Rising construction material prices present headwinds for real estate developers

 The U.S. real estate sector has enjoyed a long post-recession recovery with ample capital, cheap debt and strong fundamentals. Since the end of the Great Recession nearly a decade ago, these factors have driven a surge in construction. Homebuilders have doubled housing starts to 1.2 million since 2012, while developers during that time added 138 million square feet of new office space; 84 million more is expected by the end of 2019.
Recent U.S. trade policies, however, have placed increasing uncertainty on the cost of materials. A newly enacted 25 percent tariff on steel will curb the development of office, retail, industrial and multifamily building (steel generally accounts for 14 percent of building costs). Meanwhile, a 21 percent tariff on Canadian lumber enacted in 2017 adds additional pricing pressure to homebuilders (lumber accounts for 5 percent of the average sale price of a new single-family home and 9 percent of total construction costs, excluding labor.) The lumber tariff, along with a reduction in lumber supply because of rail slowdowns, tree disease and forest fires, has led to a 36 percent increase in lumber costs since last summer.

 

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