Because of the current imbalance of supply and demand in the commodities market, the cost of construction has been trending downward over the last year or so. Some of our projects take years to develop, and before this correction, the previous several years saw 3-4% increases annually. It’s hard to come back to your customer relationships and routinely share news of a bigger bill. The tables have now turned. The projects we bid a couple of years ago are costing less to finish than we anticipated. But how long can this continue?
I watch commodity prices every week, and over the last 60 days some have increased on the order of 30% or more. This will ultimately lead to higher building costs after supply balances with demand. I am not sure when that will change, but it will change.
I have mentioned to some of our customer relationships that I believe the next couple of quarters might be a good time to lock down pricing. Of course there is also a school of thought that there’s another shoe to drop with commercial real estate values. Who knows?
To make the best decision, it’s important to educate yourself. Among other newspapers, I try to read The Wall Street Journal daily. At the first of the year, it seemed like they published very few articles reporting positive news, but now the mix seems to be about 50/50. Lingling Wei and Peter Grant published an excellent article Monday regarding the commercial real estate sector, its relation to the economy as a whole and why the downward trend might stay a while.
As a practical example, I recently visited with a friend at the Sewanee: The University of the South. In the course of our conversation, she relayed her concern about the low pricing they received for a new project. The advice I gave her is the same I would I offer you. As a developer, if the contractor that submitted the price was qualified, proceed on but have a contingency to take care of those “misunderstandings” and change orders which will occur during these times. The low price you receive initially is just the beginning of the process. Be careful to keep a reserve in case our downward commodities trend starts moving back up.