By Strategic Passive Investments
Thanks to what many industry analysts are calling a “perfect storm” in the construction industry, the Construction Products Association (CPA) has actually downgraded growth projections for 2022. This sounds like terrible news, but it does not have to be for savvy real estate investors willing to think creatively and be flexible and innovative with their strategies. In fact, that sounds like what most real estate investors are doing already!
The key is not to let “pandemic fatigue” influence decision-making when it comes to identifying opportunities and moving quickly and decisively to make the most of them. Here are five things to know that will help with that:
There are a Lot of Shortages in the Pipeline
In 2020 and 2021, the United States experienced its fair share of shortages, some self-induced (think: toilet paper) and others that were outside our control (think: semiconductor chips for cars). Oh, and also, there was a huge, serious, massive shortage of lumber that drove wood prices sky-high and made it extremely difficult to renovate existing homes and nearly impossible to build new ones because even if a builder had an unlimited budget the lumber still might not be available for building.
Of course, part of the issue with lumber involved the economic shutdowns in early 2020 and concerns that a recession might cause home prices to plummet (spoiler alert: they did not). As a result of this combination, many lumber producers delayed production due to shutdowns and many developers did not order as much lumber as they could have used in 2020.
The aftershocks of what turned out to be a massive miscalculation reverberated throughout not just 2020 but also 2021. Transportation and shipping issues further exacerbated and continue to exacerbate the issue. Real estate investors must be prepared for these shortages and have alternative strategies in place for dealing with them as well as be willing to track the progress of how shortages are emerging and changing in 2022.
A Shortage Does Not Mean Supplies are Not Available (Somewhere)
In some cases, particularly in the case of Christmas presents and holiday items (to select one of the most obvious and timely examples), a shortage of something does not always mean there is not enough of it in existence. Sometimes, the shortage has more to do with access to the item in question.
With many holiday items, the issue for consumers is that the item exists in an inventory and may be ordered but probably cannot be delivered due to massive port blockages and backups at coastal ports that bring in international goods.
Investors must be prepared to deal with delays on this type of item, but unless you can acquire large volumes of an item in question (say, plywood) and sell it quickly, you will not necessarily make your fortune by ordering a lot of inventory that will no longer be in such desperate demand once the blockages are cleared.
In Construction, Labor is Likely to be the Most Serious, Long-Term Shortage
If you have good contractors and resources for construction labor, treat them well this holiday season! According to Lehigh Valley Business, “Supply chain problems will continue to cause increasing backlogs of work,” but “labor and equipment shortages have been plaguing the construction industry for some time.”
In today’s economic environment, it seems highly likely that 2022 will be a tough year for you if you do not have access to reliable, loyal workers who deliver good work and show up for you when you need them. With backlogs becoming more and more of an issue on all fronts, keeping your crews informed and staying in touch with them over any holiday break will be vitally important.
Of course, construction workers are vital to real estate investors, but the more than-11-million job openings nationwide in November 2021 include other important positions like shipping, transportation, freight, and manufacturing. Savvy investors will monitor all of these issues to make sure that they can track what is heading down the pipe in terms of what things will be available, what things will be in short supply, and where these shortages are likely to be most severe.
“Most of the time, the root cause of supply-chain disruption is a lack of sufficient workers,” warned Bill Conerly, principal at a consulting firm in Oregon. He cited “early indicators” that could present particular issues for soon-to-be-needed non-residential construction like warehouses, light industrial, and suburban office space, warning that many of these projects were planned prior to the pandemic or are now in a rush because companies cannot safely return to work in old facilities. Investors will be competing with big projects like these for both labor and materials – and it is entirely possible that there will not be enough supply for all parties.
Conerly is also worried that ongoing tension with China will mean businesses will be forced to source domestically, a concept that is great in theory but could put smaller operations out of business. “Many businesses that would like to source domestically cannot find any vendor in the United States that can make Chinese prices, and Chinese companies have improved the quality of their goods significantly,” he told the Association of the Wall and Ceiling Industry in late November.
Copper and Lumber are Not Getting Easier to Come By
Lumber and copper have not been easy to obtain (or terribly affordable) in several years, and that is unlikely to change with rising inflation in 2022.
Get ready to experience ongoing difficulties getting framing materials and the pipes you need for plumbing, as well as household appliances. In some cases, the overriding desire to own a home or rent a single-family residence may help you, since buyers or future tenants may be willing to bring their own appliances even though often these have been something most expected to be provided in the property.
Construction Costs are Heading Skyward
In October 2021, construction costs rose more than 12 percent year-over-year. A lot of this has to do with rising inflation rates and the need to pay more for labor as well as materials.
While some analysts say the supply picture will look better in 2022, it is important not to count on this while acquiring investments in 2021. The crucial question is now, as it always has been, “How many alternative routes can I take that lead to a successful return?” If there are multiple ways to leverage an investment and make it successful, it is more likely the investment will succeed.
Real Estate is Going to be ‘Busy for Years’
Some real estate investors are feeling serious concerns about 2022, wondering if they will be able to do business in this environment full of ongoing supply shortages and difficulty acquiring dedicated, skilled labor. However, even if the demand for housing diminishes in 2022 as interest rates rise, most analysts believe the backlog that has accumulated over the past two years will keep builders, developers, and investors occupied for at least that long into the future.
“The growing backlog of projects should keep builders busy for the next couple of years,” said Wells Fargo senior economic Mark Vitner in a recent interview with Reuters.
This prediction should extend to real estate investors as well, as long as they are careful and methodical when it comes to dealing with a volatile national economy and the ongoing issues with supply that are going to keep affecting our industry.