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    How Real Estate Developers Are Handling Erratic Material Costs

    The costs of steel and lumber have thrown real estate developers for more than one loop in the past year. Many hoped the pandemic would suppress construction materials costs. Instead, costs shot up, setting new records along the way—but the price increases have hardly come in a straight line. Prices have soared then plummeted in an exhausting pattern—but whether the cost of materials is up or down, developers want off the rollercoaster.

    2021 Construction Price Trends

    In the last 15 months, the cost of construction materials has reached stunning new records. Steel and lumber prices are more than three-times what they were prior to the pandemic. Lumber peaked in May at $1,700 per thousand board feet, and Shanghai steel futures traded at a high of 6,198 yuan per metric ton. These prices pushed the average cost of construction to $350 per square foot in the US, and residential development is now nearly as expensive as commercial development, within 5% of the cost. 

    There has been some reprieve. Lumber prices fell in September and again in May, eventually dipping below $1,000 per thousand board in June. While the price is down 45% from the peak in May, lumber remains well above 2019 prices of $400 per thousand board. Steel futures have also tumbled from the peak in May, and Trading Economics expects steel costs to continue to fall. The latest forecast pegs prices at 4,657 yuan per metric ton by the end of the summer. 

    Some experts attribute the most recent dip in lumber prices to the waning pandemic and a decrease in single-family home repairs and upgrades, but the fact that there was a similar downward trend in September casts doubt on that theory. It also keeps developers guessing if prices will again turn upward. Even as the market has fluctuated, the cost of both lumber and steel remain more than 200% above prices at the end of 2020.

    [Ebook] Download How to Cut Real Estate Development Costs by 2-6%  to uncover  how top development firms are pulling away from the pack.

    Technology Curbs Costs

    Developers ordinarily leverage construction technology to amp up productivity. Data automation and AI platforms like Northspyre can save up to 6% on construction costs by leveraging dynamic forecasting and analytics to enhance project decision-making —ultimately helping to offset rising materials costs—but other technologies can tackle the problem head on. Managing construction materials with tracking identification technology and Building Information Modeling can combat price volatility by keeping material orders lean. 

    Tracking identification technology includes Radio Frequency Identification, barcodes and QR codes. Developers and contractors can track every material with this technology, whether it is in storage, on a truck or on the job site ready for installation. Closely tracking materials shaves down a project’s total spend by reducing jobsite waste—and the savings can be significant. Construction Industry Institute estimates that the average rework order, which includes materials and equipment as well as labor, equates to 2.4% of a development’s total budget. Other outlets say rework costs can run as high as 20% of the total project budget. 

    Building Information Modeling or BIM technology digitally charts construction using 3D models to simulate the construction process in advance, allowing stakeholders to make crucial decisions about a development, including the type, quantity and delivery of materials as well as construction methods. The technology can reduce unbudgeted project changes by up to 40%. 

    By combining both productivity-driven tools like Northspyre and materials management technologies, developers have the potential to realize significant cost savings even as materials prices are on the rise. Learn more about Northspyre today.

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