It’s déjà vu for many of us. It happened in September 2016 as well as the spring of 2008, and 2003-04 if you really want to reach into the vault. While it’s common for steel prices to fluctuate, these years really grabbed our attention. Now, here we are again facing a familiar dilemma. And self-storage developers, builders and suppliers are feeling it.
Much like everything else, we can place part of the surge’s blame on the coronavirus. Some steel mills that produce flat-rolled products shut down during the pandemic, and there’s been an ongoing labor shortage, even now. A global supply problem means steel is a hot commodity, so prices are bound to rise. Add in a renewed—some might say continued—demand for steel, and pricing will soar.
So, what does this mean for self-storage? I reached out to several industry builders and metal-building suppliers to get their reaction to what’s happening and how it might affect new development. The following experts were kind enough to share their thoughts.
- Seth Adams, National Account Manager, ClarkDietrich Building Systems
- Roger Burgin, Chief Operating Officer, Forge Building Co.
- John Cross, Chief Operating Officer, Mako Steel Inc. and Rabco Cos.
- Louis A. Gilmore, President, Miller Buildings Inc.
- Angie Guerin, Vice President of Business Development, Mako Steel Inc. and Rabco Cos.
- Steve Hajewski, Marketing Manager, Trachte Building Systems
- Richie Webster, CEO and President, Rapid Building Solutions
Why is pricing for steel and other raw materials escalating?
Burgin: Demand for most raw materials generally fell significantly in the early months of the coronavirus pandemic, including the demand for steel. The sharp decline in demand caused many steel mills to curb production, which caused capacity utilization to drop to multi-year lows. The early decreases in production, together with the continuing impact of the pandemic on supply chains and economic activity that has rebounded as the country reopened, has resulted in a potent mix of volatility, and increasing prices in the steel market.
Cross: Steel and other related building materials have been on the rise since October 2020. Supply has simply not caught up with demand and that continues today. Pricing has reached record territory and material allocations have become commonplace.
Hajewski: The rapid increase in demand for items made of steel, such as appliances, construction materials and cars, has taken the industry by surprise. Additionally, import tariffs from a few years ago remain in place. The cost of trucking, which is a part of the cost of materials, has also skyrocketed as many truckers left the industry during the shutdown.
Johnson: It’s been going up 8% to 10% every month since December. A combination of demand and other issues is causing a snowball effect.
Webster: While the country was closed last year due to the pandemic, construction was classified as essential and we, like many other contractors, kept building at the same pace while most of the general public was at home. This created an inventory problem because while the manufacturing plants were closed, the construction industry was consuming the world’s inventory. We have now run out of inventory and factories are playing catch up, which has caused steel demand and ultimately steel prices to increase.
Also, Amazon has thrived during the pandemic. This has forced it to build more distribution plants across the county to keep pace which, in turn, has driven up the consumption of the world’s steel supply by an additional 30% on top of the already squeezed supply chain.
How is the increase affecting the self-storage industry?
Adams: As an industry consuming finished steel goods, self-storage builders are paying historic prices for the products. If pricing on steel for a project wasn’t secured in a contract say, six months ago, it’s possible that those products are up 80% on transaction today. Lead times are also at unprecedented levels, so project schedules are certainly being strained.
Burgin: At the beginning of 2021, U.S. steel prices rose 20.4%, and we have seen additional increases in February and May, with another pending in June. This is causing many first-time developers to hold off their projects in hopes prices will stabilize in the fourth quarter. Another issue is the lead time for deliveries have doubled, pushing projects back three to six months or halting construction completely.
Gilmore: Construction inflation will force some developers to rush to beat increasing costs, cutting corners during the design phase, ignoring seasonal challenges, selecting subcontractors without credentials to tighten schedules—all the things that make construction risky. Other developers will put everything on hold, stop the bleeding, and wait it out, crossing their fingers that material costs will trend lower and be hopeful that the labor pool won’t dry up. Seasoned construction experts will continue their pursuit of approvals and permits while considering phasing the development to postpone unnecessary costs. Multi-story projects will see the biggest delays and the highest cost increases, with strong demand for critical parts of the development such as elevators, HVAC equipment, sprinkler pipe and rebar.
Guerin: The increases in construction costs are creating a lot of uncertainty for developers, especially for those in the home stretch of obtaining financing. Additionally, the storage vendors who deal in construction supply—metal-building companies, insulation contractors, concrete contractors, sprinkler systems and electrical conduit—are all clamoring on the supply side and fighting rising costs that are making contractual obligations not only too tough to honor but sometimes impossible. Despite these conditions, the storage developers that we work with, by and large, have continued to push into construction, noting strong upside, low interest rates, and delay in revenue generation being more painful than rising costs.
Hajewski: Historically low interest rates, high occupancy and rental rates have conspired to keep construction activity at an unusually high level despite the increased costs. Standing-seam roof panels and the decking in multi-story buildings are particularly hard-hit components. To keep projects moving along as much as possible, it’s likely that some components, such as roof and unit doors, may be delayed in shipping. The materials shortages are impacting far more than just the steel buildings.
I’ve heard reports of shortages in the steel wire mesh and rebar that goes into their foundations, lighting, locks and vinyl graphics film used to make unit numbers. The rapidly escalating prices mean that your quotes from vendors may have a quick expiration date. When arranging financing, developers need to understand these dates and arrange for the correct amount of financing—hopefully with a healthy contingency built in—and then immediately contract for all materials to lock in prices where possible.
Webster: The storage industry is suffering due to these increases in steel because building companies are sending out huge change orders to their customers due to the unstable steel market. Every company has steel escalation clauses built into their contracts, which state that price increases can be passed. Every self-storage builder hates passing on these change orders to their customers based on increased steel prices. But, if they don’t, it would be very difficult to weather the storm and the company could belly up really fast. We only make a 15% to 20% profit on a steel package, so if you’re facing 60% to 70% price increases, you don’t need to be a rocket scientist to figure out the numbers won’t work.
What steps can developers take to keep their project from derailing?
Adams: Adjust budgets and timelines accordingly. Begin planning steps as far in advance as possible. Work very closely with contractors and suppliers. Order material as early as possible.
Burgin: One of the easiest steps is to underwrite in contingencies for future increases. This way you’re prepared if prices continue in the upward trends that we’ve seen in the first half of 2021. Also, put together a great team of contractors, architects and builders who’ll value-engineer your project and assist with keeping costs low. Overall, commercial construction will remain a challenge throughout the remainder of 2021. However, the self-storage industry remains a bright spot. Aided by a COVID-driven boost in demand, self-storage has proven resilient, and fundamentals continue to perform well.
Guerin: Contingency budgets are important right now, and bolstering those numbers to deal with rising costs is good preparation. More important, it’s understanding lead times and building a schedule around the reality of the crisis. Lead times for much of the materials used to construct storage have doubled and tripled in 2021. I would recommend developers stay in touch with core vendors, and ask their GCs to select subs as early as possible so that downstream suppliers can be notified and materials can be backlogged for those specific projects. We expect shortages to remain with us into the fourth quarter, so the more time developers give subs to prepare, the more likely it is that material will be available for them.
Hajewski: Start by developing a solid plan. Work with a local civil engineer to develop a stormwater and site plan. New developers often spin their wheels asking suppliers for pricing or banks for loans before they have actually designed their site. This is a waste of everyone’s time. You can’t get a meaningful quote without a plan, and no bank will commit to a loan without current quotes on city-approved plans on land that you have under contract. Bottom line: You need to invest in design work up front if you expect to be taken seriously.
When comparing and signing contracts, developers need to understand if the contracted price is firm or if it’ll be adjusted at time of shipment. Most building manufacturers will have a clause in the contract that stipulates material increases will be assessed at the time of shipment. This is an important conversation to have. Developers should be ordering everything as far in advance as possible. Locks, bollards, LED light fixtures, architectural finishes—every step of the construction process is another chance for supply-chain issues and escalating prices to throw you off schedule and over budget.
Finally, understand that your contractors and suppliers are doing everything they can to help you, but delays are going to be inevitable. Even if your job isn’t delayed by supply-chain problems, there’s a good chance that issues at other projects could affect yours. For example, erectors may need to pause work on your site to follow up visits to past jobs to install a roof that shipped late. These things will happen and are an inherent risk in building a new project.
Johnson: You need to have allowances for steel escalation, about 20%. Your cost per square foot could go up. You also need to pad your schedule due to the delays in receipt of steel.
Webster: People ask me this all the time and my answer is to value-engineer your projects and maybe cut back on the bells and whistles. Also, carry a larger contingency number in the proforma that may or may not be used.
Some responses have been truncated, and all were edited for clarity.
