Developers and contractors are adjusting projects amid material cost spikes but share an optimistic outlook. Developers and contractors are adjusting projects amid material cost spikes but share an optimistic outlook.

Contractors adapt to remain active amid high commodities costs, labor challenges

BY Sunday, July 04, 2021 04:45pm

Developers and contractors see some light at the end of the tunnel as sky-high prices for lumber and other construction commodities begin to decrease from peaks during the pandemic. 

Despite the construction industry’s challenges involving material costs and access as well as talent shortages, West Michigan executives tell MiBiz that — for the most part — projects are roughly on par or exceeding pre-pandemic levels of activity. This is attributed to low interest rates and pent-up demand as COVID-19 restrictions lift across the state and country, according to industry executives.

“People have pent-up demand, and even with the high cost of materials they’ve held off on projects for over a year,” said Mike Novakoski, president and CEO of EV Construction Co. “Some larger commercial projects are still being delayed, pushing timelines back where maybe they would have a fall groundbreaking and are doing it in spring instead.”

The cost of construction goods and services has increased 24 percent in the past 12 months — nearly twice as much as in any previous year, according to a June analysis by the Associated General Contractors of America (AGC). Materials with especially steep price increases from May 2020 to May 2021 cover a wide range of commodities, while lumber and plywood prices more than doubled with an 111-percent increase, according to AGC.

Chad Veldkamp, partner at Grand Rapids-based Construction Simplified, said the company has a couple of projects that have been delayed because of lumber costs.

“They’re generally apartment projects or smaller user spaces where it’s only 2,000 to 3,000 square feet of new build,” he said. 

Lumber typically makes up about 10 percent of a project’s budget, Veldkamp said. The doubling of prices in the past year caused a significant increase in overall project costs from when they were originally bid out, he said.

“That’s real money, but at the same time in the discussion with our clients, we’re also looking at availability of land and (low) interest rates” to offset material costs, Veldkamp said.

Construction Simplified is also seeing construction activity with small and mid-size medical offices, contributing to an overall optimistic outlook, he said.

“The construction market is very good right now and we’re not seeing any signs of a slowdown,” Veldkamp said.

The AGC attributes construction employment declines to record-high materials costs, high demand for projects and delays in receiving construction supplies. However, Michigan was among just eight states that added construction jobs from April to May this year, with an additional 1,600 construction jobs. Most gains in employment are likely attributable to more demand for homebuilding and remodeling than to nonresidential building and infrastructure projects, according to AGC Chief Economist Ken Simonson.

‘Think outside the box’

Novakoski noted that typical eight- to 12-week lead times on steel buildings have more than doubled to 30 weeks, based in part on an increase in fulfillment center construction.

Meanwhile, lumber manufacturers are “almost non-committal” with pricing, and drywall compound used for plastering remains difficult to find, he added.

“I’m talking to lumber yards that are saying, ‘Yes, we can get materials, but we don’t know when because we don’t have drivers to get the lumber here and take it to your sites,’” Novakoski said. “It’s all these elements that are having an impact on almost everything we’re doing.”

Veldkamp said soaring costs for building materials have led to the need to reconfigure projects. 

“We’ve had to start looking at alternative types of building,” Veldkamp said. “On the lumber side, we started pricing out buildings using structural steel studs, sometimes because of availability or cost. Previously, lumber was always a cheaper option, but that started to swing the opposite way.”

The company has also turned to steel beams for building structural support that have been easier to acquire compared to more conventional steel bar joists, Veldkamp said.

“We’re just trying to think outside the box in order to find materials that are available that meet our standards,” Veldkamp said.

Residential construction

Meanwhile, material costs appear to be having less of an effect on residential demand, Novakoski said.

“People who want a house are sucking it up and doing it,” Novakoski said. “I think it has a lot to do with how cheap money is, and when you’re getting an almost zero-interest loan and can spread it over 30 years, you can get a lot more money to do what you need to do.”

Dan Clappison, vice president of construction services at Wheeler Development Group LLC, says high material costs for single- and multi-family projects pose challenges but can also be partially absorbed.

“It’s been challenging, but the positive side of things is that the low interest rates have helped offset some of these cost increases,” Clappison said. “Financing can help some projects move forward in that regard.”

Wheeler Development has five active deals that have been delayed because of lumber costs, making it difficult to plan and finance projects, Clappison said. He expects the company will get back to its typical workload of three or four active construction projects by the end of 2021.

“Things are coming back online, but there is still a shortage or drawn-out timeline for how fast these suppliers can get you these materials that you’re buying,” Clappison said.

For Grand Rapids-based Inner City Christian Federation, which specializes in affordable housing projects, high and unpredictable lumber costs have been a significant challenge for financing projects, said President and CEO Ryan VerWys.

“The developments we’ve just finished were past the point of seeing lumber pricing increase, so that didn’t affect those recent projects,” VerWys said. “But as we look to start construction at Tapestry Square, we’ve had to make some adjustments to our plans, and the hope is that the cost will come down some.”

ICCF’s Tapestry Square project is planned for the southeast corner of Division Avenue and Wealthy Street in Grand Rapids and will consist of 56 residential units across four floors. The project is expected to break ground in August.

“Every day that those lumber costs come down I’m grateful and hopeful because we have a significant need for more affordable housing,” VerWys said.

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