Inflation and my Hawaii Warehouse Projects
Stories of inflation dominate the headlines. It’s the topic of concern for the Fed, politicians, holders of cash (and debt), business owners and developers. COVID shut down supply chains. Upon reboot, things didn’t come back the same as before. Once the news of a vaccine spread, people re-emerged from their bunkers. They began spending, really spending, on big things like home renovations and new cars, assured the world wouldn’t come to an end. The evidence of price increases soon spread, starting as “transitory”. But then, oddly enough, a large portion of US workers decided they didn’t want to return to work, limiting the supply of labor. And China no longer seemed interested in returning to its former role as world’s top exporter of cheap crap, along with other really useful things too like steel (more below).
Months turned into quarters and the Fed even finally abandoned the word “transitory” last week, banished to retirement from its meeting minutes, at least for now. The scary word “permanent” is now a popular adjective used to describe the latest iteration of inflation, which likely means we’re in for something bad, something potentially long-term of the likes we haven’t seen since the 1970’s. It’s still soon to tell whether it’s really in a sustained 6% - 10% range and could last 5+ years or something much less severe. But whenever people start talking crazy like this, I start to listen, and really start to think about the impact of these changes on my cash reserves and future real estate developments.
Since my world is currently warehouse development on Maui, in particular metal-framed multi-tenant warehouses around 12,000 SF, I can at least share my story with inflation. In Oct ’19, I bid a project with a metal building manufacturer along the lines of what I outlined above. The result, just around $9 psf, very consistent with the 5 years prior. In Feb ’21, nearly 17 months later, I bid a similar project, this time, steel prices landed at roughly $11 psf, a 22% increase. At $11 psf, things were still manageable, meaning deals could still pencil. Oh how I wished I had locked in prices then… Again, I went back out to my manufacturer for a quote in Nov ’21 as my actual project start date drew nearer. The result, a whopping $18 psf, a 60% increase from only 9 months prior. Compared to the Oct ’19, quote prices doubled!
The feedback from my metal manufacturer is prices should level, at least for the next couple months. Beyond, things are much less certain so I’m paying close attention. Prices always seem to be sticky to the upside. Once they go up, they rarely come down, except for recessions. I don’t plan on waiting for this type of reprieve before making next move.