While general contractors are largely optimistic about the prospects for business growth in 2021, supply chain demand challenges remain. In the precast concrete industry, the rising price of steel, combined with a general shortage of material, sits at the top of that list.

The Steel Shortage

According to the Producer Price Index (PPI), iron and steel scrap has surged 50.8% in the last 12 months, including a 25.8% jump from November to December, followed by another 20.6% jump from December to January. The reason, of course – the pandemic.

When demand dropped in early 2020, steel factories significantly scaled back production, and many of those facilities are still not running at capacity. Other factors like supply chain glitches and tariffs play a part as well. But the reduced production rate is paramount as contractors grapple with delays in a variety of building materials – including steel.

Economics 101 dictates that when there’s a shortage of anything, price tends to increase. Steel prices climbed throughout Q4 of 2020 despite some predictions that they would reach their peak at the end of the year. And now, experts are saying the price will likely continue to rise throughout 2021.

For those of us in the construction industry, this shortage (and price increase) means reworks of material costs on current and upcoming projects. Many manufacturers are offering pricing proposals to contractors that expire after just one to three days – meaning contractors need to be nimble.

Rethinking Our Approach

Increased demand in the market for industrial building, COVID-related production issues, and large bulk purchasing of steel products has caused 2021 to be somewhat of a scheduling challenge.

“We typically see a 4- to 5-month backlog for precast heading into the summer construction season,” said Mike Walsh, Vice President, Business Development at ATMI Precast.

“This year that still holds true. However, the steel delivery date has now exceeded the precast dates, which is unheard of, and has caught a lot of the developers and general contractors off guard.”

Walsh says that extended schedules and much higher pricing has caused the development and contracting community to rethink their approach to these market conditions.

“We are working more closely with developers to ensure that we are doing everything we can to hold down pricing, such as long-term bulk purchasing, and providing commitments to our vendors along with attractive payment terms,” Walsh said.

ATMI Precast is also heavily engaged with the general contractor community, and works daily on revising schedules to meet steel deliveries, out of sequence work, and revising erection scenarios that allow the general contractor to work other site areas and utilities while the building construction is pushed in schedule.

“Pricing pressure and schedule pressures have not yet subsided, and we don’t see this relenting until late summer,” Walsh said. “Fortunately for ATMI Precast, we have increased production capacity and storage capacity to allow us to make product as needed without the need for long-term storage. And, because we own our erection company, we have the flexibility to relocate crews as needed,” Walsh said.

Even though we left 2020 in our rearview mirror, the ripple effect still lingers in 2021. As we look ahead, ATMI Precast is committed to doing what we can to meet demand, satisfy our customers and keep building.

“Our long-term relationships with our customer base have proven to be solid resources that allow them to make decisions knowing they have a large subcontractor supporting their decisions,” Walsh added.

When the pandemic struck, many companies had to close their doors and ask their employees to begin working from home in a scramble to protect lives and livelihoods. The virus has impacted almost every part of everyday life across the planet. The future of many industries was unknown including the industrial real estate market here in the Chicagoland area.

ATMI Precast kicked off 2020 with a full industrial backlog and hit the ground running in January 2020. However, come mid-March 2020 the spread of COVID-19 impacted life as we know it which translated to an immediate loss of 25% of our backlog. Business for the remainder of the year and into 2021 was unpredictable.

To our good fortune, the Chicago industrial market roared out of the gates in 2021 despite the ongoing disruptions caused by the pandemic. Industrial demand is measured by net absorption and new leasing volume. Both indicators returned to pre-pandemic levels matching the impressive net absorption recorded during the first quarter of 2020. The total vacancy clocked in at a healthy 5.76%. This was the first decrease recorded since the first quarter of 2020. The vacancy rates in eight (8) of the twenty-two (22) industrial submarkets tracked are near all-time lows.

Leasing activity remained strong at the start of 2021, as over seventeen (17) million square feet of deals were recorded. This is the third consecutive quarter in a row this figure has increased. There were two (2) deals signed with more than one (1) million square feet. As a complement to the sustained leasing velocity found in the Chicagoland industrial market, the development pipeline remains robust. The construction activity remains strong as nearly 23.6 million square feet of industrial properties are recorded in the market, spread across fifty-nine (59) developments. Net absorption in the first quarter topped over 2.5 million square feet.

There were more than seven (7) million square feet of industrial product delivered across the Chicago metropolitan area during the first quarter of 2021. This is about 1.4 million square feet more than the industrial market delivered this time last year. Build-to-suit projects compromised 55.7% in the quarter while the remaining 44.3% were speculative developments.

Total first quarter 2021 industrial investment sales volume in the Chicago market is estimated at $862.3 million, a 67% decrease from the pre-pandemic quarterly sales volume record reported in the first quarter of 2020. Twenty (20) transactions occurred during the first quarter totaling 10.2 million square feet across thirty-three (33) buildings.

The investment community has continued to increase capital allocations to industrial real estate, creating more competition and pushing pricing to record high levels. Thus far, sales in 2021 represent a 21.4% increase in price per square foot value from the same time in 2020, with an average sale price per square foot of $84.87.

As the leader in wall panel capacity and delivery in the Chicagoland market, we continue to look ahead. ATMI Precast is committed to doing what we can to meet this increased demand, satisfy our customers, and keep providing precast solutions!

Similar to our blog post from August 2021, the vacancy rate for Chicago-area industrial properties has hit an all-time low. If your business needs warehouse space today, you better move quickly when you find it. What is going out there is going fast!

The vacancy rate for Chicago-area industrial property dropped to 4.91% in the first quarter, down from 6.68% a year earlier and an all-time low for the local market, according to Colliers International. E-commerce, logistics, manufacturing, and other companies continue to gobble up warehouse space faster than developers can build it.

The industrial real estate market, already strong before the COVID-19 pandemic, has soared to new heights since the early days of the health crisis, emerging as the hottest sector in the commercial real estate market.

No company has had a bigger impact on the market than Amazon, which went on a real estate binge to expand its distribution network and speed up delivery times. The Seattle-based online retailer, now the Chicago area’s biggest private-sector employer, signed the two (2) biggest industrial leases in the Chicago area in the first quarter for warehouses totaling one (1) million square feet each in Joliet and Kenosha.

Rates of inflation are increasing rapidly. There is no escape from the impacts of inflation. Construction companies are feeling the effects – not only are essential materials and skilled labor significantly more expensive, but supply chain pressures and shortages are making it harder to secure needed construction materials. The cost of concrete production, delivery to job sites, and the price for for the finished product are on the rise.

Lumber, steel, and many other materials critical for construction projects have experienced skyrocketing increases in pricing. While the root of the problem was supply chain disruptions due to the COVID-19 pandemic, new challenges continue to put pressures on pricing. At the same time, the available workforce is shrinking.

As the saying goes, knowledge is power so here are a few tips to help prepare for the effects of inflation according to World of Concrete 360.

1. Inflation rates for consumer and producer price indexes continue to rise.

The U.S. Bureau of Labor Statistics (BLS) found the inflation rate for the consumer price index (CPI) to be 9.1% for the twelve (12) months ending in June – the most significant increase seen since November 1981.

“A more compelling number along with that is the producer price index (PPI) that went up 11.3%” said Dr. Martin R. Cantor, director of the Long Island Institute for Socio-Economic Policy. That index includes concrete. “The PPI for construction materials was up 51% since January 2019, pre-pandemic”.

“Compared to January 2019, the latest numbers from April 2022 from the BLS and the Federal Reserve Bank of St. Louis show that gasoline went up 72% and crude oil went up to 76%, and both are involved in the cost of diesel delivery of the component parts of concrete to where it is manufactured and sites where it is used”, Cantor said. “Unfortunately, there is little that producers and purchasers can do. The delivery cost has gone up because you have a supply chain issue that impels inflation, and you have fewer drivers to deliver the product where it is needed”, said Cantor.

2. Wages are increasing due to related growth of minimum wage requirements and gas prices.

Cantor noted, “there is an increase in wages due to inflation and an increase in minimum wage and gasoline prices. There is nothing the businesses can do about it except pass it on unless they become more efficient. This is why there are increased costs in construction projects to pay for concrete. Concrete producers and general contractors are at the receiving end of goods and services.”

3. The Fed is likely to continue increasing interest rates.

Cantor believes that the Federal Reserve System will increase interest rates by 75% and, at the same time, take $95 billion per month out of the economy in cash. “They are decreasing liquidity in the marketplace, which makes construction costs more expensive while decreasing the number of buyers for real estate – both commercial and residential”, Cantor said.

4. Stay informed and ride out the storm.

Cantor stressed that purchasers of concrete are just as stuck as producers, nor does he see any relief soon.

“We are going to be in a recession, and right now, we are in a jobless recession because we still have plenty of jobs”, he said. “Once the Federal Reserve interest rates and tightening of the money supply start taking hold, which will probably be felt in September, we will see some impacts. But I do not see things changing until 2023.”

Cantor’s analysis was backed up by New York-based Peter Scalamandre & Sons, Inc. – in addition to being a respected general contractor, produces concrete via Seville Concrete Mix, a ready-mix concrete business providing high quality service to the New York City metro area for over forty (40) years.

“Our hands are tied right now”, said company president Peter Scalamandre. “Prices for materials and fuel have gone crazy. Cement is up 25% this year, aggregates – sand and stone – are probably up 20%, and fuel is up 100%”.  End-users for concrete have no choice but to pay the market price.

In September 2022, the Chicago Chapter of The Society of Industrial and Office Realtors (SIOR) hosted its fall Speaker Series. The discussion focused on the state of capital markets in commercial real estate. Key takeaways include:

• Interest rates have taken a toll on underwriting in all asset classes.
• Multiple banking relationships have never been more important, as many non-traditional lending sources have evaporated and the CMBS market is frozen.
• Most active buyers today are all-cash or low levered.
• The large transaction market is non-existent.
• Re-trading deals has been common this year, typically 10-30%.
• Auction sites are seeing some success with the rapid speed of execution.

Cap rates in the single tenant net lease sector increased slightly for all three (3) sectors in the third quarter of 2022. For the first time the past two (2) years, cap rates increased for two (2) straight consecutive quarters. Single tenant cap rates increased to 5.86% for retail, 6.80% for office and 6.61% for industrial in the third quarter of 2022. As the Federal Reserve continues to increase rates in an attempt to curb inflation, debt costs have increasingly put upward pressure on cap rates for buyers of net lease properties.

As economic pressure mounts, formerly opportunistic sellers removed properties from the market that were attempting to take advantage of the historically low cap rate environment. In the third quarter of 2022, the supply of net lease properties decreased by more than twelve percent (12%) when compared to the prior quarter. Furthermore, buyers and sellers have yet to agree on pricing levels given the current environment and a period of price discovery continues.

The rising rate and inflationary environment impacted acquisition criteria for net lease buyers. Investors demand properties with rent growth or the ability to increase rents in the near term are in the greatest demand. Investors expected cap rates to widen for non-core net lease deals with short term leases, lesser tenants or secondary markets. This has yet to occur on a wider scale, causing a wait and see approach for many investors.

The capital markets will continue to impact the overall net lease market. Investors will be carefully monitoring the Federal Reserve’s monetary policy, and its impact on their borrowing costs.

The construction industry remains one dominated by men. But a new analysis of industry numbers shows that a growing number of women are entering in this field, too. The latest numbers from the U.S. Bureau of Labor Statistics reported that the number of women in the construction industry jumped by 52.9% from 2013 to 2022. Women working in construction and engineering is on the increase! In 2013, there were 840,000 women in construction. But in 2022, that number had risen to 1.28 million. 37% of new entrants into the construction industry that came from higher education are women.

Most women in the construction industry are working in the management, professional and sales side of the business. Women are still significantly outnumbered by men in the construction industry, though. The only area in which women outnumber men in the construction field is in sales and office jobs. In this part of the industry, women hold 72.2% of the jobs. Misconceptions about gender-specific roles are gradually diminishing with a growing number of women choosing a career in construction and engineering.

There are thousands of exceptionally talented female construction workers who are changing how women in construction are perceived. While both men and women working in construction face many of the same risks, there are some unique issues that are of greater concern to women. In addition to the primary safety and health hazards faced by all construction workers, there are safety and health issues specific to female construction workers. These safety and health hazards in construction create barriers to women entering and remaining in the field.

Women are respected for the work they do and have great opportunities to grow their careers in this field. This is a good time for women to enter the construction industry, whether as a tradesperson, construction manager, team member, architect, engineer, executive, consultant or professional. The construction industry needs women because the industry is facing a skills shortage, and women bring a wide range of skills that benefit employers and enrich the construction industry. With so many rewards and benefits of working in the industry, there is plenty of room for career progression and skill development, so it is an industry well worth looking into.

During the month of March which is Women’s History Month, construction firms of all sizes and types are encouraged to participate in Women in Construction Week to show their support for their female employees. The goal is to celebrate the different journeys women have taken toward the same goal which is to strengthen and amplify the success of women in the construction industry.