Local developers say they are struggling to keep up as global construction prices climb.
While some are able to absorb the increased costs, others are facing the prospect of having to pause projects already underway.
Rising costs, from raw materials to shipping
Managing director of Davenport Development, Paul Pearson, in an interview with the Cayman Compass, said over the last few months he has watched shipping costs, material costs and interest rates jump, in some cases five times more than the previous prices.
“We buy our tiles in Spain and it used to be 4,000 euros a container, and it’s now just over 9,000 euros. The shipping has come down – it did get up to 12,000 [euros] so it’s come down somewhat, but it’s still double,” he said.
“But when you do your budget in 2019 at $5,500 for a container, and it’s actually $15,000 for a container, the developer has to swallow up the cost,” Pearson said.
Some developers, however, he said, do not have the resources to absorb the increased costs, leading to significant strains.
Pearson lamented that essentials such as sheetrock, which is used in every construction, have risen.
“Arvia [residential complex in Grand Harbour] only closed out last year. We were paying $19 and then $21 for plywood, which, again, is everywhere in your house, and it’s now $39.95. Sheetrock, which is on all of these walls here in my office and all of the walls in your house and everybody else’s house, we were paying $8.50 and it’s now $12.95, just under $13… that’s 50%,” he explained.
Kris Bergstrom, of Edgewater Group, in a telephone interview with the Compass, said prices his team was able to obtain before the pandemic could not be honoured due to a shortage of materials caused by supply chain shutdowns.
“When you went to place your order, then the prices have escalated,” he said.
“We saw price increases on some materials of over 100%. But then, generally, we could see across the board 25% to 35% increase in costs of procurement of materials. First of all, the challenge was to try and maintain the project viability with these increased costs because your budgets obviously had to then increase,” he said.
The problem was then exacerbated when increased shipping costs had to be factored in on top.
“The shipping supply also became very expensive, with much, much longer lead times… it forced us to get creative and start looking into markets that we hadn’t purchased from before,” he said.
The spike in construction costs is not unique to Cayman; Coldwell Banker Richard Ellis (CBRE), in its 2022 U.S. Construction Cost Trends report, forecasts a 14.1% year-over-year increase in construction costs by the end of 2022, factoring in the continuing rise in costs of both labour and materials.
The report states it expects cost increases to stabilise by mid-2023. It cautioned, however, that the industry is still vulnerable to geopolitical events that could impact the cost of some materials.
NCB group managing director Matthew Wright, in a written response to Compass queries, said, on average, shipping costs have been “extremely volatile over this past year depending on the jurisdiction they’re coming from”, making it difficult to forecast and budget the costs.
“Fuel costs have gone up during the Ukraine/Russian conflict, so all costs associated with shipping jumped tremendously last year but we’re seeing some stabilization now but this is at 3-4 times pre-pandemic rates,” he said.
Justin Matheson, NCB Construction operations manager, and NCB procurement/logistics officer Barry Burgon, also said that the cost and availability of items “is an issue, especially on commodity items”.
“We don’t expect them to come back to where they were 2 years ago. For example, the cost of plywood doubled, PVC went up 300%, aluminum prices sky-rocketed. Rebar (a lot of rebar comes out of Eastern Europe and Ceramics come out of Turkey, Ukraine…etc.), so the cost of these materials has increased substantially,” they pointed out.
Tapping new markets
Bergstrom said the situation in Cayman has presented “a lot of challenges” and it changed purchase patterns for developers including Edgewater Group.
“We used to buy a lot of materials out of the Asian market. We also purchased a lot of materials from North America… Today we’re actually purchasing fairly substantial quantities of materials and products out of South America. But then we’ve also been looking to other partners, for instance we have some stuff coming from India now, out of Spain,” he said.
Larry Thompson, development manager at A. L. Thompson’s, said, on the suppliers’ end, they have started to see some price drops, but not to the pre-COVID figures.
“They’ll probably never go back to what it was before but it is starting to normalise. The back orders… if we place an order now, more than likely we’ll get a majority of our orders, compared to a year or two years ago, if we got half our orders we were lucky,” Thompson said.
Like the developers, he said, as a supplier he, too, is looking to different markets to source supplies.
“We have probably hundreds of suppliers that we work with on a regular basis, and we’re always shopping to really source the best prices possible whether that’s the US, South America, China. There are some goods that are significantly cheaper, let’s say in China, but then the cost of freight kind of negates that, so you’re better from the US,” he explained.
He said there was a “silver lining” in terms of improving the supply chain bottlenecks of last year and 2020.
Matheson and Burgon said the situation had prompted them to “refocus on how we organize shipping. We’ve adapted and got better at dealing with things in advance”.
They said they have made sure containers are filled and approached the factories directly for materials, trying to bypass the distributors to keep costs down.
However, they said, much bigger issues exist, like in the US where they are “struggling to deal with volume and the logistical structure isn’t in place to deal with it”.
Longer lead times impacts delivery of projects
Pearson said Davenport is working to deliver on its projects and, while it is difficult with the costs, they will continue the projects at the contracted prices and design specifications.
He said the developments they have in the works will also continue as planned, including those in East End and Little Cayman.
“We have a good 10 years’ worth of sleepless nights to go,” he said, adding that government support of the industry was essential to ensure the sector’s survival.
“We do have the duty concession of 15%. I think the government should definitely maintain that. Although it looks like there’s a big boom, it’s very, very difficult. I know some developers have actually stopped in their building because they’re like ‘We can’t afford to sell what we sold for. We’d have to ask for 50% more and they’re [clients] not going to go for 50% more’,” he said.
Pearson welcomed government’s zero stamp duty for first-time Caymanian buyers for properties up to CI$400,000, however he said that threshold needs to be increased because developers “cannot build” at that cost.
“Arvia, I think when it first went on sale, was $425,000 for a two-bedroom unit. We couldn’t build for that now. You just physically couldn’t build, make money, maintain the staff, maintain the crew. So maybe some more incentives for Caymanian first-time buyers,” he said, would help.
Bergstrom agreed, saying that there are a lot of different ways government can ease the pressure on the industry, “but right now the government could incentivise us by amending the stamp duty regulations very quickly”.
He said that, at present, Edgewater is selling phase two of The Meadows at Batabano and “as long as we meet our sales thresholds then we won’t have to pause, we will continue building”.
He added that rising interest rates have become a “massive challenge”.
Bergstrom said, with the current trends, the prices for upcoming unsold projects will have to be adjusted upwards, to keep pace with the market conditions.
He said government needs to take note of what is happening in the market and act soon before the jurisdiction is hit by a slowdown.
Wright said NCB Group has had to absorb the additional costs “as [we] do not believe it is ethical to terminate contracts or seek price increases”.
He said the group was not currently pausing any of its projects due to the current conditions.
“Projects were only paused when the sites were shut down due to COVID but experienced significant delays and cost increases as noted,” he said.
He said, as an industry, developers have to be flexible and willing to adapt to the changing environment.
“Planning is key. Contractually, we have to figure out a way to protect ourselves going forward. [We had] more supplier issues than shipping issues. Quote times have become shorter because of the volatility in the prices,” he said.
Collectively, the developers urged patience from clients as they navigate the challenges.
“The effects from cost increases and frustrations with supply chain and ultimately delayed delivery of their homes has a greater effect on us than them which they do not feel. [There is a] need to exercise patience as delayed delivery is not something we enjoy or want to have to bear news on,” Wight added.
He advised expectant homeowners to factor in delays with regards to closing times and temporary accommodation.
“Be grateful to those developers that are still delivering their project/home at originally agreed prices as many are not experiencing the same,” he added.
The Compass reached out to the Finance Ministry for comment on the suggestions put forward by the developers; we are awaiting a response.
Editor’s Note: Kris Bergstrom is the brother of Compass Media owner James Bergstrom.
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