Inflation Will Impact Property Maintenance Costs In 2022
Prices for all types of goods are on the rise. From everyday items like groceries to larger items like car chips, lumber, and plastics, prices have dramatically increased between January 2020 and January 2022. Inflation impacts just about every industry. This includes commercial properties and the service contractors who maintain them.
In December 2021, the inflation rate reached a 40 year high of 7.0% annually. Unfortunately, many economists predict price increases to continue well into 2022. As a result, property managers need to recognize inflation will impact property maintenance costs in 2022 and plan accordingly. Keep reading for an explanation of inflation, what is driving it, how it is impacting property maintenance costs, and what property managers can do to prepare.
The Basics: What Is Inflation? What Is Causing It?
Inflation is the decline of purchasing power of a given currency over time. This increases the average price level of goods and services. Typically expressed as a percentage, inflation causes your dollar to be worth less, and in turn impacts your ability to spend.
Inflation is caused by imbalances in supply and demand. Here’s how the economic shutdown caused by the COVID-19 pandemic significantly reduced the supply of construction materials. First, many manufacturing facilities shut down entirely or greatly scaled back operations for an extended period. In some parts of the world, manufacturing is still well below pre-pandemic levels. As a result, globally, less of everything, including construction materials, are being manufactured today.
At the same time, shutdowns coupled with labor shortages crippled the shipping and supply chain industry. Fewer people are working on cargo ships, unloading goods at ports, or driving trucks today than before the pandemic. Finally, in what was unexpected at the start of the pandemic, demand for construction materials spiked. Reduced supply plus increased demand has driven prices higher.
Construction Material Price Increases
Inflation is, directly and indirectly, increasing the cost of construction materials. Here are two examples, using data from Trading Economics, that highlight how inflation will impact property maintenance costs in 2022.
In January 2020, right before the pandemic started, 1,000 feet of lumber cost around $315. In January 2022, 1,000 feet of lumber cost around $1,200. This is a 400% increase in just two years. If a class A office property needs lumber for a tenant improvement, the lumber will cost 4 times as much as it did just 2 years ago. This type of increase is also passed on to all types of construction products that use lumber.
While coal prices are probably an afterthought for most property managers, they will have an impact on property maintenance costs in 2022. Coal is input in products like asphalt sealcoat and roofing shingles. Coal prices have increased from $86 in January 2020 to $220 in January 2022. Asphalt contractors will pay significantly more for sealcoat today than they did just two years ago. As a result, property managers can expect parking lot maintenance costs to increase in 2022.
As the world continues to re-open, more new construction projects are starting and previously halted projects are being resumed. For example, Economy.com reports there were 305 multifamily housing projects starting in November 2020. That number grew to 506 in November 2021. This is also increasing the demand for construction materials.
What Can Property Managers Do?
Point blank, inflation will impact property maintenance costs in 2022. Property managers should not expect prices for construction materials to decline significantly this year. Rather, they should expect them to remain constant or even continue to increase. While prices might come down eventually, it is highly unlikely they ever return to pre-pandemic levels. As a result, property managers need a plan to continue maintaining their properties despite record inflation and construction material prices.
1. Prioritize Needs Over Wants:
With limited budgets, property managers must prioritize maintenance needs. Structural maintenance that protects the building from long-term damage should be addressed before cosmetic maintenance. Maintaining the roof to prevent leaks and water damage, should to priority over repainting common areas, for example.
2. Solicit Multiple Bids:
First, managers should review their existing maintenance agreements. Next, they should solicit multiple bids for any that are out of date. This is especially important for contracts that were executed before the pandemic and any agreement that includes time and material price structures. While prices might be higher across the board, now is a great time to make sure long-term vendors are appropriately pricing their services.
3. Require Transparent Material Pricing
New property maintenance agreements, for everything from roof inspections to landscape maintenance, should include transparent material pricing. This can reduce and hopefully eliminate surprises on invoices for a service call or regularly scheduled maintenance, like parking lot striping. Property managers should require contractors to notify them of any significant price increases before work begins.
4. Double Check Time & Material Pricing
While time and material pricing make things easy, it can cause a sticker shock if property managers aren’t paying close attention to the cost of construction materials. Property managers should work with vendors using time and material pricing to double-check material costs before authorizing work orders. This can be as simple as requesting a material price sheet on a monthly basis.
5. Use High-Quality Materials
Investing in high-quality materials, even with surging prices, is one way property managers can address long-term inflation. Consider a small repaint project with a budget of $10,000 that originally called for a high-quality paint expected to last 7 to 10 years. Due to increased paint prices, staying on budget might require a lower quality paint that only lasts 5 to 7 years. In this scenario, exceeding the budget for a higher quality product, that will last longer, certainly makes sense.
6. Don’t Delay Major Maintenance Needs
Inflation is projected to increase by 2023. Delaying maintenance items is not a viable strategy to address inflation and will not result in lower costs next year. In fact, property managers should take the reverse approach and tackle pressing property maintenance items sooner rather than later. Addressing critical maintenance needs, especially ones that can lead to bigger issues if left unchecked is a prudent strategy to avoid paying even higher prices down the road.
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