FIRST QUARTER CONSTRUCTION OUTLOOK 2010
Posted: February 5th, 2010 | Author: hannah | Filed under: Newsletter | Tags: bidding, commercial, construction, demand, downturn, federal, Nonresidential, QUANTITY, recession, stimulus, SURVEYOR, unemployment | No Comments »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.
