attention.”

Predictions For 2022

Wright, Williams, and Bergmann all expect these higher construction and materials costs to continue through the end of 2022.

“My crystal ball? I’ve got to start preparing our clients and the industry for continuing price increases,” Wright says.

His prediction in December and January that steel prices would stabilize and hopefully improve as the year progresses has shifted to expecting at least one more increase this year. From the time Wright’s company engages with a client to the time it produces steel for delivery, six to 18 months can elapse, which means prices can change, despite the fact that the price of steel has remained relatively stable throughout most of his career.

Williams agrees that higher prices will probably continue, especially “so long as oil doesn’t settle.” If the U.S. decides it is willing to use its resources on hand and even if it just says it’s open to considering that, that will ease the market’s volatility. But it won’t change otherwise.

“Oil costs are almost as much driven by what might happen as what is happening, same as the stock market or oil futures,” Williams says. “Right now, there’s a war and potential for a long-term war, and the U.S. is doubling down on not increasing production in the U.S., not issuing leases for offshore drilling, not continuing pipeline construction. If there were a change in that dialogue, that would automatically provide assurance to long-term buyers that there’s a readily available supply that’s not coming from Iran or Venezuela … (and) it would certainly help settle the price. I’m certain of it. But I don’t think it’s going to happen. … We maybe will have another two and a half years of this.”

Bergmann expects Capco’s customers should expect at least another 10 percent construction costs increase through the end of the year. “Demand has clearly overrun the supply,” he says. “It takes a long time for manufacturers to dump a lot of supply back out there on the market to drive prices back down.”

In January, Wright would have said steel costs had been and would continue to be stable. Unfortunately, that’s no longer the case. As for Williams, he notes that TLW Construction’s cost for light-gauge steel peaked last August and had two or three decreases during the holiday season. With fuel and other price increases, that will probably increase again.

Wright’s watching how interest rates will affect developers’ appetites. He has read that the Fed may raise rates up to six more times through the end of this year, “but the appetite to build and develop self-storage is still very strong.”  

We’ve not slowed down,” says Wright. “We thought with the vertical price increases for a 12-month span that a lot more projects might be put on hold because they were over budget, but lending is still very opportunistic with developers. They like the rates, they like the terms, and if they put it in the right location, these self-storage developments have proved nothing but successful from a financial return on investment standpoint. I’m a little more worried about it given the recent news. With price increases, once one does it, they all do it. The crystal ball is not a very clear one right now.”

Despite the pricing woes, Williams says he is hopeful that conditions will start to normalize. “The last two or three years have been difficult. Everybody’s looking for some stability in pricing and availability.”