Below analysis & commentary from Senior Commercial Real Estate Economist Xander Snyder at First American about this morning’s PPI release.
What is the PPI? The Producer Price Index (PPI) for inputs to construction measures the changes in the prices of goods and services purchased by building construction companies. The PPI for inputs to construction surged throughout the pandemic as supply chain disruptions made it more difficult to acquire building supplies and warehouse shortages made it more costly to store those supplies near construction sites.
Growth in Transportation & Storage Costs Decelerates, but Delivery Delays Remain
Two significant costs associated with construction are transporting and storing (TAS) building materials. The need to store construction materials either on-site or in a nearby warehouse accelerated when the pandemic disrupted supply chains, leading to a marked increase in lead times. This, in addition to higher diesel prices, drove inflation of TAS costs to nearly 13 percent year-over-year in August. There are, however, some early signs that TAS-related price relief may be on the way.
- Monthly TAS inflation declined by 0.8 percentage points in August, its first monthly decline since May 2020.
- While TAS inflation remains significantly elevated, annual growth in TAS costs slowed for the third month in a row in August. The last time annual TAS growth decelerated for more than a single month was in the first wave of the COVID-19 pandemic in early 2020, when demand for diesel sagged. Though diesel fuel prices have inched up from late August, they have generally been trending downwards since mid-June.
- The other reason to expect TAS price relief is related to supply of industrial space. Vacancy rates for industrial properties, including warehouses, remain near all-time lows. This is likely to slowly ease over the next year, as there is a record amount of industrial square footage currently under construction.
- More available space to rent should moderate industrial rent growth, which would slow storage cost growth for developers.
- Additionally, Amazon has indicated that its industrial space requirements have decreased and will be subleasing millions of square feet, further adding to the supply of warehouse space.
- However, just because it’s cheaper to store your development’s electrical panels doesn’t mean you can get them in the first place! Supply chain disruptions persist, and though lead times for some parts have decreased compared to a year ago, they remain elevated.