Written by: Simon Offstein and Collin Fitzgerald
Construction Spending Continue to Fall as Costs Rise
U.S. construction spending saw another consecutive monthly decrease in August when it totaled $2.132 trillion compared to a revised $2.134 trillion for July, a decrease of 0.1%. This is only the latest in a series of monthly drops since spending value peaked in May at an all-time high of $2.168 trillion. Despite falling interest rates and a 30-month high in Fannie Mae’s Home Purchase Sentiment Index, rising construction costs continue to affect the feasibility of new construction projects.
Through 2023 and in the early months of 2024, the costs for various construction materials that had surged in years past due to COVID-related supply chain constraints were beginning to fall and stabilize. Most notably, framing lumber prices in Q1 2024 saw a 6.24% decrease from Q4 2023 and fell 18.78% compared to the year prior. Other prices for supplies such as copper and fiberglass all saw similar quarterly drops in early 2024. As these prices fell, U.S. construction spending trended upward, reaching all-time highs each month until May. With spending going up and prices going down, all signs were pointing to a supply chain recovery.
This all came to a halt in March 2024 with the collapse of the Francis Scott Key Bridge in Baltimore, Maryland. Debris from the accident caused the Port of Baltimore to shut down for nearly two months, costing the economy more than $191 million daily and forcing port workers to be out of work for months. In the trucking industry, more than 4,900 trucks crossed the bridge each day, and $28 billion worth of goods would cross annually. Major rerouting had to be done for any merchandise heading in or out of Baltimore, a big hit to a still vulnerable supply chain.
As the year progressed, prices for basic construction materials began to increase again. Looking specifically at Q3, materials such as framing lumber, copper, and fiberglass all saw a quarterly increase of 7.61%, 10.62%, and 16.67%, respectively. With such high prices, some new construction projects have become unfeasible as the return on investment would require developers to charge exorbitant prices to tenants, which, in turn, scares off potential investors. However, as the supply chain recovery progresses, including recent news with the U.S. port workers strike ending on October 3rd, we should see prices for materials beginning to stabilize and construction spending continuing its upward trend from before May 2024.
How this affects Columbus Commercial Real Estate Market
The recent fluctuations in construction spending and material costs are expected to have significant implications for the commercial real estate market, particularly in Columbus. With construction costs climbing after a period of decline, new commercial projects may slow, as developers face increased financial barriers and tighter profit margins. For the Columbus market, known for its ongoing growth and demand for commercial spaces, this could mean delays in new developments or a shift toward repurposing existing properties rather than initiating new builds. Higher costs may deter investors, impacting the pipeline of commercial projects in the area. However, the recent resolution of the U.S. port workers strike offers hope that supply chain pressures might ease, potentially stabilizing material costs and encouraging renewed investment in Columbus commercial real estate
Our Take
Our perspective on the current economic landscape suggests cautious optimism. While rising material costs and fluctuating construction spending have created headwinds, the Columbus commercial real estate market remains resilient. We see opportunities in adaptive reuse projects and strategic investments in existing properties as effective ways to navigate cost pressures. Additionally, with recent improvements in supply chain stability, we are hopeful for gradual normalization in material costs, which could help to reinvigorate the development pipeline. Balancing prudence with strategic growth will be essential as we move forward in this dynamic market environment.
Sources: