Supply Chain Disruption Slows CRE Development
By Alex Rhoten, Principal Broker
Coldwell Banker Commercial Mountain West Real Estate
Delays and shortages in construction supply slow development and raise costs
Missing material and inventory slow commercial development.
Supply chain disruptions are hitting the economy and putting multiple sectors into direct competition for raw materials. From the auto industry to commercial real estate (CRE), it looks like this will continue until at least 2023, and perhaps even longer. Just as extended waits for new cars are now the norm, so too are slowdowns, and halts in new commercial real estate development.
Developers face a scarcity of the materials they need, especially appliances, lumber, doors, and windows. Not surprisingly, when delays happen, costs go up. The bids are time-sensitive and the supply chain disruptions are costly for CRE developers.
When the cost of labor and material goes up, so do CRE prices.
In August of this year U.S. Secretary of Labor, Marty Walsh, paid a visit to the Mid-Willamette Valley. He spoke to the United Association of Plumbers and Steamfitters Local 290 in Springfield, sharing the news that the $1.2 trillion federal infrastructure bill is a “once-in-a-generation opportunity.” He emphasized that creating jobs is a major focus of the bill, which passed the Senate with bipartisan support just prior to his visit.
This tells us a few things. The first takeaway could be that the cost of CRE development is going to go up even more. This would be because supply chain disruptions are caused by a labor shortage. As the public and private sectors compete intensely for labor and materials, more shortages will be inevitable. A second takeaway is that there will be long-term positive outcomes for CRE, ones that result from improving U.S. infrastructure. However, for those, we will all have to wait.
Demand for warehouse distribution space is on the rise.
So where is everybody going to get their goods? Supply chain stress is happening across all sectors, and in this interconnected world we live in, the industrial sector is racing to keep up with the turbo-speed growth of e-commerce.
For industrial real estate, that’s a game-changer. As the massive dependence on imported goods (e.g. 30 to 40 percent of production from China) became apparent during the pandemic, companies struggled to fill next-day orders. The simple solution is more distribution facilities near population centers. Consequently, Salem’s General Industrial (IG) and Industrial Commercial (IC) zones are getting a lot more attention.
Expect outright price hikes for new CRE and more change of use development.
Labor and material shortages during a time of economic growth mean we can expect prices to soar for new commercial development. This seems especially true for multifamily housing and industrial warehouse space.
With economic growth comes inflation, and with inflation, the Fed adjusts its rate higher. Since the central bank’s rate lived at virtual zero for so long, this was foreseeable. When the costs of borrowing money, hiring labor, and ordering lumber all go up, tighter margins make it harder for investors to meet financial goals. I anticipate the ongoing lumber shortage will also cause investors to take a fresh look at existing assets for change of use and redevelopment potential.