High demand and limited supply have led to dramatic increases in domestic steel and lumber prices this year, significantly increasing the cost of commercial real estate development. By early May, both steel and lumber prices had more than tripled since late last year, according to SteelBenchmarker and TradingEconomics. However, since peaking at $1,686 per thousand board feet on May 7, lumber prices have dropped by 23% to $1,306 on May 19—still up by 260% from late last year.
The pricing surge is partly due to limited supply after many steel and lumber mills were temporarily closed during the height of the COVID-19 pandemic last year. As restrictions eased and commercial real estate development began to resume, producers were unable to keep up with skyrocketing steel and lumber demand.
Rising costs are creating sticker shock for developers, causing some to cancel or postpone projects. Others are increasing their pre-pandemic construction budgets by as much as 20%, anecdotal evidence suggests.
Despite some cancellations, 2021 will still see a boom in new commercial real estate development. Dodge Data & Analytics reports that projects costing more than $50 million each will increase by at least 40% year-over-year for total completions of 430 million sq. ft. Multifamily projects account for around 45% or 194 million sq. ft. of that total, followed by warehouse projects at 36% or 158 million sq. ft. Office projects account for 17% and retail projects just under 2%.
Figure 1: Construction Materials Cost Index with CRE Completions
CRE Projects $50 Million and Higher, includes office, industrial, retail, and multifamily. Steel and Lumber Index: 1982 = 100. Source: St. Louis FRED, CBRE Research, Q2 2021.
Residential development spending today is nearly the same (95%) as that of commercial real estate development, after hitting a low of just 36% in 2009. With thriving single-family home markets across the U.S. seeing even more new development and permit authorizations in 2021 at a 10-year high, this trend shows no sign of reversing.
Figure 2: Total Construction Spending, Residential vs. Nonresidential ($ Billions)
Residential spending includes both single-family and multifamily construction. Source: St. Louis FRED, CBRE Research, Q2 2021.