Commercial Real Estate Needs To Rein In Exploding Supply Chain Costs
Have you noticed that everything is getting more expensive? With costs rising exponentially in housing, food, and fuel, you would have to be living off the grid or exceedingly wealthy to not notice the effect on your pocketbook. The same forces that are driving up costs for the average citizen are also driving up costs for commercial real estate, especially in terms of supply chain shortages that are causing significant price spikes in essential materials.
Post-Covid and Inflation
Canada recently recorded inflation of 6.7%—an historic high not seen in over 30 years. One of the biggest culprits is fuel, an essential in most households, that has close to doubled in price in a few short months. Some believe inflation is a short-term problem that is an after-effect of the Covid pandemic, including Benjamin Tal, deputy chief economist at CIBC World Markets, who said at the Vancouver Real Estate Forum that 60-65% of the inflation we are seeing is Covid-related.
“Sixty to 65% of the inflation we are seeing now is COVID-related…If you all agree with that assumption, that this is a transition year, [this inflation] should disappear over the next year.”
- Benjamin Tal, deputy chief economist CIBC World Markets.
Commercial real estate is feeling the pinch as both building and borrowing cost more, making commercial real estate property more expensive than ever.
While the Covid pandemic certainly wreaked havoc on global supply chains, it’s no longer the only contributor.
The Impact of the War in Ukraine on Global Supply Chains
In an interview with The Globe and Mail, Jon Stovell, president and chief executive officer of Reliance Properties Ltd., expressed confidence in the future of commercial real estate but also admitted he is concerned about the “radically out of control” prices of building materials.
According to The Globe and Mail, Russia’s iron and steel exports to Canada totalled almost $210 million in 2021; with sanctions in place, the price of those materials is undoubtedly set to rise. Even with countries still friendly with Russia, such as China, the supply chains are still disrupted as engineered white oak flooring manufactured in China relies on oak supplied from Russia. Despite still engaging in trade, the supply chain still has disruptions and the price of this popular flooring has increased four-fold since the war began.
Remedies for Commercial Real Estate Investors
In a typical construction project, everything is built-in sequence and therefore a delay in one part holds up development for the entire project. Some innovative builders are using prefabrication to alleviate some of the headaches from supply chain disruption and keep construction projects on schedule.
In prefabrication, components waiting on parts can be assembled in tandem with the rest of the construction project to keep timelines on track.
In The New York Times, Deryl McKissack, the chief executive of the design firm building the new Dallas-Fort Worth International Airport terminal, kept the project on track despite supply chain issues that prevented critical electrical switchgear from arriving on time. The components that needed that particular gear were prefabricated off-site and installed later when the parts were available.
Global shortages in key construction components are spurring a trend in prefabrication as delays in receiving materials no longer need to impact the timeline of the entire project.
There are some drawbacks to the prefabrication method, including very high shipping costs and, particularly in residential, the perception that the results look homogenized; but as the chief executive of a developer in Brooklyn pointed out, standardizing construction brings down costs and makes building more predictable.
“[Without standardization] Every time you build a building you are reinventing the wheel.”
- Alfonso Medina, chief executive of Madelon Group