What Will Happen With Construction Prices?

We continue to get buffeted by price increases, seemingly weekly, which puts pressure on our estimates and has a negative effect on feasibility for our clients.  Though prices are being locked in for Fall starts up North, clients have repeatedly asked me what will happen to them for their Spring starts.  It’s certainly understandable.  I’d want to know too.  Normally, I’d have a good sense of this, but I don’t feel that I have a good basis to know now.  This summer, home building continued at a brisk pace, and lumber peaked at over $1,800 per mbf.  Clients kept asking me what they should do at those prices, but this situation was unprecedented.  Most locked in, and then lumber started to come down.  Jeff Korzenic, Chief Investment Strategist of Fifth Third Bank, said earlier this summer that the best cure for high commodity prices is high commodity prices since it attracts more capacity and more entrants to the market.  And he proved right on lumber.  But so much has gone up so fast this year, and you wonder if it will have a similar downward trajectory as lumber.  Yogi Berra once said the problem with the future is that it’s hard to predict.  And that’s certainly true now.

So our own Rey Rodriguez, a Project Estimator in our Florida office, surveyed some of our subcontractors in the state to see what they were saying.  We got answers, but I’m not sure it lessens the confusion or uncertainty.  Many of the subcontractors, and these are good subcontractors, are a little shell shocked with increases they’ve been dealing with this year.  Their predictions were all over the board, and no one is predicting a decrease in prices over the next six to twelve months.  Some, like Gypsum, are predicting 5% to 10% per quarter increases.  Some are even higher.  I find this hard to believe, and the recent reductions in lumber pricing would make me believe that there will be some abatement over the next six to nine months.  By way of example, we just updated pricing on a wood-framed Discovery Village project in Gainesville, Florida, and the price is virtually unchanged since April.  But demand for homes and home building continues to be strong.  With that factor, a strong economy, and continued skilled trade shortages, it seems a stretch to think overall prices will decrease much.  If I were developing, I probably would add 3% or so to current pricing, and I bet I’d be pretty close.  But, “the problem with the future is it’s hard to predict,” and I could easily be wrong.

Peter Douglas, P.E.
The Douglas Company

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