| 
Equity Residential’s The Alcott apartment tower, right, is seen rising next to The Hub on Causeway in January. Despite surging construction costs, 2021 is set to be a record year for commercial building deliveries.
For years now, experts have warned of a looming construction price apocalypse, a time when prices for everything from labor to steel would blast project budgets to smithereens and bring work on new towers to a screeching halt.
Well, the construction price apocalypse has finally arrived, with steel and lumber both nearly tripling in cost over the past year.
But that sound you hear is not projects collapsing or developers throwing in the towel, but rather the rumble of heavy equipment and the hammering of workers at construction sites across Boston and beyond.
To date, we have had no debacles like the empty foundation hole next to the Filene’s building in Boston’s Downtown Crossing, which languished for years after the developer forced to mothball plans for a grand office tower in the lead up to the Great Recession hit in 2008.
A Record Year for Building
Certainly, some developers are carefully reassessing their plans, with a halt ordered to a major warehouse project as the owners come to terms with rising costs, one executive familiar with the plans noted.
But most projects and the developers behind them are forging ahead, not just in Boston, but around the country, with the economy rebounding better than many would have predicted in the dark days after the pandemic first hit in March 2020.
“I don’t think anyone predicted this commercial construction market would take off again with a vengeance, and the supply chain was not equipped to respond so quickly,” said James Kirby, president and CEO of Commercial Construction Consulting in Boston and a construction price expert.
Work continues on Amazon’s new office high-rise in the Seaport, as well as on Winthrop Square in the Financial District and the One Congress office tower near City Hall, among many other projects.
The building continues even as some contractors and developers have had to boost their construction budgets by 20 percent, according to a new report by commercial real estate firm CBRE.
In fact, not only has the surge in steel, lumber and other key material prices failed to put a damper on construction activity, but 2021 is shaping up to be a record year.
Big projects over the $50 million mark are poised to rise by 40 percent or more this year, according to CBRE, citing Dodge Data & Analytics statistics, with total completions slated to increase to 430 million square feet nation-wide.
In a sign of the times, multifamily and warehouse construction are expected to be the big drivers, at 45 percent, or 194 million square feet, followed by warehouse at 36 percent of the total, or 158 million square feet.
Outlook Much Brighter than ’08
So, what gives? Why are we not seeing developers pull the plug on projects?
Interestingly, 2008 also saw a big spike in steel prices – it still holds the record. While mostly forgotten now, we were coming off a big construction boom at the time, too, with only a seemingly minor recession to worry about until the sudden, near-collapse of the financial and stock markets that fall.
The big difference between then and now is the outlook for the future.
In the summer of 2008, when the Filene’s tower project was effectively mothballed after some initial site clearing and foundation digging, storm clouds were already brewing, even if no one could have predicted the cataclysm ahead.
By contrast, the outlook for the economy is much different now in the summer of 2021 than it was back in 2008.
We are headed into a period of continued economic recovery and expansion. If anything, the worry now is that a big surge in growth could lead to an overheated economy and a rise in inflation.
If you pull the plug on your new tower now, you could very well miss the coming wave.
Construction Slowdown Ahead?
That doesn’t mean it’s full steam ahead across the board, without any hesitation. While developers who have already broken ground and have towers and buildings taking shape are plunging ahead, some with plans still on the drawing boards are taking a pause to assess the impact of rising prices, industry observers say.
That, in turn, could lead to a drop in the number of projects breaking ground a year or two out.
“I still think those projects will get finished up,” said Greg Vasil, CEO of the Greater Boston Real Estate Board. “The key will be what will be in the pipeline a couple years from now.”
Yet that problem may also take care of itself. There are already signs that construction prices may be peaking, with the price of lumber, while still at crazy levels, having retreated a bit in recent weeks.
Over the coming months, the bottlenecks in the supply chain will begin to smooth out as lumber and steel mills ramp up to meet surging demand and more truck drivers are recruited or brought back into the workforce to make those crucial deliveries.
Scott Van Voorhis
“When those supply disruptions sort themselves out, there will be a return to normalcy and predictability in pricing, although I do expect the overall costs to be higher than pre-pandemic,” Kirby, the construction consultant, said.
Still, as Kirby clearly notes, that most likely means a leveling off at high prices, rather than a big drop – downturns are pretty much the only times you will see major drop in construction prices.
And while high building costs can be challenging, it’s hard to imagine anyone rooting for that.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
