--> Gill Blog: Demand for Steel Affects Construction Costs

Gill Blog

Tuesday, April 19, 2005

Demand for Steel Affects Construction Costs

It's logical to assume that the economic incentive for a developer to move forward on a real estate project, is that he/she will capture a sufficient return on the investment they inject to get things going. Once in a while, even the most well thought out plans don't materialize due to some factor beyond the control of planners. If things do move ahead, the only way to capture the desired return, is for the project to yield higher economic rents. Either that, or swallow the loss on the real estate play, and move on to other asset categories the next time around.

We mentioned the boom in China and India in our Kunstler post last week, so I thought why not throw one more log on the fire. Seems that even though China's demand for steel has been slowing, it still moving at a torrid pace. This may be good news for some, but may not be for others, including real estate developers in the U.S.:
Since June 2003, the price of steel has doubled. The costs of copper, gypsum, plywood, lumber, cement and petroleum used to fabricate, transport and install many materials have also increased steeply, if less drastically...Such nettlesome price increases have been compounded by the difficulty at times in obtaining steel and other materials as the fast-growing economies in Asia, especially China, soak up supplies.
Beyond these micro-anecdotes that use isolated cases to illuminate how rising costs can adversely affect the economics of a real estate project, it seems as though the scope of this phenomenon is wider, and is in fact affecting the larger economy:
An increased demand and price hike in commodities is likely to push the costs of construction in the buoyant US property construction market higher, according to Rider Hunt Levett & Bailey president Julian Anderson.
At what point do required economic rents become cost prohibitive? Whether this phenomenon represents a blip, or is indicative of what might be defined as "the new normal", it offers one more clue that the long-term nature of workplace will change.