May 2022 Update, Part 2: Rising Inflation, Real Estate Stagflation, & the Outlook For Architecture & Construction Projects

Hard, raw data on rising prices & inflation in construction, plus upcoming stagflation - and the situation for Architecture & Construction projects.

Here’s our second update on the mid-year impacts to Architecture & Construction projects. Read Part 1 here - where we discuss the Supply Chain and Shipping Crisis.

In Part 2, I cover Rising Prices, Inflation, and Real Estate Stagflation. I review many bits of hard data we’re seeing today in the industry over rising inflation, price increases, and current rising interest rates that are impacting the market. I discuss impacts to Architecture & Construction projects in much more detail at the end of this article, & where it’s expected to go into next year.

In light of recent developments that are unfolding since two weeks ago, I’m also going to feature a Part 3 piece covering diesel fuel scarcity and rising fuel costs situation that is rapidly unfolding especially in the United States, which I anticipate will also create ripple effects across the industry.

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Inflation

The supply chain crisis is creating a massive ripple effect with inflation, creating rising prices and costs for construction. Inflation is to the tune of 5-12% per month at times. This is in turn creating a stagflationary environment - where the cost of desired work is too much to engage in, thereby reducing both project scope, as well as the volume of projects for the industry.

Rising Prices

In early April, I heard from one of the lead estimators in a construction firm I worked with –

“ We are receiving calls now everyday from suppliers. <An office fronts vendor> just called me saying the aluminum and glass for their office fronts is going up 12% due to their suppliers increasing their pricing for raw materials. Right now certain items are extremely volatile.”

He forwarded two messages from different subcontractors – here’s one dating to March 2022:

“This is to notify you that due the economic impacts of the Covid-19 pandemic leading among other things to shortages in raw materials, and increased labor costs, over the past two years the prices on the following items have increased as follows:

• Black Fittings 65%

• Black Pipe 110%

• Copper Pipe 100%

• Copper Fittings 100%

• Grooved Pipe 45%

• Grooved Fittings 40%

• No Hub Pipe/Fittings 25%”

And from another subcontractor, whom, the latest in March 2022:

“We have received notification from all domestic steel pipe manufacturers of an approximate 12% increase on all fire sprinkler pipe effective immediately”

Here’s an image from a January, 2022 notice. The estimator graciously forwarded me 43 notifications of price increases since March 2020.

The latest April 2022 American PPI report also paint a worrisome picture. Here are some snapshots from the Producer Price Indexes on the April 13, 2022 Bureau of Labor Statistics’ report.¹ Look at “unadjusted 12-month percent change” between March 2021 to 2022.

First, on page 15:

Materials and components for construction saw a 21% increase over one year. Materials increased 15.2%, and components increased 26.2%. Also notable is a ~15% increase in cost of supplies, and a 20% increase in container costs.

Next on Page 20:

Furniture costs increased ~14%, and appliances 13%. Electronics also see an approximately 13% increase.

We can see that new building costs have risen almost 20% on average, to a staggering 32.1% in the industrial sector! Architectural and Engineering Professional Services have seen only a 5% increase in pricing.

On page 22, the PPI report covers raw materials - we can see that on average, costs have increased for construction items 20% YoY, whereas some products have further increased in price as high as 40%!

Due to the combined delays of shipping, and increasing cost of raw materials, the effects of inflation are expected to worsen. I think this will cause a further pull back in investments into property, with much work deemed too expensive to pursue.

Inflation Leading to Stagflation?

Many economists have recently and since 2021 been worried that global inflation will continuing to soar and growth severely waning, creating stagflation anxiety. This chart conveys how Inflation creates Stagflation.