Amazon crushes the building materials supply chain and sends shockwaves through the construction industry

“Sorry, I can’t help you. Amazon has bought everything into production for the next six months.

That’s the answer Andrew M. Smith, president of Dallas-based McRight-Smith Construction, got from a national supplier of steel joist and deck materials when he set out to build a medical practice in the Dallas-Fort Worth area last year. Although he placed the order 20 weeks in advance, the supplier quoted a lead time of at least 40 weeks, which forced Smith to seek out a small company to handcraft the materials. This alternative reduced the cost from $65,000 to $99,500 while cutting delivery time by 24 weeks, he said.

“That’s the choice people have to make,” he said. “Are you willing to spend more money to take another route, or do you extend the duration of the construction project?”

Supply chain bottlenecks have plagued the construction industry for several years now, creating unusually long lead times and prohibitive price spikes. Many factors are causing delays, including overseas factory closures, backups at U.S. ports and global labor shortages. But few things have been as disruptive as the pandemic-driven surge in online shopping, a trend dominated by e-commerce giant Amazon.

“When you talk about distribution centers, think of them as cash registers,” said Marc Wulfraat, founder and president of supply chain consulting firm MWPVL International Inc. “If you want to grow revenue from the sales of products because you’re selling more stuff, then you need more square footage.

Amazon’s real estate footprint has grown significantly over the past few years. At the end of 2016, the company had 97.3 million square feet of ground floor real estate in the United States, according to data provided by MWPVL. The latest figures show a 370% increase, with the company expected to reach 457.3 million square feet by the end of this year.

Amazon did not respond to bisnowThe request for comment despite several attempts.

Wulfraat said Amazon was expanding its warehouse footprint before the pandemic, but the crisis led the company to embark on a massive spending spree to try to keep up with demand. According to data from PYMNTS, nearly 60% of all online retail purchases in the United States were made on Amazon in 2021.

“There’s a two-pronged thing,” Wulfraat said. “The ability to support sales growth and the need to get closer to the customer.”

Amazon’s growth has disrupted countless industries. A February 2021 report from Colliers said the company’s rapidly ramping up warehouse construction activity was putting significant pressure on the building materials supply chain. The report pointed to an unnamed U.S. steelmaker who said orders for Amazon-related construction projects were about 33% of its domestic capacity, pushing lead times to a 20-year high.

The report also referenced advice from national industrial contractor ARCO Design/Build Industrial, who advised customers to expect price increases for joists, beams and deck materials that could lead to an overall increase in Construction costs $1.30 per SF.

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Builders report difficulties in sourcing steel joists, among other materials.

Some materials, like steel joists and decking, are only available in bulk from a handful of U.S. suppliers, Smith said, so once Amazon runs out of supply, it can be hard to know. where to turn. Other materials, like concrete, can’t travel far and must be purchased locally, which can also be problematic if a nearby Amazon fulfillment center is under construction.

“When you have someone pouring 2M SF of concrete like Amazon was doing, it will take the full capacity of one or two or even three batch plants for the day,” Smith said, referring to a large Amazon fulfillment center project in Austin, Texas. “So while these guys are removing all of that, everyone is waiting because they can’t go any further – they still have to have local concrete as well.”

Many companies have had the foresight to order materials months in advance, but only some institutional giants like Amazon have enough capital to stock materials. That gave the bigwigs a serious advantage, said Fred Ragsdale, a partner in JLL Dallas’ industrial services group.

“The smart money that had the ability and capability to do that, got out there and started buying certain materials because they knew what they had to do,” he said.

Delays caused by material shortages are causing dramatic price spikes in the construction industry. Before the pandemic, Smith said his company was used to steel cost increases of between 3% and 5% over one or two quarters. Now, he said, it is no longer uncommon to see the price of steel double in the same period. Despite these jumps, Smith advises customers to pay the extra cost.

“We know what the costs are now; we don’t know what’s going to happen in three, four or five months – we see prices moving just as quickly,” he said. “We have been able to hold deals in the past for 30-60 days, in some cases 90 days. The maximum I can get contractors to hold bids now is three weeks. »

Amazon and the shift to e-commerce aren’t entirely to blame for supply chain cramps. Other factors, like tariffs issued by the Trump administration that are still in place, also play a role, Smith said. And inflation only made it worse.

“It all kind of came together for this perfect storm,” he said. “So we continue to see things go up.”

Recent data from the US Census Bureau showed that construction costs hit a 50-year high in 2021, according to a report from NBC DFW. Prices rose 17.5% year-over-year between 2020 and 2021, and last year’s costs were 23% higher than in 2019, the data showed. In February, the cost of wood had increased by 85% in three months.

“It’s the kind of [jump] it can put projects at risk if they don’t move forward,” Smith said.

Despite these issues, most developers find workarounds, Ragsdale said, such as sourcing materials directly from overseas manufacturers or operating on a narrower scope until the materials become available. These solutions seem to work. New industrial supply in the United States totaled 82.7 million square feet in Q1 2022, up 17% from Q4 2021 and 28% above the five-year average for deliveries of the first quarter, according to Cushman & Wakefield.

“There’s usually a way to mitigate,” Ragsdale said.

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In an effort to reach more customers in a shorter time, Amazon has rapidly expanded its fulfillment center footprint in recent years.

Fortunately for the construction industry, the rate at which Amazon builds its fulfillment centers is expected to slow after 2022, according to MWPVL. A report recently published by Newmark indicates that Amazon recently withdrew plans for at least some of its new industrial projects, although it has 200 in the pipeline.

Wulfraat said part of the pullback could be due to a change in budget management that came with the changing of the guard from Jeff Bezos to Andy Jassy. Jassy took over as CEO of the online retail giant in July.

“They really emphasize the word ‘focus,'” Wulfraat said. “Let’s focus on the areas of business where we make money and make sure we don’t put ourselves in a situation where we are overcapacity or overcapitalized.”

A lack of available workers, a challenge facing not just Amazon but the industry community as a whole, could also drive some of the reduction. A survey released in February by Instawork, a flexible staffing firm, found that 73% of light manufacturing companies had recruitment issues, up from 26% in 2021. This is particularly challenging given the sharp increase in sector demand: 58% of these companies. saw execution volume increase over the past 12 months, and 75% said they felt unprepared for 2022.

“[Amazon is] reaching a point in their history where if they go out and add more space, can they even find the people to staff these buildings? said Wulfraat. “We’re now reaching some pretty serious moments where the only way to get more labor is to dramatically increase the wage rates you’re already offering.”

Slowing fulfillment center growth should bring some relief to the building materials supply chain, but Wulfraat said other areas of Amazon’s business are on the verge of growth. The company invests millions in expanding its transportation capabilities, for example, so it can reach more customers without relying on the postal service or UPS.

“This growth has everything to do with Amazon laying the railroads of tomorrow,” Wulfraat said. “This build involves hundreds of buildings and millions of square feet of warehouse space that have nothing to do with product service.”

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