FIRST QUARTER CONSTRUCTION OUTLOOK 2010

While there are signs that the broader economy appears to be emerging from the depths of recession, there is little sign that there is any momentum towards a recovery for the construction industry.  The U.S. Department of Commerce in November estimated an overall construction “put-in-place” decline of 10% for 2009 and forecasted a further decline of 2% for 2010.

The federal figures indicate a somewhat more positive outlook for residential construction with a forecasted 7% increase in 2010 after a 25% drop in 2009.  On the opposite side of the spectrum, commercial construction shows a forecasted 25% decrease in 2010 after a 32% decrease in 2009.  Office construction is forecasted to decrease 22% in 2010 after a 20% decrease in 2009.

Over 1.7 million construction jobs have been lost since the peak monthly employment in the summer of 2006.

In public funded construction there is a 6.1 percent increase over the past year.  Given the depth of the recession in the construction industry, stimulus funds may only be sufficient to reduce the depth of the cuts in employment rather than creating an increase.

The demands for “private sector, small firms” in qualifying for federal, state or city projects is extremely onerous and subsequently stimulus funds will tend to feed the larger companies with previous public sector experience.

Demand for new construction in the commercial sector is very low – many areas remain overbuilt, and it will be some time before the excess is absorbed.

New commercial development is further hampered by non availability of financing for new developments.  In a survey conducted by ENR involving 941 construction firms, the single biggest complaint is the lack of bank financing for projects no matter how investment-worthy the projects.

Construction Cost

The cost of construction materials has seen significant fluctuation over the past two years. The major indexes all show a peak in 2008 followed by a 5.6% decline in 2009.  ENR is projecting a further 1.9% decline in 2010.

Looking at individual materials, however, there are a wide variety of profiles.  Steel has shown a sharp decline of some 30% from its peak and ENR expects it to decline another 4.8% in 2010.  Lumber has fallen steadily from a peak in 2004 and will get an initial boost in the first half of 2010 as the housing market improves and is forecasted to end 2010 at 5.2% higher.  Cement prices have fallen steadily in 2008 and 2009 and is likely to fall further as consumption is forecasted by the Portland Cement Association to slip another 0.7% after plunging 50.3% in 2009.

Labor costs are showing no significant reductions but rather the rate of increase are much lower than in the past.  The Construction Labor Research Council, Washington, DC reports that the average negotiated increase for 2010 is 3.6% which is well below the average of 4.6% in 2008.

From an overall construction cost viewpoint, greatly increased competition between suppliers, sub-contractors and contractors have resulted in each party reducing overhead and profit margins thus reducing bid prices and leading to moderate to strong construction price deflation. Overall construction cost indexes reflect that selling cost of construction on year to year basis declined between 7% and 10% and are at 2006 levels.

The most cost efficient procurement method would be to introduce some form of competitive bidding.  However, this comes with risks in terms of quality and increased change orders and the possibility of contractor/subcontractor insolvency.

Overall Construction Escalation Outlook

The large reduction in overall construction activity is leading to greatly increased competition between bidders and putting downward pricing pressure on projects.  In most areas cost trends continue to be sharply negative, leading to moderate to strong construction price deflation.

In the short term, bid prices are likely to remain low due to the very weak demand and lower input costs.  In the longer term, the outlook is less clear.  It is likely the construction market will have a slow recovery over many years as it will take time for investment to return to the construction sector.

The most likely escalation scenario is an uneven slow recovery over the next three or four years.  We see 1% – 1.5% de-escalation in 2010, a static 2011, a 1% – 1.5% escalation in 2012 and a return to a manageable 2% – 3% per annum thereafter.

Pro-Cost Merry Christmas

SECOND QUARTER CONSTRUCTION OUTLOOK 2009

A QUANTITY SURVEYOR’S PERSPECTIVE – NEWSLETTER
SECOND QUARTER CONSTRUCTION OUTLOOK 2009
September 10, 2009

The second quarter of 2009 has seen some signs of the recession slowing in a few non-construction sectors. Construction still remains in a downturn as funding for projects is still very difficult obtain, keeping construction growth and employment in decline. It is forecasted that the construction market will continue on a downward trend through the end of 2009, but the intensity of the downward spiral is easing and should level off by December 2009.

Nonresidential construction projects are currently limited to State and Federal projects financed with the Federal stimulus packages. These contracts are beginning to start work, which has allowed civil construction to remain at or near levels reported in the first quarter of 2009. It is projected that costs for this sector of the construction industry will remain stable with the only changes coming from the unions in contract increases and with minimal increases in materials beginning the first quarter of 2010.

Material pricing has fallen to levels seen in December 2007, prior to the wild climbs in 2008, and are projected to show a slight increase in the first quarter of 2010. Steel prices are still in decline for the second quarter of 2009 despite steel mills pushing for a 22% increase to take the pricing back to where it was in the first quarter of 2009. The overall demand remains low as nonresidential construction starts are down, and construction spending has dropped 6% since the start of 2009 and by the end of the year is projected to drop a total of 11%.

First time buyer incentives have created a slight increase in residential construction, but with foreclosures and homes rolling off the Real Estate rolls there is still an abundance of properties keeping the market prices lower than what was seen in 2008. The slight increase in residential construction has had no impact on nonresidential construction or materials pricing.

The increased competition between contractors will help dampen previous strong upward pressure from sub-contractor pricing, a major escalation driver in some markets, while the drop in commodity prices will assist in reducing material costs nationwide. Further, lower material costs and overhead may make previously uneconomic projects more attractive if funding becomes more readily available.

In summary, the effects of the financial downturn are continuing to shift the construction industry from an abundance of activity with insufficient capacity to a reduction in activity with over capacity. The resulting increase in competition, in conjunction with declining costs of materials, will see no escalation increases in 2009 and are projected to remain flat until the second half of 2010.

Going Green!

http://www.bdcnetwork.com/index.asp?layout=article&articleid=CA6397390

December 5, 2006
Building Design and Construction

According to a new study by PinnacleOne, a construction consulting firms, almost half (48%) of public owners in the United States have implemented construction projects with energy-efficient designs in the past year. More importantly, of those owners who implemented energy-efficient designs, the vast majority (87%) were familiar with Leadership in Energy and Environmental Design (LEED®) green building standards and more than two-thirds (70%) used LEED standards in their designs.

“While more public owners need to address energy efficiency in their construction plans, it is very encouraging that those implementing green building designs are using LEED standards,” said Bruce Risley, vice president at PinnacleOne. “It is interesting to note that most of these owners are pursuing the lower levels of LEED certification and that they often overlook the use of outsourcing as a vehicle for financing and managing these facilities.”

These are just a few of the findings in The 2006 PinnacleOne Pulse of U.S. Public Construction survey which examined the opinions of 166 public owners involved in construction projects throughout the United States.

Some of the major energy-related findings:

Silver in the LEED. More than two-thirds (70%) of the owners who implemented energy-efficient designs in the past year say their designs received LEED certification. Of those designs, 71% received a silver certification, 29% achieved a gold certification and none received a platinum certification (the highest).

Old and New Embrace Green. Of those owners who have implemented energy-efficient designs in the past year, approximately a quarter (24%) have used green designs to renovate existing facilities only, more than one-third (34%) have gone green exclusively in new facilities, and the remainder (42%) have implemented energy-saving designs in both new and existing facilities.

Outsourcing Underutilized. In terms of financing and managing an on-site energy infrastructure, close to half (43 percent) of the owners prefer to outsource design and construction while maintaining ownership and management, while a similar amount (45%) have not yet utilized outsourcing at all. Only 10% prefer to completely outsource all aspects of the facility’s funding, construction and management.

Regional/Vertical Differences. During the past year, owners in the Northeast (74%) and Western (62%) regions were more likely to implement energy-efficient designs than owners located in the rest of the country. Interestingly, owners in the education sector were more than twice as likely to go with green designs as other industries. Of those owners in the Western region using energy-efficient designs, a majority (53%) did not pursue LEED certification.

The 2006 PinnacleOne Pulse of U.S. Public Construction study was a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, that examined the attitudes of public owners on construction issues related to project costs, program management, energy/environment, and dispute resolution. The survey was conducted in August of this year.

FIRST QUARTER CONSTRUCTION OUTLOOK 2009

A QUANTITY SURVEYOR’S PERSPECTIVE – NEWSLETTER
FIRST QUARTER CONSTRUCTION OUTLOOK 2009
January 16, 2009

The speed and scope of the events in September and October 2008 were startling. The national economy and indeed the whole world are now feeling the full force of the financial crisis that is now causing collateral damage in virtually every industry and resulted in the U.S. economy being in a recession. Moreover the problem is worldwide as Asia, Europe, the Middle East, and Latin America all struggle.

The 2008 mid-year peaks in base metal prices, oil, and other construction related commodities coincided with the drying up of capital availability due to the spreading financial crisis, threatening what had been strong demand in the non-residential construction markets. Investors have been running scared from any debt backed by loans to apartment buildings, office space or warehouses, freezing financing for new projects.

Inflation peaked during the first half of 2008 with both steel and oil prices soaring to record levels despite a subprime mortgage crisis that was destroying the housing industry. But with the financial crisis during the last quarter of 2008 when the full extent of the financial crisis started to reveal itself and with banks, insurance companies, Wall Street investment firms and the automotive industry all lining up for bailouts, commodity prices started to tumble. Oil prices fell from over $140 per barrel to less than $70. Steel prices also started to head down and are expected to keep falling through in the foreseeable future especially as demand for scrap metal from China has declined dramatically. Structural-steel prices fell 15% in the last quarter of 2008 and prices are expected to decline another 20% by the second quarter of 2009 before firming.

During 2008 when the housing market was particularly hard hit, workers turned to “non-residential building” for construction jobs. New commercial construction that continued at a steady pace helped cushion job losses that would have been more severe. With the abrupt halt in commercial projects in September, unemployment started to soar, and will undermine wage negotiations in 2009. In November 2008, the U.S. Dept. of Labor reported construction’s unemployment rate was 12.7%, more than double what it was a year ago. For all of 2008, 632,000 jobs, or 8.5 percent, were lost in total construction
For single-family housing, declines are continuing and showing no sign of an upturn. Home prices are continuing to drop—a 20 percent drop in 2008 with an expected further 10 percent decline through the first half of 2009. Thereafter, things should level off. Store construction has taken the biggest hit with an estimated 30 percent decline in retail square footage starts this year.”

In the near term, we are likely to experience a continued downward spiral with job losses, reduced construction volume, investor and lender fright and as the employment data and other statistics continue to reflect the ongoing, seemingly limitless retrenchment in economic activity, the chances for a major stimulus package emerging from the incoming Obama administration and the new Congress improves. However, the increased competition between contractors will help dampen previous strong upward pressure from sub-contractor pricing, a major escalation driver in some markets, while the continuing sharp drop in commodity prices will assist in reducing material costs nationwide. Further, significantly lower labor and materials costs may make previously uneconomic projects more attractive.

In summary, the effects of the global financial downturn are shifting the construction industry from an abundance of activity with insufficient capacity to a reduction in activity with over capacity. The resulting increase in competition, in conjunction with declining costs of materials, will see no escalation increases in 2009. In fact there could be a 2% to 3 % drop in the first half of 2009 followed by a corresponding increase in the latter half of the year resulting in a net zero for the year.

Procost saves you money!

Procost was featured in the Puget Sound Business Journal last year – “As construction expenses rise, Pro-Cost thrives”. – http://www.bizjournals.com/seattle/stories/2008/07/14/story15.html

[From Puget Sound Business Journal]

JLJ@BIZJOURNALS.COM | 206.876.5426