Are Construction Costs Dropping?
By LC on Dec 11, 2007 in Construction
The answer depends on the sector. Residential construction is off about 40%, and labor has dropped slightly in that sector, however commercial construction costs, including strip malls, have not seen this decrease. In some submarkets construction labor costs have escalated since May 2007. We need to accept that the old domestic demand and supply playbook doesn’t work as materials are now valued on a global, not simply a domestic, metric. In every cycle there are markets and submarkets that do not participate. This post contains citations from The Means Report, the Sacramento Business Journal, and finally the Dubai Chronicle where costs are escalating.
When evaluating seasonal construction pricing, both labor and materials must be considered. While in the northern US labor costs have traditionally decreased in the winter months due to weather-related layoffs, the plywood mills, concrete batch plants, and asphalt plants supply less or shut down, hence the material pricing often increases. The large homebuilders will use the derivitive markets to lock in lumber pricing on occasion, but we little guys who do $5M - $20M projects don’t view ourselves as commodity traders and pay the spot price.
from The Means Report
Cost Increases Easing Except for Nonresidential Labor
Jim Haughey
Construction costs have weakened quickly in the last few months under pressure from the 10% drop in construction activity since the February 2006 peak level. The 40% drop in single family construction spending has more than offset still rising nonresidential construction spending. Residential labor rates and margins and prices for materials heavily used in residential construction have fallen significantly but labor rates and margins for nonresidential buildings and heavy projects have yet to weaken although some modest weakening is expected in the next year.
The Labor Department price index for construction materials was at the same level in October as it was in May. Prices for some items rose during the summer but have since declined. The only significant changes since May are the 10% increase for diesel fuel and 9% increase for nonferrous pipes and tubes. These increases are more due to the falling dollar and strong world commodity demand than domestic construction spending trends. Even higher prices are likely into the winter before the commodity “bubbles” for these two items burst. These increases were offset by the 12% drop in gypsum prices and 4% decline in lumber and structural steel prices since May.
Average hourly wages paid by general contractors increased at a slim 2% annual rate since May after rising over 5% in the year ending in April. Since May, the average hourly rate paid is unchanged for residential contractors. But labor supply remains tight in other construction markets. Since May, nonresidential building contractors have raised hourly wages at a 5% annual rate and heavy contractors have given even larger raises.
The dichotomy between cost trends in the single family market and the balance of the construction market will widen further into the spring, possibly the summer. Then the gap will begin to close when activity begins to pick up at homebuilding sites and spending growth at other construction sites drops from the recent 1%/month plus pace to about 0.6-0.7%/month.
The materials price index is expected to decline slightly more through the spring. Residential labor costs are unlikely to move above the current level until late next year. Labor costs for other contractors will keep rising through next year faster than overall inflation in the economy but the pace of wage gains will begin to slow by mid-2008.
UPDATE!
I received this from the Sacramento Business Journal an hour after posting. Turner Construction’s comments are consistent with the previous content–LC
Construction cost increases slow down
Sacramento Business Journal - by Michael Shaw Staff writer
Turner Construction Co. says that construction costs are easing after a period of rapid growth.
The New York-based company on Tuesday issued its building cost index for the fourth quarter, showing a 1.51 percent increase over the previous quarter and 7.09 percent increase over the fourth quarter of last year, compared to a period of double-digit increases.
Karl Almstead, Turner vice president responsible for generating the index, said in a news release that activity in the non-residential market remains strong in spite of concerns over the credit markets. He said commodity prices have eased slightly over the past quarter, but global demand continues to drive an upward trend in prices.
And finally….here’s what we mean by some markets not participating in the domestic trend.
From The Dubai Chronicle
09 December, 2007
Construction costs to jump 20 pct in 2008
Construction costs in the United Arab Emirates could jump by a fifth next year on higher raw material and labour costs, according EC Harris consultancy.
Costs for materials such as cement and steel could rise 19 percent during the next 12months, London-based international real estate and construction consultancy EC Harris said, according to the Dubai-based newspaper.
Costs of materials have risen between 15 percent and 20 percent this year.
Construction costs rose 25 percent in 2006, as the estimate for 2007 is not yet released.
An amnesty for 345,000 illegal foreign labourers earlier this year — allowing them to return to their home countries without penalty — is driving wages higher.
