Supply Chain Disruption

Logistics issues causing major delays across the supply chain

Skyrocketing global shipping costs, combined with a backlog of domestic freight operations, are causing a shortage of goods and materials, inflating costs.

Labor shortages in rail yards, manufacturing plants, warehouses and trucking companies are exacerbating delays at U.S. seaports. The American Trucking Association reported in October 2021 that the industry is short about 80,000 drivers and they expect that to increase to 160,000 by 2030.

To attract more drivers, the sector has boosted wages, but the recent increase in demand for transportation services has spurred the need for even more drivers. Barriers to entry for new drivers, like licensing, are making it more difficult for the industry to respond quickly to demand. 

Figure 13: General freight trucking, cost vs. tonnage changes

Source: U.S. Bureau of Labor Statistics, Producer Price Index, U.S. Department of Transportation, CBRE Strategic Investment Consulting, April 2022.

Figure 14: Global market rate for 40-foot containers

Source: Freightos Baltic Index (FBX), Global Container Freight Index, CBRE Strategic Investment Consulting, April 2022.

Sky-high lead times for many critical materials

The global supply chain remains fragile, adding complexity and uncertainty to construction projects.

Supply chain issues are being exacerbated by steep rises in energy costs, which impact logistics dynamics, and increasing construction activity, which drives up competition for scarce materials.

Lead times may vary on a regional and project basis, but Figure 15 provides a snapshot of typical conditions for several key construction materials currently facing availability issues. These estimates represent aggregations from multiple active general contractor firms as of April-May 2022. 

Figure 15: Typical lead times for key materials

Note: Lead times reflect aggregated information from multiple major general contracting firms and are current as of April-May 2022.
Source: CBRE Econometric Advisors, CBRE Strategic Investment Consulting, April 2022.

Tariffs, supply chain issues put additional pressure on imported materials prices

Import prices are rising much faster than export prices for building materials, with imported building materials more than twice as expensive as exported materials in late 2021.

Import costs will be also be affected by recent U.S. tariffs on Canadian softwood lumber. These administrative changes, alongside continued growth in residential construction volume, could cause contractors to face higher prices.

Figure 16: Producer Price Index growth through March 2022, key construction commodities

Note: Selected building materials include lumber and wood, construction glass materials, and non-wood or glass materials such as stone. Iron and steel PPI export data unavailable prior to December 2020.
Source: U.S. Bureau of Labor Statistics, CBRE Strategic Investment Consulting, April 2022.

Figure 17: Spread between import and export price indices, select building materials

Note: Data is trailing 12-month average. Latest data as of March 2022. Spread calculated as the import PPI value minus the export PPI value for the “select building materials” commodity grouping.
Source: U.S. Bureau of Labor Statistics, CBRE Strategic Investment Consulting, April 2022.

Global events compounding supply chain disruption

Tariffs on Canadian and EU imports and exports

The U.S. Commerce Department increased tariffs on Canadian softwood lumber from 8.99% to 17.99% in November 2021, but temporarily dropped them to about 12% in early February 2022 as negotiations continue.

The U.S. government removed previously implemented tariffs on aluminum and steel imported from the EU in late 2021 to help alleviate material spikes seen earlier in the pandemic.

In February 2022, the U.S. and Japan changed the 25% tariff on steel to a tariff-rate quota, which means higher duties will be paid on steel after imports reach a specified threshold. The deal will make up to 1.25 million metric tons of steel duty-free.

A U.S. Chamber of Commerce survey of construction contractors in Q4 2021 revealed that nearly half of contractors foresee steel and aluminum tariffs, as well as any new material and equipment tariffs, having a high to very high impact on their business in the next three years.

War in Ukraine

While the direct impact of the war in Ukraine is still emerging, its effect on shipping costs and petroleum-based products will most likely continue to be felt in the coming months.

Sanctions on Russia have disrupted markets for several key commodities. Nickel prices were four times higher in March 2022 than they were at the beginning of the year, as Russia produces 17% of the global high-purity nickel supply. This is also impacting stainless steel products, as more than two-thirds of global nickel production is used to produce stainless steel.

Russia is also a major producer of palladium (40% of the entire market last year), which is used in semiconductor production. Ukraine currently supplies the U.S. with 90% of the semiconductor-grade neon gas it uses in chipmaking.

Ongoing COVID-19 concerns and restrictions

While federal, state and local governments have lifted most of the COVID-19 restrictions that hindered construction and supply chains, the industry continues to grapple with ongoing policies, particularly outside the U.S., and the possibility of disruptive new variants and spikes.

The U.S. Chamber of Commerce survey showed that two-thirds of contractors are experiencing COVID-19-related project delays, most notably due to impacts on the supply chain and worker shortages. This largely overlapped with the spike in cases from the omicron variant, which has been spreading more slowly as of May 2022.

Energy prices impacting the building industry significantly

The rapid inflation year-to-date has been particularly pronounced for energy commodities.

Prices for refined petroleum and gasoline have increased dramatically in 2022, adding pressure on the supply chain and driving up the cost of moving and producing materials for construction. With these increases, petroleum-based products such as plastics and asphalt will continue to face challenges to maintain current levels.

Additionally, natural gas is up 57% over a two-year period, impacting the bottom line of many operators and builders. Electric power is up 14% over the past two years and has increased significantly in recent months.

Figure 18: Producer Price Index growth through March 2022, select energy commodities

Source: U.S. Bureau of Labor Statistics, Producer Price Index, CBRE Strategic Investment Consulting, April 2022.

Figure 19: U.S. average regular retail gasoline price since pandemic onset

Note: Latest data as of June 13, 2022. For prior years, June data reflects average for the entire month.
Source: U.S. Energy Information Administration, CBRE Strategic Investment Consulting, April 2022.

Supply chain issues impacting critical service providers and material manufacturers

Manufacturers are having trouble filling orders amid high demand and supply chain challenges, and materials suppliers are raising prices significantly.

For example, there has been a steep rise in unfilled iron and steel product orders since the onset of the pandemic, with the dollar value of unfilled orders at nearly $19 billion, as of early 2022.

Building material and supplies dealers have also raised prices as they struggle to obtain adequate supply to keep up with demand. 

Figure 20: Manufacturers' unfilled orders, iron & steel mills

Note: Not seasonally adjusted.
Source: U.S. Census Bureau, CBRE Strategic Investment Consulting, April 2022.

Figure 21: Producer Price Index: building material and supplies dealers

Note: Not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics, CBRE Strategic Investment Consulting, April 2022.