Investing in residential or commercial properties can be a lucrative endeavor. But right now, real estate investors are seeing a huge surge in construction costs. And there are a number of key building materials that are driving prices up on a whole.
We can't blame lumber anymore
Earlier in the year, the cost of lumber skyrocketed as supply chains were halted during the pandemic. Mills and lumber yards had to shutter in 2020 due to safety concerns, and as of the spring of 2021, supply had yet to catch up to demand.
In May of 2021, lumber reached an all-time high before creeping back down over the course of the summer. And while that's helped keep construction costs more manageable, the drop in lumber prices has been largely offset by hefty price increases across a number of key building materials.
Materials that are up the most
These 10 materials have seen their cost increase the most so far in 2021:
- Steel mill products
- Building paper and building board mill products
- Plastic water piping
- Fertilizer materials
- Laminated veneer lumber
- Thermoplastic resins and plastics materials
- Structural metal joists and concrete reinforcing bars
- Wooden window and door frames
- Copper piping and tubing
All of the above materials are up at least 30% this year. But steel mill products have seen the sharpest increase -- they're up a whopping 81.3% so far following a 2020 increase of 11.1%.
Should investors buy properties or sit tight?
Right now, a newly built residential home will cost buyers about $36,000 more on average to purchase. Real estate investors in the residential space may have more leeway to pay up than the typical buyer, but all told, higher building costs are creating an even tougher housing market for buyers to navigate.
Meanwhile, investors in newly built commercial properties will also pay a premium in the coming months. And whether it makes sense to pay up will depend on the upside.
In the near term, for example, the demand for multifamily real estate could soar, so paying up to purchase newly constructed buildings could still make sense. Whether that logic holds true for every new project is a different story, so investors will have to crunch their numbers and assess opportunities individually.
Will things get better soon?
In time, the cost of building materials should begin to come down as supply chains are able to catch up with demand. But things could take quite some time to normalize.
Furthermore, even once building materials come down in price, builders may not be so quick to pass those savings onward. Many builders were forced to put their own plans on hold during the pandemic and are still struggling to procure the materials they need to move projects forward. Those delays can be costly, so builders may seek to compensate by maintaining higher prices even once supply-chain holdups become less of an issue. And so inflated construction costs for new builds could be here to stay a while in both the residential and commercial real estate space.