How One Investor is Mitigating the Surge in Materials Costs

Rising materials prices are becoming a bigger and bigger issue in real estate.

In a May 2021 survey for the NAHB/Wells Fargo Housing Market Index (HMI), 90% of builders report shortages of appliances, framing lumber and OSB. And Marcus & Millichap’s John Chang, in a recent investor outlook video, said that materials prices have skyrocketed this year, with lumber up by 90% and steel and copper up 50%. Overall materials are 17.2% over the norm.

Dr. Masaki Oishi, co-founder and chairman of MarketSpace Capital, says the situation with lumber prices is the worst he has ever seen. But there are ways to combat these materials increases and shortages.

“There are several strategies that we’ve used in the past,” Oishi says. “A lot of it is actually driven by the general contractors that we tend to use.”

Oishi says the three key ingredients to a project are time, materials and labor. “It’s really important to build relationships with contractors who have the experience, the know-how and the connections to make sure that the projects can get done and get done in a timely manner,” he says. “That is so fundamental.”

Oishi says a good general contractor will work with their client and give them ways to save on time,  if not necessarily save money on materials. “If we can finish a project a week or two earlier, that’s a big savings in and of itself,” he says. “So there are ways in which we can help each other to keep costs under control.”

Oishi says these contractors anticipate needs ahead of time and either procure materials or have contracts to purchase them at a certain price. “So they’re locked in to some degree,” Oishi says.

But sometimes more imagination is required. “In some cases, we’ve actually had to get a little creative and substitute other materials—like using teel frames instead of using wood—or there are other ways to get around using one particular type of material,” Oishi says.

An experienced general contractor and a creative approach can help a developer overcome some hurdles with materials shortages.

“A combination of working with a general contractor that has a lot of experience and all the connections that are necessary to get the project done, along with some creative planning, is one way in which we try to keep costs from spiraling out of control,” Oishi says.

Even with material and labor shortages, things could be worse. While there is an appetite for multifamily, single-family and industrial projects, other sectors are facing headwinds. That should limit starts for things like office and hotel projects.

“There is a real problem with demand in some of the sub sectors of the real estate market, like office space,” Oishi says. “People are still in their home office. Also, in terms of retail, there is still a big, strong trend towards more and more e-commerce.”