You'd think that construction costs would be rising in the age of the COVID-19 pandemic. Added safety measures, permit delays, and a recent lumber shortage have made it more challenging to embark on new construction projects, and with regard to the latter, a low supply has absolutely driven up wood prices.
In fact, it's not just lumber costs that are inflated. The price of raw building material costs increased by 2.2% in June due to supply-chain issues.
Still, the Turner Building Cost Index, which measures construction costs in the U.S. nonresidential building market, fell during 2020's second quarter by 1.01% compared to the year's first quarter. And this is the first time the index has fallen since 2010. That's good news for real estate investors, many of whom may have put new projects on hold earlier on in the pandemic and are now itching to move forward.
What's driving construction costs down?
Due to the ongoing health crisis and the recession it spurred, there's been less demand for new construction, and so companies that work in the industry are lowering their prices in an effort to get hired. All of that bidding is driving down costs on the whole. Furthermore, while construction firms expect sales to increase over the next half-year, they're also anticipating lower profit margins. And that's good news for investors who may be able to capitalize on low-cost construction for both residential and commercial properties.
House flippers may be in a strong position to capitalize, too. Those who flip houses for a living don't always do the work themselves, so if the cost of labor is shrinking, that means there's more opportunity to make money.
But investors still need to keep an eye on quality
Construction firms and contractors may be willing to offer their services at a lower cost due to limited demand, but that doesn't mean investors won't get what they pay for. Opting for the lowest bid on a new build could be disastrous if the construction firm in question cuts corners, uses subpar materials, or cares little about extensive delays. As such, while a dip in construction costs puts real estate investors in a great position during the latter part of 2020, they should still proceed with caution and do a thorough job of vetting builders before signing any contracts.
Another thing to keep in mind is that low profit margins put construction firms and contractors at risk of going out of business, especially when combined with the general impact of the COVID-19 crisis. Investors should, therefore, hire diligently and shouldn't be afraid to ask firms or contractors what their cash flow looks like. Engaging a company to start a job only to have that company go bankrupt mid-project is a good way to lose money -- even at a time when it seems to cost less to have a new home or building constructed.