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How is an Increase in Construction Costs Affecting Commercial Development?
Harsh economic times have plagued development. Many industries are going down with the Covid-19 pandemic. The construction industry is among the top sectors affected by rising construction costs. Most specifically, commercial real estate has experienced significant obstacles as a result. This development is due to a shortage of raw materials, skilled labour and issues in the supply chain, especially for the construction materials.
The real estate industry is going down, with commercial construction costs increasing by the day. These rising costs are due to a shortage of labour and increased prices for raw materials. This is affecting both new and established constructions. Therefore, you must understand the reason behind these developments to get the best commercial development deals in the market.
Main Concerns on Construction Costs
The construction industry depends on the availability of building materials and skilled labour. Therefore, these two must be available in adequate supply for the smooth running of the industry in general. However, tough economic times have led to a shaky construction environment. This is due to a shortage of labour and increased material costs:
Increased cost of Materials
Increased tariffs and trade restrictions lead to escalation of material costs. Other factors leading to increased costs include varying demand and environmental regulation. Typical construction materials include fuel, lumber, iron and steel. Most of these have hiked in price in recent times.
Inadequate Skilled Labour
Despite the many construction job openings, there is insufficient skilled labour for the work. There is increased demand for construction talent. Therefore, competition for these candidates in the hiring process is inevitable.
Fighting for the few construction experts in the market has led to increased wages and employee benefits. This is so because many firms will use the rewards to lure the employees to work for them.
Effect of Increased Construction Costs in commercial real estate
With the continued fluctuations in the market price for commercial buildings, making suitable investments is a challenge. Construction costs continue to rise, which has had a massive impact on the value of commercial property. Therefore, it is vital to understand the factors for raising construction costs to invest well.
The cost of raw construction materials has significantly climbed by double-digits making it difficult to do commercial buildings. This has happened as construction firms struggle with a lack of skilled labor. At the same time, they have limited capacity to increase costs for their services.
Typical materials with increased market prices include diesel fuel, steel metal sections, aluminium products and other construction materials. Moreover, raised tariffs on imports of construction materials hiked the prices. All these led to an overall increase in the construction costs.
So, what does this mean? Well, here are important points to observe:
Construction firms rely heavily on labor and materials. Therefore, the increased costs for these resources make the profit margins tighten.
Many construction firms have managed to acquire the best workers at a high cost. With the continued shortage, labour costs will continue to rise further. Ultimately, the firms will have little profit to enjoy. To counter this effect, firms have no choice but to increase their prices. As a result, the industry will experience adverse effects.
With increased building costs, existing buildings at the trade centres continue to attract more value than before. This shift in price is due to increased replacement and renovation costs.
New commercial buildings have increased rent to scoop meaningful profits from the heavy investment in construction. The market dynamics have been vital to the decision to attach high-rent to these new constructions.
As construction costs remain high, commercial development may slow down a bit. Not many construction firms are willing to take up new projects. At the same time, there are very few renovations made to existing buildings.
The construction industry continues to rely on labor and building materials. However, increased costs of acquiring these resources have hit hard on commercial development. Construction firms do all they can to cut down on labor and material costs that have squeezed their profits. The first course of action has been to increase prices to widen their margins. However, there is a need to develop more sustainable measures as we await the economy to stabilize and lower the rising construction costs.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes