A few weeks ago, we spoke with Reed Stvan, KGO’s Vice President of Operations about the impact that the pandemic has on the project management and construction management industries. In the interview, Reed touched briefly on the challenges that occurred as a result of the supply chain crisis, a side effect of the COVID-19 pandemic.
We put together a list of four impacts of the supply chain on commercial real estate projects.
1. High Demand
During the height of the pandemic when the country was on lockdown, real estate and non-urgent construction projects were paused indefinitely. This pause and the lack of demand for corporate real estate development due to the increasingly popular remote and hybrid work options has led to developers letting their supply dwindle. Now, as the U.S. is beginning to recover from the pandemic and projects are ready to resume, local manufacturers and distributors lack the supply to meet the demand.
About 30% of building materials imported to the U.S. come from China, making it construction’s biggest supplier. The pandemic caused the global market for raw materials to slow down, resulting in contractors adding to the existing demand for locally distributed materials.
During the last two years, projects that did not experience cancellations still had to deal with delivery delays. Shipping companies cut their schedules at the start of the pandemic in anticipation of a drop in demand for moving goods around the world. Now, they are trying to play catch-up as demand for products continues to increase.
Containers have been arriving at ports in North America and Europe at an increasingly high volume, creating a heavy influx of ships that overwhelmed the availability of docks. At California ports like Los Angeles and Oakland, dozens of ships were forced to anchor out in the ocean for days before they could load and unload. At the same time, the labor shortage means fewer truck drivers and dock workers to unload goods, further slowing the process.
These delivery delays brought about by the pandemic have caused lead times to increase from as low as six weeks to as high as six months.
3. Labor Shortage
The pandemic caused extensive layoffs in almost every industry. But, despite the construction industry employing 5% of the nation’s workforce, 709,000 workers or 10.8% of the total construction workforce were let go at the start of the pandemic.
As projects begin to resume, the industry is now facing a labor shortage, and some of the workers may never return to the construction industry. According to the U.S. Bureau of Labor Statistics data by Associated Builders and Contractors, the construction industry may have to hire as many as 480,000 new workers in 2022, and this number could continue to rise.
Additionally, the pandemic is continuing to disrupt production on construction sites. For example, some clients require developers to provide a brief for every contractor employee who will be on-site that day, reminding them that they have to wear masks and practice social distancing.
“[The sites] do an inventory of the number of people who will be on-site and determine how many have been vaccinated. That alone can take an hour of your day,” Reed shared in his previous interview. “And then in many cases, because of social distancing, a lot of the contractors can only put a set number or decreased number of employees on-site.” This has a direct impact on the timeline and budget of the project.
4. High Prices
In April 2021, the Associated General Contractors of America (AGC) issued a Construction Inflation Alert which cited the rise in input costs from April 2020 to February 2021. The report recorded a jump of nearly 13% in material costs for contractors and subcontractors. This is a major problem for a lot of general contractors because, in many cases, they have won a bid with a guaranteed maximum cost, meaning their price is guaranteed to the client, but their costs cut into profits. Simply put, contractors who submitted bids in 2020 now have to pay a higher price for the same projects.
Essential construction materials such as steel products saw a price jump of 20% or more. With the high cost of materials, contractors are hesitant to continue projects that they had put on hold in 2020.
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