How Commodity Prices are Shaping the Commercial Construction Market
As the Front Range economy begins to move forward from the COVID-19 pandemic, the commercial construction market is witnessing unprecedented volatility. Todd Ruff, GH Phipps VP of Preconstruction, has continued to keep a watchful eye on the market across Colorado and Wyoming. We recently sat down with Todd to discuss his view of the marketplace today. Here’s what he had to say on the subject:
“Due to market volatility, we have seen many trade partners submit their bids and say, ‘Here’s our bid, it’s good until the end of the week.’ GH Phipps stays in close communication with our clients throughout the bidding process to provide them with transparency and expert insight, helping to manage these variable conditions.”
Much of the volatility in the market can be attributed to increases in commodity prices. In general, the trend harkens back to basic laws of supply and demand. In the early stages of the pandemic, manufacturers and material suppliers decreased production under lockdown regulations, also expecting decreased demand from builders/developers.
As the economy is now starting to ramp back up, projects that were previously put on hold, and new construction, are reentering the marketplace. This has created a sharp increase in the demand for materials – particularly steel and lumber – which has far outpaced the rate at which suppliers can replenish their stock. This volatility has forced trade partners to put tight deadlines on their bids and required general contractors like GH Phipps to monitor the market closely.
Figure 1 demonstrates the phenomenon of market change. Between April 2020 and February 2021 bid prices remained fairly stable, increasing by only .5%. However, input costs that measure the expenses of a contractor’s purchases spiked by 12.8% over the same 10-month period. If a contractor won a job in April of 2020 but waited until early 2021 to purchase materials, this price inflation would have greatly impacted their projected profit margin.
Figure 2 shows the change in price for a variety of construction and selected materials nationwide.
Steel Product Prices
Within our local commercial construction market, steel product prices have driven much of the volatility. Nationwide, the price of steel commodities increased by 20% between April 2020 and February 2021. In addition to this increase in price, the supply chain has also been interrupted. An example: steel joists and decking supply availability dropping drastically over the past year. This can be attributed in part to speculative industrial space and companies purchasing a sizable percentage of available joist supplies to fuel their increased warehouse development.
As a result of factors both endemic and non-endemic to the construction industry, lumber prices have greatly increased by 62% and are still climbing. Within the industry, both residential and multi-family projects have accelerated to meet the demand for attainable workforce housing. Other industries, such as furniture and appliances, utilize lumber to package and palletize their products. The increase in demand for these and other lumber uses has created a spike in both the demand for and cost of lumber.
Electrical Cost Impacts
Several anomalies have had a large impact on the market. For instance, a fire at a PVC manufacturing facility greatly reduced the amount of insulation that could be produced for copper wire. “When we hear electricians discussing commodity prices, it’s usually in regards to copper prices.” This instance has served to drive up the price of electrical installations.
In terms of labor prices, we are seeing stable to modest increases. Companies are bringing back employees to work on projects that were previously put on hold. Ruff noted, “We are seeing people learn how to tackle a project with fewer available resources. It’s that ‘Do More with Less’ mentality. The consideration of, ‘What can we do to become more competitive?’” This is a direct reaction to market volatility. Trade partners are trying to combat increased commodity prices by utilizing more efficient production methods so that they can continue to bid competitively.
Our knowledge of the local trade partner community and commercial construction industry has equipped us to successfully manage client relationships while continuously monitoring the current state of the market. Through all of the uncertainty, we have prioritized our commitment to our clients and trade partners, and have continued to provide a top-rate service.
If you are looking to move a project forward in the coming months, we would be happy to discuss the ways we can utilize our expertise to ensure an exceptional building experience.