Many have grown weary from reading numerous articles regarding the impact of COVID-19 and related shutdowns on various segments of the national and local economy over the past year. What might be less known is the impact these events have had on the local commercial real estate market: supply chain and material cost increases, manufacturing delays, a slowdown in municipal approvals, changing consumer habits and evolving construction priorities by developers.
These contrast with the positive impacts we have seen with record homebuilding starts and closings in our area.
Our builder and construction clients are concerned with cost increases, especially lumber prices. But ongoing supply chain issues, coupled with ever-increasing demand, are leading to higher prices for nearly every building component.
The spot market for random length lumber ($/1,000 board feet) increased from $354 in June 2020 to $975 in February 2021, an astonishing 175% increase in approximately eight months’ time. This significant rise in cost translated into havoc, with initial project budgets needing quick increases and upward revisions. Additionally, we are seeing more homebuilders reluctant to fix a contract price, given the uncertainty of their basic lumber costs. These trends have led many builders to take on higher speculative percentages on their guidance lines of credit versus firm contracts for sale. We anticipate these trends will continue throughout 2021, as most recently the Austin market housing inventory dropped to an all-time low of 0.4 months in January 2021, according to the Austin Board of Realtors report.
Early in the pandemic, delays in deliveries of basic materials needed to complete homes and construction projects lead to supply chain disruptions. Appliances were backlogged 3–6 months, as were most electronic goods, including garage door openers and mechanical equipment. Supply challenges continue to escalate; however, builders are adapting by placing orders early in advance and being flexible with substitute products.
Another cost increase was related to delays in entitlement approvals, with most municipalities having their development services staff working from home. In trying to coordinate the necessary approvals for the start of construction projects and maintaining code inspections, delays of 4 to 6 months were common.
The trend of online deliveries replacing traditional brick-and-mortar retail is underway. You can see this with the number of last-mile distribution centers popping up around the city versus new big-box retail and/or junior anchor-space construction. For the first time in a decade, retail net absorption in the Austin MSA was negative, while the industrial market saw 6.5 years of growth through the fourth quarter of 2020.
When looking at a new retail project for construction financing, it is better to categorize it as a consumer service-type center versus “retail” to capture the typical tenancy of nail, hair salon, restaurant, doctor/dentist office, insurance agencies and similar retail tenants.
Despite the COVID-19 headwinds, our homebuilder clients have seen record sales due to the combination of work-from-home, low interest rates, major corporate relocations and accelerated migration to Austin and the surrounding areas. The Austin market is again expected to be the nations’ best housing market in 2021, according to Zillow. This astonishing growth is also reflected in housing starts, with 6,022 homes started in 2012 and more than three times that figure in 2019, and projections that more than 20,000 home starts will occur in 2021. ULI’s Emerging Trends for 2021 reports that Austin is ranked as the second-best market for both homebuilding and real estate prospects. This is also influencing the average home price in the Austin area, with the average home price increasing by 19% from January 2020 to January 2021, to a median sales price of $365,000.
Despite the uncertainties the last year brought us, the commercial real estate market in Austin is showing no signs of slowing. Even February’s historic winter storm did little to slow demand. Despite losing a week due to the ice, snow and electrical outages, that month’s total sales still exceeded the pre-COVID-19-lockdown month of February 2020.
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