The Covid-19 pandemic disrupted lives – and industries – around the world. Yet despite lingering concerns about new variants such as Omicron, the global economy is on a more solid footing than it was in the fourth quarter of 2020, with many economists predicting real GDP growth of 3.9% in 2022. 
Disparity in new construction numbers
Overall, construction has rebounded. According to U.S. Census Bureau statistics, total construction spending peaked at $1.57 trillion in July 2021 – not only a record high but also 12% higher than average 2019 levels.  But that growth was driven mainly by residential construction – commercial new construction has lagged significantly behind. Not only did nonresidential spending remain weak for much of 2021, spending across education, office, transportation, health care, and commercial facilities saw its largest year-over-year decline in July of 2021.
While the ongoing supply chain issues and labor shortages have certainly contributed to the decline, containers piling up in ports and new OSHA mandates driving vaccine-hesitant workers away from larger companies also contributed to this slowdown.
In any given year, the cost of construction materials increases due to inflation – it’s an issue contractors faced since long before anyone heard of Covid 19. But the pandemic created a perfect storm of circumstances, driving those numbers higher than ever before.
The U.S. construction industry relies heavily on foreign construction materials such as steel and stone. However, given the global nature of the pandemic, many overseas factories producing these materials saw significant delays and closures. As a result, supplies dwindled, prices rose, and even domestic materials and resources have seen dramatic price increases.
As of October 2021, the United States’ year-over-year inflation rate stood at 6.2% , and construction material costs over the year were up 23.1% – almost four times the market norm. 
There were double-digit percentage increases in the selling price of materials virtually across the board. For example, the price index for steel mill products rose by 123% compared to last August. Lumber and plywood jumped 15.9%, the copper and brass mill shapes index shot up 45.3%, and the index for plastic construction products increased 29.6%.  Prices for other input costs, including fuel and natural gas, are also sharply higher compared with year-ago levels. All of which has contributed to the weak numbers in commercial new construction.
Builders forced to adapt
Early in the pandemic, contractors would often lower their bids to stay in business. But the rapid rise in costs has made that practice unsustainable. According to the Associated General Contractors (AGC), while bid prices have increased by only 0.5% since the start of the pandemic, input costs have risen by 20.6%. 
The dramatic increase in the cost of materials and reduced profit margins across the industry saw many firms taking losses. In addition, the lag time between when a contract is signed and the final delivery has been a key issue. Although contractors have always had to deal with unforeseen additional costs, Covid 19 caught many wholly unprepared. As a result, many are learning from the painful lessons of 2021 and instilling contingency measures in their 2022 planning to mitigate risk, whether longer lead times or tighter margins.
Outlook unclear – but there are reasons for optimism
With so many looming questions about the impact existing and future Covid variants could have on businesses worldwide, the overall economic outlook for 2022 is uncertain. As Circle Squared CEO Jeff Sica recently commented, “Given that construction demand in the U.S. is likely to remain high well into the coming year and recognizing that both inflation and global supply chain woes show no immediate signs of easing, it’s hard to see costs – particularly for imported products – coming down meaningfully in the short term.”
That means that contractors will continue to deal with rising costs and lessening resources for the foreseeable future. However, there is a silver lining; the combination of historical demand and ever-increasing rents may well absorb many of these costs. Since March of 2021, the average U.S. asking rent has risen by $179, close to the increase over the previous five years combined. According to Yardi Matrix’s September survey of 140 markets, multifamily rent growth helped fuel that surge – rising 11.4% year-over-year through September to $1,558. 
Behind these gains is unprecedented demand; some 475,000 units were absorbed nationally through September, surpassing the all-time annual high. If such a trend persists, it could continue to make sense to build in many metro markets.
At Circle Squared, we help our clients navigate the tumultuous waters of real estate. We do it by keeping on top of industry trends, news, and insights – to ensure every decision you make is based on thorough, vetted real-world information.
If you have questions about how rising inflation may impact your portfolio, reach out today. We’re here to help.
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 (Braun, Forbes, 2021)
 (U.S. Census, Construction Spending, October 2021)
 (Statista Research, November 2021)
 (Statista, Construction, 2021)
 (Associated General Contractors of America, September 2021)
 (Multi-Housing News, December 2021)