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Why Industrial Development Costs Are Constantly Rising

Everyone is still feeling the effects of inflation due to shortages of all kinds of consumer goods, from groceries to gasoline. Certain product shortages and high inflation have been the lingering effects of pandemic-induced supply-chain disruptions that are slowing down not only deliveries of finished goods, but also parts and parts needed to manufacture a variety of products from automobiles to semiconductor chips. There are also raw materials. , These forces are also affecting the raw materials and other products used in construction projects.

In a vicious circle, shortages of construction materials that delay new deliveries of industrial space to the market are exacerbating supply-chain issues as the lack of required storage space for incoming products has created port bottlenecks and slowed down the process further.

Nationwide industrial vacancy hit a record low of 3.2 per cent at the end of 2021, with demand for industrial space supplying, according to a report by commercial real estate services firm CBRE.

“In-flight or planned projects since the end of 2020 have been hit hard by significant lead-time issues and availability woes since the end of 2020 for a myriad of reasons,” says Dan Richardson, director of cost consultancy with CBRE. Global Workplace Solutions. For example, the cost of commodities like concrete and steel have seen double and triple digit growth respectively over the past two years. This pattern will likely be further complicated by the passage of the Biden administration’s infrastructure bill, which will create more competition for these products.

According to global industrial giant Prologis, the cost of building materials, which increased by 40 percent last year, is accompanied by a 50 percent jump in the cost of developable land and the rising cost of skilled workers, to develop new industrial projects and made more expensive. more than ever.

In the fourth quarter of 2021, industrial construction distribution grew by 7.9 percent compared to the prior quarter at 81.0 million square feet. Ft., as per CBRE data. But that amount of space was still 10.3 percent less than the previous year. Another 513.9 million sq. The new industrial space was being constructed by the end of the year 2021.

In Southern California, total construction costs increased 50 percent last year, according to Orange County, Calif.-based Stephen Bachelor, regional partner—West, with Transwestern Development Company’s Logistics Group. Construction delays coupled with supply-chain issues added to the high cost of new development, he noted, as lead times for the delivery of some materials can now take anywhere from six months to more than a year. For example, the lead-time for electrical switch gear is 50 to 60 weeks; 20 to 22 weeks for upper door; 30 to 40 weeks for dock seal; 35 to 42 weeks for the dock leveler and 22 to 26 weeks for the main electrical panel.

According to CBRE’s Richardson, material shortages prompt manufacturers to make replacements or design changes with available items and move projects forward when possible. However, other projects have been forced to push delivery schedules or cancel altogether due to rising costs and limited materials.

Meanwhile, giant e-commerce companies like Amazon, which have virtually unlimited resources and are building their own warehouses, are “adding fuel to the fire” by piling up a year’s supply of building materials in advance, says Bachelor. make note. This further limits the supply of materials and construction products needed for small developers.

When can things get better?

Richardson notes that material shortages aren’t just due to international supply-chain issues. For example, the cost of harvesting domestic or imported lumber from Canada has gone up, as have the cost of both American and foreign produced steel.

Richardson says lead times for open web-bar joists are skyrocketing due to lower imports and increased demand from Europe and Asia, as US mills struggle to meet demand. He also noted that roof insulation and related materials are currently experiencing the longest run times in the entire construction industry.

With the pandemic over most regions around the world, there is some optimism about supply-chain recovery and markets returning to pre-pandemic normalcy. Purpose Cheryl A. Tyndall, Vice President of Enterprise Project Management Professional Services | The US, along with real estate services firm Colliers International, has warned that US and world economies and manufacturing operations do not act like a light switch. For example, she notes that parts made by many different companies around the world often go into a finished product.

“The industry needs time,” Tyndall says. “A new normal and expectation needs to be set.”

While products made in the US make up a substantial percentage of the total amount of building materials needed, many of these products contain imported components that are heavily affected by supply-chain issues, agrees Richardson. This includes mechanical equipment and controls, doors and hardware, switchgear, generators, electrical wiring and lighting. He noted that in 2021, the largest amounts of imported building materials, which mainly consisted of steel, aluminum, glass, stone slabs and wood, came from China, Europe, Mexico and Canada.

“Supply chain is complex, so fixing current issues will require a multi-pronged approach and patience,” says Brad Wright, CEO of Chunker, an online real estate listing service that focuses on providing users with access to temporary industrial storage space. is focused. They noted that the Biden-Harris plan, which focuses on increasing manufacturing of critical products domestically and improving supply-chain resilience, is providing a mix of solutions aimed at making an immediate impact on port operations.

These include funding to update port facilities and technology to streamline operations such as inspection and customs; round the clock services by working longshoremen; and funding for temporary solutions such as pop-up container yards to clear shipping containers out of ports, among other measures.

But while these solutions could help move cargo domestically, Bachelor noted that the war in Ukraine dashed hopes of a return to normalcy too soon. Some of the poorer countries may have the most supply chain effect hunger as both Russia and Ukraine are among the world’s most important grain producers. And when it comes to manufacturing, restrictions on Russian oil exports will hurt supply chains, driving up transportation costs for ships, planes, trains and trucks around the world, for example. Additionally, many semiconductor manufacturers rely on raw materials such as neon and palladium that are imported from Russia and Ukraine and further semiconductor shortages will affect everyone.

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