By Tanja Marinovic
May 04, 2021
While many traditional office deals have been sidelined, medical providers have continued to operate during the pandemic, causing steady demand for tenant improvement projects in medical office buildings. However, the pandemic has greatly disrupted the construction industry, with volatile labor rates and material costs complicating evolving facility design and layout.
A variety of pandemic-related forces caused construction costs to decline slightly for the first time in a decade. The Turner Building Cost Index, which measures costs in the U.S. nonresidential building construction market, fell to a value of 1171 in third quarter 2020, a 1.5% quarterly reduction from the beginning of 2020 and the lowest value since 2010. The index held steady in the fourth quarter and increased only 0.09% in the first quarter of 2021 to 1172.
We’ve seen a 20% to 25% price surge in two primary building materials: lumber and steel. According to the Producer Price Index released in March, during the past year, softwood lumber spiked 73% and iron and steel scrap has surged 50.8%. The steel industry claims it’s facing tremendous pressure from the domestic mills and has subsequently raised prices on all products by 5% each month beginning in October 2020, then 10% in January and February, and 20% in March and continuing through at least April 2021.
Some of the root causes working to exert extreme pressure on the domestic steel supply are:
- Mill consolidation decreased the number of domestic steel providers
- Mills idled capacity in response to the COVID-19 pandemic
- Buyers leaned out inventories as the 2020 economy constricted
- Section 232 tariffs, combined with increased international demand, led to a reduction of competitively priced imports
- Current demand for construction products remains brisk after a late 2020 rebound
The lumber price increases are due to a variety of reasons, such as factories that pulled back production when demand dropped still not running at capacity, lingering supply chain issues stacking up ports, tariffs on lumber, and even wildfires in the west. Mostly, though, all the spikes can be traced back to COVID-19 in some way.
While the price increases affect all construction projects, they are having a larger, ripple effect into areas related to healthcare construction. The costs for drywall, copper, steel studs, and even vinyl siding have risen. As construction comes back online around the world, increasing demand for products could keep prices on the rise. And with the surge in demand for medical office buildings, we can only expect to see further price hikes as in-person healthcare activity picks back up post-pandemic.
For planning purposes, building owners need complete price transparency. Tenant demand for build-outs will not diminish amid rising prices, and landlords and tenants alike must be prepared for what can realistically be accomplished in the current environment.
Tanja Marinovic is Vice President specializing in Construction Management for Transwestern’s healthcare real estate clients.
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