Despite supply chain issues and increases to the cost of labor, land and building materials, local contractors say demand for construction is still high.
“In the past 12 months, the cost of a typical construction project in Miami probably increased by 20%,” said Chris Kennedy, vice president of preconstruction for Suffolk Construction. But, he said, “It’s almost like we can’t build housing fast enough for the demand.”
The price of materials isn’t the only uncertain factor in the market – contractors say delivery timelines have been greatly affected.
“The root cause is covid,” he said. At the beginning of the pandemic, “everything stopped overnight. Prices actually were depressed for probably nine to 12 months because there was no demand. And there was still supply.” But once demand returned, some manufacturers around the world had already started producing less, or faced logistical issues.
“Most people, myself included, didn’t really appreciate how finely tuned the global supply chain was, where you can order something and get it in a week,” Mr. Kennedy continued. “All the cogs in the wheel need to start back up again. It’s just taking time.”
This volatility has led some contractors to order and pre-pay for materials earlier than they usually would, tying more money into projects up front.
“Our timelines for basic products are just so far out of left field it is hard to fathom,” said Harry Hollub, president of high-end contractor Hollub Homes. “We’re ordering trusses before I even have permits.”
Appliances, some of the last materials that may be installed in a project, may need to be ordered before shovels are in the ground – 12 to 13 months ahead of time, he said. And while payment for such materials was often common upon their delivery, now many producers require it up front.
The cost of materials has largely risen across the board, Mr. Kennedy said. Prices for aluminum and copper, he continued, are hitting highs right now, as well as any oil-containing products including PVC and many roofing products.
“Everything that touches oil,” Mr. Hollub said, is affected due to the ramifications of the war in Ukraine. This includes any materials made with plastic, as well as fees for subcontractors who now have to pay more for gas to travel to work.
Due to inflationary increases across the market and high demand, Mr. Kennedy said, the rising cost of labor must also be factored into the cost of projects. With rental rates increasing, most workers cannot afford to live on the wages they once accepted.
Still, Mr. Hollub said he’s had no problem finding workers. “It’s not so much that there is a labor shortage,” he said, “because we’re paying top dollar.”
Ultimately, said Jeff Hartsook a principle for commercial tenant advocate firm Cresa, the brunt of cost increases is felt by consumers. Due to inflationary increases in all aspects of the market including building materials, he said, commercial landlords are looking for higher annual increases.
Additionally, he said, tenant improvement costs tied to renewals are also increasing due to the cost of building materials.
“Our costs have gone up significantly, but the buyers that we are selling to understand that and they’re willing to pay,” Mr. Hollub said of the luxury market.
According to Mr. Kennedy, contractors must now work more closely with buyers and subcontractors to factor in cost changes. Situations could arise, he said, where an electrician agreed to a given rate months ago and can no longer accept it due to increases in the costs of gas and copper. All parties must work together, he said, to ensure a fair solution
Despite cost increases, said J.C. De Ona, Southeast Florida Division president at Centennial Bank, demand for construction lending is “still there.”
“What it has affected is the underwriting process for us,” he said. Volatility, potential increases in materials costs and contingencies are factors that are carefully considered, and can make financing a loan more expensive. However, he said, these costs are offset by rising rental rates. But if the increase in the costs of a project are not proportionate with the increases in the price for the ultimate buyer or renter, he said, it may not ultimately work out.