Retail contractors might be relieved that materials and labor prices in their sector have not shown significant increases from last year’s levels, but they would probably be happier if there were more projects coming their way, the latest research figures show.
While the two major trackers of construction materials prices—Reed Construction Data and the Associated General Contractors of America (AGC)—reported year-over-year increases for products such as diesel fuel, plastic resins and copper ores, the increases are largely due to fluctuations in the global commodities market, according to Kenneth D. Simonson, the Associated Contractors’ chief economist. Prices for materials used primarily by U.S. contractors remain down, reflecting the fact that the number of new construction jobs continues to be low.
“Items that are produced here and used only by the U.S. construction industry, like gypsum, brick, lumber and plywood—the index for those items is down,” Simonson says. “Those things reflect the very sluggish demand for construction in this country.”
The American Institute of Architects’ Architecture Billings Index (ABI), which tracks non-residential construction spending accounting for the nine-to-12-months lag between spending and architecture billings, fell by 1.2 points in July, the latest months for which statistics are available. The July ABI score of 45.1 represented the biggest decline in architecture billings since February 2010.
The index for commercial/industrial billings came in at 47.9, down from 50.0 in June.
AGC, a national trade association for the construction industry, estimates that in July total construction spending in the U.S. came to $790 billion, a 1.3 percent decrease compared to June and about flat with the spending recorded in July 2010.
“Late last year and in the first couple of months of this year there was a sense that we were slowly pulling out of the downturn, but now the concern is that we haven’t yet reached the bottom of the cycle,” said AIA Chief Economist Kermit Baker in a statement. “Current high levels of uncertainty in the economy don’t point to an immediate turnaround.”
Reed Construction Data, a research firm that tracks construction statistics for U.S. and Canada, recently reduced its construction spending forecast for the U.S. for the 2011 to 2013 period. The firm now expects overall expansion of only 4.8 percent in 2012, to $774.5 billion, down from a previously expected 10.5 percent. Construction spending forecast for 2013 has been lowered to $894.2 billion, representing expansion of 10.2 percent, down from 14.4 percent.
For commercial construction, which in Reed’s definition includes mostly retail projects, the firm expects a spending increase of 4.9 percent to $44 billion in 2012, followed by a 6.3 percent increase to $46.8 billion in 2013. By the end of this year, spending on commercial construction will likely increase a modest 2.6 percent compared to 2010, to $42 billion. In 2009 and 2010, commercial construction spending experienced double digit decreases, according to Reed’s data.
“The expansion we’ve had to date has been sub-par,” says Bernard M. Markstein, chief economist for Reed Construction Data in the U.S. “And we are definitely worried about the possibility of another recession. At the moment, we’ve got 2012 [growth] as positive. But if we went into recession, it would be negative for most categories because there just would not be enough demand and everybody would be concerned about conserving cash.”
AGC estimates that by the end of 2011, year-over-year growth in non-residential construction spending will range between 0 and 5 percent. In addition to retail, AGC non-residential construction research tracks office, warehouse, hotel and higher education projects. In the period between 2012 and 2016, AGC expects total construction spending increases between 6 percent and 10 percent on an annual basis.
Low growth, low inflation
Reed reported a 0.3 percent increase in construction materials prices in July, the most recent period for which data is available, but the firm’s researchers expect that prices will remain flat going forward as a result of low demand. While Reed’s U.S. Construction-Related Price Index was up 8.9 percent year-over-year in July, the increase was largely due to the delayed trickle-down effect from spikes in fuel and metal prices earlier in the year. Those spikes, in turn, reflected political upheavals in the Middle East, not higher demand from contractors, according to both Markstein and Simonson.
In July, the price of diesel fuel was up 50 percent year-over-year, the price of iron and steel scrap was up 29.5 percent and the price of copper ores was up 45.4 percent, according to Reed data.
On the other hand, the price of gypsum products was down 3.8 percent compared to the year-ago period, the price of pre-stressed concrete was down 2.3 percent and the price of cement was down 0.8 percent.
Prices for plastic construction products, asphalt roofing and paint posted moderate increases, ranging from 4.8 percent to 6.3 percent.
AGC estimates that for the whole of 2011, construction materials costs will rise between 3 percent and 8 percent.
Even less price inflation is expected to occur in the labor market, where too many construction workers are available to do too few jobs. AGC projects that in 2011, labor costs will rise less than 1.5 percent, followed by annual increases between 2 percent and 4 percent in the period between 2012 and 2016.
In the 12 months leading up to July 2011, employment for non-residential building and specialty trade contractors increased just 0.8 percent, according to data compiled by AGC.
Part of the issue is that while there has been an increase in new commercial projects this year, the scope of the projects remains small, notes Simonson. In the retail sector, most of the construction activity involves retrofits and tenant improvements on existing stores that are being taken over by second- or third-generation tenants.
Major new retail developments remain rare, according to Jeff Katkowsky, vice president and director of estimating with Sachse Construction, a Birmingham, Mich.-based firm that was recently hired by the Taubman Co. to help with tenant coordination services at its new mall in Salt Lake City, Utah. At the moment, such projects are a one-off, Katkowsky says. On a day-to-day basis, what Sachse and a lot of its peers are working on are tenant build-outs within existing properties. They don’t expect to see an increase in ground-up development for another several years.
What’s more worrying, Simonson has doubts on whether the retail sector will be able to sustain the modest growth it has achieved going forward. He points out that a lot of retailers are more focused on growing their online business and will likely remain cautious about opening new stores.
As such, the modest increases in construction materials pricing are a sign of trouble, according to Markstein. “As much as builders complain about materials costs going up, they’d rather take a little stronger activity and [deal with] higher prices,” he notes.