How the Architecture, Construction, and Property Management world evolved in 2021, & foreseeing 2022’s Rising Inflation, Supply Chain Issues, Real Estate and Property Prices, & Rising Interest Rates.
Today we’ll cover how we saw the Architecture, Construction, and Property Management world evolved in 2021. Working for over three years as an Owner’s Representative on large New York City Architecture and Construction projects taught me many new lessons about the industry, particularly the last two year’s transformation of the past two years.
Since 2020 and continuing into 2021, we’ve seen the industry change and evolve month by month. Initially construction and crews were limited by COVID protocols and work restrictions, which emerge again from time to time (such as December 2021 in New York City). However, the biggest stories of 2021 are threefold – first, a fast restart and boom in real estate leasing to take advantage of the market, and second, surging late year inflation combined with a third factor, supply chain delays, rippled through every corner of the industry.
As we turned the year to 2022, we’re also witnessing a massive surge in new construction, renovations and retrofits of all sizes, creating an interesting situation for the next year with supply chain delays and inflation to continue and worsen. I expect the surge in new construction to continue, especially if businesses continue to have access to cheap credit and excellent new deals on leasing and real estate; at the same time, supply chain problems and rising inflation will continue to raise the cost of and lengthen projects over time.
In the long term, we live in times of rising inflation, an ongoing and worsening Supply Chain crisis; and potentially stagnating real estate and property prices, plus rising interest rates. These factors combined mean owners and managers face unique challenges and opportunities in 2022 – and thus we’ll need to be extremely cautious about managing our costs and financial performance on our projects and properties, as we move into the next year.
Let’s cover each of these one at a time.
#1 – Rising Inflation
In 2021, I witnessed massive cost increases in some projects, especially as the year came to a close. In the final three months of 2021, we witnessed up to 5-7% cost increases per month for products such as furniture, floor and wall tile from abroad, lighting and lighting control systems, and more. Inflation began in earnest in late summer 2021, and is expected to continue.
The effect of inflation translates to both Rising Costs for Construction, plus additional costs for Supply Chain delays with shipping costs increasing (which are also affected by rising inflation).
Ironically, it has become more important than ever to invest in capital projects quickly, before inflation becomes even further problematic. Decisions on projects must be made quickly and expeditiously, to ensure that orders are placed before price increases take effect.
Owners and managers should be sure to press vendors for information on any upcoming price increases, and for maintenance lock in contracts at preferred rates.
#2 – Supply Chain
One of 2021’s great stories was show supply chain issues were rippling through the economy, causing shortages everywhere. The ultimate effect of the supply chain is two-fold – one is unreliability in shipping assessments, and two is longer construction costs. Both have the effect of raising the costs of our projects – due to longer time required, and also for difficulty in procuring components.
This pattern will continue in 2022, either remaining static or worsening in the early part of the year. I expect it may be until 2023 when this situation fully stabilizes. The most impacted trade in my experience has been with Appliances – specifically with SubZero refrigerators. These high quality products have also reached lead times sometimes in excess of one year – meaning that they must be specified and designed for well in advance.
It makes it more a catalyst to take course now – if you have supply chain disruptions, you used to have a cushion of margin of error. Now you have much less.
#3 – Stagnating Real Estate and Property Prices
For most of late 2020 thru early 2021, the real estate market was on fire outside of major metropolitan areas, specifically for residential. This, plus a hiatus in commercial leasing operations in 2020, created a boom in several states experiencing explosive population growth. By early 2021, the pattern had shifted once again with metropolitan areas reabsorbing new residents, and businesses seeking to take advantage of the flurry of office space space available. In New York City for instance, many businesses have taken advantage of favorable long term lease rates to secure new space in new buildings, or expand their existing offices; the residential market has also returned past last decade highs.
This pattern has left an influx of new construction in mid to late 2021, that expects to carry over into 2022. However, a broader worry is that this pattern might conclude with stagnating real estate and property prices, as demand is expected to slow in 2022.
Just like with supply chain, the trends in real estate and leasing we’ll be closely following in early 2022.
#4 – Rising Interest Rates
Rising interest rates go in hand with inflation rocking the industry; at the end of 2021, the Fed has called for three interest rate increases starting in 2022. While the exact periods have not yet been established in monetary policy, the broad spectrum effect is expected to slow economic growth and recovery. We can expect that new construction may slow down as interest rates rise, so we’re likely to see a slowdown in new projects in late 2022.
Meanwhile, as interest rates currently remain low, there continues to be key demand in sourcing new construction and new projects under favorable terms. The interest rate factor combined with rising inflatin, We’ll also watch this closely throughout 2022.
What You Can Expect in 2022
So with these four things in mind, let’s talk about what we anticipate as we start 2022, and how we can best manage the circumstances on our project and properties, as Owners.
Negative Factors
First comes the bad news. All in all, we face some serious challenges on our projects and properties as we move into 2022. All of the key metrics indicate that both Businesses and Individuals are facing decreased margins in our projects. No longer can we count on the same expectations of pricing and performance that defined our project in the years prior to 2019 – instead, we are entering a time of increasing inflation, lengthening supply chains, increasing demand all at the same time. With favorable real estate and low interest rates, demand remains high for new construction – keeping vendors busier than ever, and most suppliers struggling to maintain capacity for the number of projects. This is also contributing to the supply chain and inflation problem, which will continue as long as demand stays high.
This means that projects will take longer to complete, with more expensive materials, both factors which translate to more expensive construction and real estate projects in 2022. All factors translate to decreased Margins on our projects – more expensive and longer construction, with more margin for error.
Positive Factors
Now fear not, because 2021 has revealed many new opportunities, and that brings us to the good side. More than ever, we’re seeing once-decade leasing deals and real estate opportunities at various times. There’s no better time to engage in a new renovation or a new build, while prices precede further inflation and translate to hard assets. Furthermore, Owner Managers can secure better long term deals on maintenance contracts.
2021 has also unveiled the raw importance of having Owner-Managers deeply involved in understanding the nature of the business, whether pursuing a new build, a renovation retrofit, or maintenance of an existing property. Look out for the opportunity to take our courses on professional Project and Financial management for your properties.
At Arcobee, we work hand in hand with local partners to ensure you have the right, trusted project management and Owner’s Representative resources to ensure everything goes smoothly, on time and on budget from beginning to end. As we launch our REACH tools and programs, look out for more information on partnerships, and how we can help you build your projects.
Table Of Contents
Leave a Reply