Prices Have Jumped. Pay Attention!

The Real Estate Espresso Podcast

Prices Have Jumped. Pay Attention!

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Prices Have Jumped. Pay Attention!

Welcome to the Real Estate Espresso podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.

Today, we’re talking about the immediate impact of price escalations in construction projects. Not next quarter, this is right now.

In the past few weeks, we’ve seen a growing list of US building product manufacturers announce price increases across a wide range of products, including roofing, insulation, siding, waterproofing, gypsum boards, steel, all kinds of different products, air conditioners. It’s not a theoretical inflation story. This is what’s happening on the ground.

These letters often start with: “Dear valued customer, effective such-and-such a date our prices across the board are being reissued,” and they’re up 10% or some other number.

I’m going to give you a few examples. CertainTeed announced an 8% increase on commercial roofing products effective this year. Owens Corning announced a 5% to 9% increase on synthetic underlayment effective May 11th. Sika Rmax announced a 6% increase on all of their insulation products effective May the 6th. Johns Manville announced an 8% increase on closed-cell spray foam insulation and 10% on open-cell spray foam insulation effective April 20th. Westlake announced a 6% to 8% increase on vinyl siding, insulated siding, shakes, soffits, accessories effective April 27th. The list goes on and on.

Now, when you step back and look at the list, you realize this is not one manufacturer having a bad month. This is a repricing cycle moving through the entire supply chain.

So what is the immediate impact on a real estate project?

The first is the reliability of your budget. The construction budget is only as good as the assumptions embedded in it, and if your estimator priced the job 30 days ago and your envelope package—roofing, insulation, siding, all these other things—your budget may already be out of date before you’ve awarded a single contract.

In a rising cost environment, the spreadsheet gives the illusion of certainty, but the quotes underneath it are decaying with every day. The shelf life of these quotes is extremely short. So the impact is on the validity of the bid. It used to be the case that folks would give you a bid that might be valid for 60 days or 90 days. Today, we’re seeing bids with a very, very short time window, sometimes as little as 14 days.

Third, the impact is on value engineering. Value engineering is supposed to improve the project, but when price escalation hits quickly, value engineering becomes a euphemism for cutting scope under pressure. The owner starts asking whether the premium underlay is necessary, whether specific interior finishes can be substituted, whether an insulation assembly could be simplified, whether the amenity package can be deferred. Then every one of those questions consumes time, creates redesign, and might trigger new coordination work across architecture, structure, mechanical, and code.

The next impact is on financing. Lenders do not get excited when the hard cost budget rises after underwriting is finished. The construction loan was sized to a cost estimate prepared a few months ago, and now multiple divisions are moving up simultaneously. You might need to bring more equity to the project. That can reduce returns. It can delay closing. It can force a sponsor to re-cut the deal. On a marginal project, a few percentage points of escalation across materials can be the difference between proceeding versus pausing the project.

The fifth impact is on schedule. Every time you are going through a redesign of any nature, you’re delaying the project. Owners push to lock pricing, but contractors want to accelerate the releases. Suppliers ration inventory. Teams spend a lot of time chasing substitutions, re-quoting alternatives, and rebasing the budgets.

So let’s translate that into different stages in the project. If you’re in pre-development, your feasibility study needs a fresh look. You can’t just rely on one from last quarter. And right now, prices are rising way faster than rents are rising.

If you’re in the design and development stage, it’s time to identify cost-sensitive assemblies and make hard decisions early in the process.

If you’re in tendering, you need to shorten the time between pricing and awarding contracts.

And if you’re under construction, you’ve got to buy out the volatile packages as quickly as you can, make sure that you have that product in inventory and locked down.

And if you’re the sponsor looking at a new acquisition or the start of a development, you need to stop pretending that the construction budget is static. In a market like this, the budget is a moving target.

Now, what I’m telling you are things that effectively have already happened. That doesn’t mean that the risk is behind you; there’s still more price escalation risk in front of you. Some of these suppliers have already increased prices two and three times in the last six weeks.

So you want to be carrying real contingency in your budget, not just a cosmetic contingency. You want to make sure that your most escalation-sensitive categories are well covered, including roofing, insulation, siding, drywall. All these things that you use an awful lot of are going to materially impact the cost of your project.

Now, not every line item is affected, but there’s an awful lot that are. Now, we don’t have all the answers. This is what we’re seeing in the marketplace, and it’s one that you need to be paying very close attention to.

Price escalation is not a line item buried in contingency. It’s an active force shaping the design, the financing, the procurement—everything in real time. As developers, ignore that at your peril.

As you think about that, have an awesome rest of your day. Go make some great things happen. I’ll talk to you again tomorrow.

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