Construction Economic News

Construction costs cool but still squeeze contractors; Reed says starts rise

July 16, 2010

The producer price index (PPI) for finished goods fell 0.6% in June, not seasonally adjusted (0.5%, seasonally adjusted), and rose 2.8% compared to June 2009, the Bureau of Labor Statistics reported on Thursday. The PPI for inputs to construction industries, a weighted average of prices for materials used in all types of construction plus items consumed by contractors (such as diesel fuel), dropped 0.9% for the month but was 4.2% higher year-over-year. Several key materials had one-month decreases and 12-month increases: copper and brass mill shapes, -6.6% for the month and +13% for the year; diesel fuel, -5.9% and 16%; lumber and plywood, -4.9% and 18%; aluminum mill shapes, -3.7% and 11.5%; steel mill products, -1.3% and 30.5%; and asphalt paving mixtures and blocks, -0.5% and 7.4%. The PPI for concrete products shrank 0.4% and 2.1%. The PPI for gypsum products rose 1.8% for the month and was unchanged from June 2009. General and subcontractors continue to be squeezed by falling bid prices. PPIs for finished nonresidential buildings, which reflect labor costs, overhead and profit as well as materials costs, were generally flat for the month but fell year-over-year by 4.3% for new warehouses, 3.9% for offices, 2.9% for industrial buildings and rose just 0.5% for schools. The PPIs for subcontractors' nonresidential building work fell compared to June 2009 by 2.0% for roofing contractors, 1.3% for concrete contractors and 1.1% for electrical contractors, and rose 2.2% for plumbing contractors.

Some prices have slipped further since PPI data were gathered in mid-June. "Nucor, the largest North American producer and fabricator of steel rebar,…notified customers late Monday that net transaction prices of rebar, merchant bar and structural products (angles, flats, rounds and channels) would decrease by $20 per short ton effective with shipments Tuesday, July 13, [matching a] price reduction announced by competitor Gerdau Ameristeel on July 6," Platts Steel Market Daily reported on Tuesday. The national retail average price of on-highway diesel fuel fell 2 cents per gallon this week to $2.90, down 22 cents from the year's high on May 10, the Energy Information Administration reported on Monday.

The year-to-date value of nonresidential construction starts from January through June climbed 13% from the same months of 2009, Reed Construction Data reported on Tuesday, based on its own compilation. June starts were 2.9% higher than in May, "a little more than the usual seasonal gain in June….June's heavy construction starts fell 9.1% from a very strong May, but the year-to-date total its 16% above 2009." Nonresidential building starts rose 11% year-to-date.

Many state Departments of Transportation are projecting 30-50% declines in their highway construction budgets next year, officials reported this month at regional meetings attended by AGC. Last year's spending for many DOTs was at record levels as a result of federal stimulus funding and the lingering impact of bonding and other state funding initiatives since 2005. However, with the stimulus funds having largely been spent and with state budgets being negatively impacted by the economic downturn, many state DOTs reported that their programs will drop significantly next year. The DOT officials also reported that the uncertainty over federal surface transportation authorization legislation, which is 10 months late and unlikely to be enacted soon, will force them to focus their construction programs on maintenance and rehabilitation contract rather than expansion projects.

"Total state tax revenue in the first quarter of 2010 increased by 2.5% relative to a year ago," the Rockefeller Institute of Government reported on Tuesday. "Total tax revenue declined in 33 states in the first quarter of 2010, down from 40 states during the fourth quarter of 2009."

Real-estate research firms reported mixed results for commercial vacancy and rental rates in the second quarter. Office vacancies rose 0.1 percentage point to a record-tying 18.0%, while apartment vacancies dropped 0.2 points to 7.8% and retail vacancies fell 0.1 point to 7.6%, Robert Bach of Grubb and Ellis told a National Association for Business Economics webcast on Thursday. CoStar Group reported on Wednesday, "Of the 20 largest office markets, eight posted positive net absorption so far this year, three had little or no change and nine posted negative net absorption. Washington, D.C. led the country with 2 million square feet of net absorption," followed by Denver, -1.6 million; and Minneapolis, 1.3 million. The biggest losers were New York City, -2.8 million; Los Angeles, -2 million; and Philadelphia, -1 million. "But even the markets experiencing negative absorption were doing so at much reduced levels compared with last year. Importantly though for New York, all of the negative absorption occurred in the first quarter, while the market absorbed more than a half a million square feet in the second quarter and as a result saw its vacancy rate decline one-tenth of a percent. Similarly, across the country, the quarterly change in vacancy rate has been rising at a less rapid rate and appears to have stabilized, approaching 0% change….with building conversions and obsolescence factored in, the U.S. office market could see overall negative inventory growth in 2011 and 2012-an unprecedented occurrence. That means that office markets are actually shrinking. Not only is there very little new office product being built, there likely won't be for some time as new office construction starts are also at historically low levels-less than 5 million square feet in each of the last three quarters." The Wall Street Journal reported on July 8, "Apartment vacancies fell slightly during the second quarter, the first drop in three years," citing figures from Reis Inc., which found vacancies climbed in only 15 of 82 markets. Rents fell in just 10 of the 82.