Orange County Partnership - News

NAIOP: Commercial Real Estate Operating Conditions Improve, but Supply Shortages Delay Projects, Raise Costs

Although business conditions have improved for commercial real estate, according to the most recent COVID-19 impact survey conducted by NAIOP, 86.6% of developers now report delays or shortages in construction supplies—an all-time high since the survey began in April 2020. The survey findings released on July 9 suggest that supply chain disruptions may outlast other effects of the pandemic, increasing construction costs and slowing new development.


The percentage of respondents reporting some type of deal activity has more than doubled for office and retail properties over the last year. It has also increased substantially for industrial (92.2% vs. 71.2% in June 2020) and multifamily (76% vs. 58.6%) properties.


The share of respondents reporting a decline in leasing for current development projects has dropped by more than half, but shortages of construction supplies and workers are both more acute now than a year ago. Although local governments have had more than a year to adapt to the pandemic, the share of respondents reporting delays in permitting or entitlements due to COVID-19 has remained unchanged since June 2020, with two-thirds of respondents reporting these delays.


For the first time since NAIOP began the coronavirus impacts survey, most respondents reported witnessing some type of retail acquisition or development activity. Nearly a third (31.3%) reported new retail development, and 39.1% reported acquisitions of existing retail buildings, marking a sharp increase in both measures since the January survey. Seventy percent of respondents reported that 90% or more of their retail tenants had paid their rent in full and on time by June 15, the first time most respondents have reported this rate of on-time collection for retail properties since the survey began in April 2020.


“The materials and supply chain issues are lagging effects of the pandemic, and they are affecting every industry,” said Thomas J. Bisacquino, president and CEO of NAIOP. “While the pandemic’s impact was deep, there’s a sense of optimism among NAIOP members, with deal activity rising and an increase in people returning to offices, restaurants and retailers.”


In June, NAIOP conducted its eighth survey of its U.S. members on the impacts of COVID-19. Since April 2020, the association has examined the pandemic’s effects on commercial real estate and how firms have responded. The survey was completed by 239 NAIOP members between June 16 and 21, 2021. Respondents represent a range of professions, including developers, building owners, building managers, brokers, lenders and investors.


Ken Simonson, Chief Economist with the Associated General Contractors of America, in an article penned for NAIOP’s summer 2021 edition of “Development Magazine” said escalating lumber prices have been a major concern for the building industry.


He noted that from November 2020 to May 2021 lumber and other building material prices rose sharply.


“Both the Random Lengths Lumber Price Index and quotes for hot-rolled steel topped $1,500, more than three times the year-ago levels. The retail price of diesel fuel climbed for 20 straight weeks, rising 82 cents per gallon or 35% in less than five months. Copper futures set highs before mid-May. Meanwhile, contractors’ bid prices climbed just 2.3% from April 2020 to April 2021, as weak demand for new projects forced contractors to hold down their prices even though their costs were soaring by 19% over the same interval,” he stated in his Development Magazine column.


The Wall Street Journal reported on July 14 that lumber prices have recently fallen back to levels similar to those before COVID lockdowns were imposed.


July futures ended July 13 at $599 per thousand board feet, down nearly two-thirds from the high of $1,711.20 hit in May. More actively traded futures for September delivery settled at $649.90, just $10.90 above the pre-pandemic high, the newspaper stated.


Simonson stated that while price surges in lumber and other key products will abate, “Past episodes of materials price spikes show it can take as long as two years before contractors are able to pass through their added costs.”


He concluded that while the price declines may be good news for project developers and owners, “It is likely to mean many contractors, especially smaller subcontractors, are driven out of business or withdraw from certain market segments, potentially leaving projects unfinished or far behind schedule. An unfortunate event for all concerned.”