TUESDAY, MAY 12, 2009
Chicago |
| Jeff Raday, McShane Construction |
By Jeffrey A. Raday
The construction industry is facing challenging times, but many companies are still building across certain submarkets. Part of our job is closely monitoring construction costs in order to ensure our customers are receiving not only the best-in-class final product but also the best price available in the market. Our business depends on materials that are used worldwide, have varied supply growth and are often difficult to transport, thus industry experts are accustomed to continual shifts in price.
Looking aheadThroughout 2009, the producer price index for construction materials is predicted to remain the same or drop by up to 4 percent, according to the Associated General Contractors of America (AGC). Total construction spending was down 5.1 percent from 2007 to 2008; it is predicted to decrease an additional 3.7 percent in 2009, according to Reed Construction Data. Increasing vacancies in commercial properties, along with declining rents, have certainly slowed office and industrial construction. Residential building is on the decline, with housing starts down 16.8 percent in January, the U.S. Department of Commerce reported.
Reed Construction Data reports that institutional construction spending will likely increase 5 percent this year, buoyed by public funds supporting healthcare and educational facility construction. Commercial construction spending is forecasted to decrease by 3 percent, because of overbuilt retail and a weakening office demand. Residential construction spending is anticipated to dip 2.8 percent this year - a more manageable decrease compared to last year's 26.6 percent drop. A surplus of inventory and rigid loan requirements has cooled the homebuilding industry, which is expected to rebound sometime in 2010. Although some materials are declining in price, this slow down in building has not caused all material prices to dip, as one might expect.
Steel After steel prices tumbled across the globe because of an oversupply due to stalled construction projects, prices are flattening. Savvy producers curbed supply to limit the recent freefall in prices and suppliers are beginning to deplete their stock. Demand in the Middle East and China pushed prices to record highs in early summer 2008. Major steel consuming industries, such as automobiles, will lessen demand for steel amid dismal sales, but provisions in the February 13, 2009, $789 billion U.S. stimulus package favor the use of domestically produced steel, iron and manufactured goods for government products. The price of steel products is predicted to increase 5 percent this year, according to the AGC report.
AsphaltAsphalt prices are on the rise - the AGC predicts a 33 percent increase in 2009. The cost of asphalt is directly tied to the price of its main ingredient - crude oil. Currently, crude oil is trading at roughly $35 a barrel. This price is drastically lower than the $100 per barrel average of 2008, but it is on the rise. In addition, the refining process used to make asphalt is difficult, and no new refineries have come online in the U.S. since the late 1970s, making production extremely finite. Also, harsh winters have caused the need for more road repairs, driving demand.
Lumber and PlywoodThe AGC predicts a 7 percent drop in the price of lumber and plywood. This decrease is directly tied to the reduction in housing starts. Additionally, technological advances have made production more efficient and have reduced wood waste. Mills are now able to transform smaller logs into usable lumber, increasing supply.
Copper and Brass Mill ShapesCopper prices are finally retreating from their wild surge and are predicted to fall 24 percent this year by the AGC. The correction is attributed to the decline in new home starts and slowed demand from China - the world's largest copper consumer.
Concrete Concrete prices will likely increase by 4 percent in 2009. The stimulus package earmarked $140 billion in infrastructure investment for highway and bridge construction, airport improvement, housing facilities, health centers and other projects. The immediate start of "shovel ready" infrastructure projects that depend heavily on concrete is expected to boost demand, albeit slightly.
LaborAlthough construction jobs fell by 8.5 percent in 2008, according to the U.S. Bureau of Labor Statistics, average hourly earnings increased by 5.1 percent. Labor is one of the most expensive components of construction pricing, and wages are predicted to increase 3 to 4.5 percent, reports the AGC. This is especially true in the unionized Chicago construction market, where average annual wage increases of 5 to 6 percent were negotiated when construction activity was at its peak.
Total Construction Costs in 2009In total, an overall softening of aggregate construction pricing is occurring and will continue to occur over this next year until the demand for new projects returns to previous levels. Pricing at the subcontractor level will be especially aggressive as firms look to simply cover their overhead and keep their organization intact until better days return. This is good news for the owners of construction projects underway or preparing to break ground. And despite the abundance of doomsday reports, such projects exist. For companies with the balance sheet and the confidence to move forward, this is the time to position themselves for growth and expansion for the economic recovery.
Jeffrey A. Raday is president of Rosemont, Ill.-based McShane Construction Co.More Articles
