Institutional Construction Costs Return to Trend Line as Economic Growth Stabilizes

Market Outlook 2014 Q1

Data from first quarter 2014 shows a steady increase in construction labor utilization for the first time since 2007.  The latest figures show a year-over-year increase in construction employment in all but five states. However, non-residential construction spending remains sluggish at an average growth rate of 4.6 percent since the bottom in 2011. Forecasts call for a continued dollar volume growth of approximately 8 percent for 2014, which will build on the 4 percent increase in 2013.  

According to Vermeulens, strong markets and consumer confidence are stabilizing construction volumes and pushing project costs back to, or above, historical trend lines nationwide, with capital construction prices trending at an annual escalation rate of 4 to 8 percent, depending on location. Recent tightening of fiscal and monetary policy, and slower growth in some regions, should moderate escalation rates in 2014 and 2015.  

Construction Costs

Current market indicators support stable construction growth led by a robust residential sector.  

A stronger U.S. dollar and improved supply are helping stabilize commodity prices. As inflation in other sectors of the economy levels out, and real interest rates drop, costs in the construction sector will continue to increase with some regional fluctuations.

Construction costs trended toward a 3.1 percent annually compounded escalation rate for the past 28 years, peaking in 2008, before sliding downward and stabilizing for two years. Costs also peaked in 1990 and 2001.

According to Blair Tennant, a project manager and cost engineer for Vermeulens, the rate of construction cost escalation is indirectly driven by the federal goal of achieving an annual inflation rate of 2 to 3 percent and the monetary policies used to achieve this.

Construction Volumes

Volume is the number one factor for construction costs, because contractor opportunities increase as project backlogs grow, which leads to higher bidding.

Residential dollar volume is currently 61 percent higher than its recent bottom in July 2011, while existing home inventories have climbed to 5.9 months, compared to 4.6 months in January 2014 and 12.5 months in July 2010.

According to Freddie Mac, the average rate for a conventional 30-year mortgage in the first quarter increased to 4.34 percent, up from 3.35 percent in 2013. McGraw Hill is forecasting continued growth of 23 percent for 2014, which will build on the 25 percent increase in 2013.

Infrastructure spending continues to be stable. McGraw Hill is forecasting dollar volume growth of 9 percent for 2014, building on the 5 percent increase in 2013

Non-residential construction spending remains at 4.6 percent since its bottom in 2011. Continued strong residential and infrastructure growth will impact future institutional prices by increasing regional demand for labor and materials.

AIA Billings

Architectural billings are another key indicator of future construction volumes.

After posting consecutive months of decreasing demand for design services, the Architecture Billings Index (ABI) has returned to a state of upward growth, driven primarily by increased activity in the south. Billings were strongest for residential and commercial projects with institutional projects seeing a slight dip.

The decline in total billings over the past two quarters, especially in the west and northeast, may be an indicator of slowing volume in early 2015.

Labor Demand

The construction unemployment rate has been trending downward nationally and appears to be stabilizing near the 10 percent range, returning to the benchmark established in the mid 2000s. 

A range of between 5 and 12 percent is considered stable.

The construction industry’s capacity utilization rate is heating up regionally across the nation. Recent data indicates that 40 percent of states have warmed to a yellow or orange labor utilization rate.  In the past quarter, seven states transitioned to a higher category of utilization, and six others are on the cusp of breaking into the next warmer category.   

Of the top 20 cities, defined by GDP, 45 percent have warmed to either a yellow or orange labor utilization rate. 

Looking Ahead

Tightening of monetary policy, combined with slower institutional construction growth in some regions, will likely reduce cost escalation rates in 2014 and 2015.

Construction prices are firm and increasing. With the current labor market capacity narrowing and continued increases in construction volume expected, costs will likely escalate close to the Construction Cost Trend Line for the near-to-medium term.

By Johnathon Allen

This report is based on the Vermeulens Q1 2014 Market Outlook report.

 

Project Data
Completion Date: 
July, 2014
Location: 
Published 7-30-2014