Recent shortages of building materials, along with ensuing price increases in those materials, have been a thorn in the side of residential builders of late. According to Cushman & Wakefield, similar woes have been mounting in the industrial sector, with the potential to slow down development and cause a ripple effect in the segment.
For example, take steel, a vital commodity when it comes to industrial construction. Prices of hot-rolled coil steel — used to make I-beams, railroad tracks, and other important components of infrastructure and logistics sites — have vaulted nearly 210% since August 2020, prompted by sparse inventory, a lack of imports since the fourth quarter of last year and COVID-induced shutdowns in U.S. steel mills over the past 12 months.
Production capacity rates at steel mills nationwide has bounced back to 75% after dropping to 50% in May 2020, though that level still remains below the 81% seen in the January before the pandemic. U.S. steel prices are currently 70% higher than the global market price, according to the Bureau of Labor Statistics, and with the timetable for supply to catch up to demand estimated at 12 months, high steel prices are likely to persist for the foreseeable future.
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That’s bad news with the present industrial construction pipeline at a record high, per Cushman & Wakefield. With the company reporting the current industrial construction pipeline at a record high nationally, supply of building materials across the country is already being stretched; escalation of steel pricing in the next few quarters will translate to further increased construction costs, both for ground-up development and for improving existing industrial sites.
Could that cost increase hold back industrial deal activity? Time will tell. With demand also at record levels, movement within the industrial sector has proven resilient even with the pandemic disrupting commercial real estate as a whole.
At the very least, Cushman & Wakefield surmises that vacancy rates within the industrial sphere will be lower in some markets, with competition and growing costs for steel pushing some to favor leasing over buying and building. Those who do choose to build, Cushman & Wakefield said, should expect longer lead times in addition to higher prices. Meanwhile, a potential slowdown in industrial construction could provide further tailwinds to the values of existing assets, at least until the steel supply is mitigated by ramped-up production and increased imports.
