If you are a commercial property owner or about to be one, and wondering how the building slowdown will impact you along with your building or renovating plans, there are many points to consider. The simple fact is residential construction is in a deep dive with no signs of a positive change for months to come. Is that good news or bad news for commercial construction? As any good economist will tell you, that depends. President Franklin Roosevelt mused that he wanted a “one-handed economist.” That was usually after hearing, “on one hand, this could happen Â… but on the other, that could happen.” As the recent impact of subprime loans shows, all is related and where it will go precisely is why some people get paid the big bucks to look into the future, while others look for more hands.
Looking at construction activity through June 2007, it is clear to see why economists always say “it depends.”
The costs in the chart at right are compared to the previous month, three months, 12 months and also three years ago.
Construction materials prices increased 1.2 percent in April and were 3.5 percent higher than the previous year. This was the third monthly pickup after a 2.2 percent decline over the previous five months.
The April increase was only 0.6 percent for the mix of materials used in the depressed housing market but 1.6 percent in the booming non-residential building market and 2.4 percent for highway construction, hit with large price increases for asphalt, concrete and steel. However, price indexes for total construction project costs declined slightly in April according to the Bureau of Labor Statistics for schools and warehouses, the only two total cost indexes currently available.
World raw steel capacity with large recent additions in Asia is adequate to keep steel-price inflation in the mid-single-digit range. But strained mill capacity for construction- specific products will continue to be a problem.
The situation with copper is similar to the added complication that financial speculators have returned to this market resulting in price swings far larger than underlying changes in the demand-supply balance. What goes up eventually must come down. Copper is overpriced; prices will continue to be very volatile.
Oil prices have persisted at $70-$75 longer than expected, so raw materials cost increases are being passed on in the prices of plastic and petrochemical products. The consensus outlook for the oil market is that prices may hold at the $70-$75 level a little longer but that the next price movement will be a fall into the $60s.
Combining world commodity market trends with domestic demand-supply balances and processing and assembly costs yields of 5 percent to 6 percent through 2008. It is significant that the two Bureau of Labor Statistics experimental total project cost indexes are essentially unchanged in the last three months, while materials prices have been rising quickly and construction wage rate gains have accelerated to a 4.6 percent annual pace, higher than wage inflation at the peak of the last building cycle in 2000.
So, is this a good time to build or plan a project? Well, you guessed it: it depends. If you believe the past is a good predictor of the future, then the answer is yes. Clearly, material costs and labor are higher now than three years ago. Sure, plywood is less costly, but the total is simple. Over the three-year period, costs are 8.2 percent higher through April of 2007 than April of 2004.
If you believe more recent events will have more of an impact, then no. Material prices are only up slightly with a possible drop in the near future. A few more liquidity scares and those expected projects may never materialize. If there are fewer commercial projects and no residential projects in the pipeline, then your bargaining power and availability of materials and labor could dictate a well-priced project.
The simple answer is that there is no simple answer. Each project is unique and financial health, money terms and business plans will have more of an impact on a project than the price of concrete. It is, however, an era of uncharted waters where it is hard to draw on much related historical data that replicates current financial markets, world economic conditions, trade barriers or no trade barriers, commodity speculation and building cycles. All of that makes project planning and management more difficult, but more lucrative for those who can see the future and find the right economist.
