Exploring Trends in Construction Costs

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1 Exploring Trends in Construction Costs Jeffrey A. Raday President McShane Construction Company Phoenix Irvine Chicago - Atlanta NAIOP. Do not distribute or reproduce without permission.

2 Jeffrey A. Raday McShane Construction Company Mr. Raday offers more than 30 years of commercial construction experience within the industrial, office, multi-family, healthcare, retail and institutional markets Mr. Raday joined McShane Construction Company in 1996 and serves as the President of the firm managing its corporate headquarters and regional offices Mr. Raday earned his Bachelor of Science in Civil Engineering from Valparaiso University and his Master of Business Administration from the University of Chicago Mr. Raday is a Registered Professional Engineer in the state of Illinois and currently sits on the Board of Directors for the Builders Association (AGC Chicago Chapter) NAIOP. Do not distribute or reproduce without permission. 2

3 Trends in Construction Costs Objectives Historical and current trends in construction pricing Impact of economic conditions on current construction costs Predictions for balance of 2011 and 2012 NAIOP. Do not distribute or reproduce without permission. 3

4 Industrial Construction Cost Trend, $27 $26 Price per Square Foot $25 $24 $23 $22 $21 $ NAIOP. Do not distribute or reproduce without permission. 4

5 Average Annual Unemployment 25% 20% 19% 21% 18% 15% 10% 6% 9% 9% 9% 11% 5% 0% Overall Unemployment Construction Unemployment (Source: U.S. Census Bureau) NAIOP. Do not distribute or reproduce without permission. 5

6 Construction Unemployment Construction unemployment peaked at 29% Of the 7.5 million US jobs lost, 2.2 million were construction related Construction starts down 4% from 2010 Unemployed workers leaving industry at 7 times the rate they are finding jobs in it Contractors / subcontractors are going out of business Fewer competitors = Increasing prices? NAIOP. Do not distribute or reproduce without permission. 6

7 Year Over Year Labor Cost Increases AGC (Nationally) 2011 : < 1.5% increase : + 2% to 4% annually Union Markets Less than 14% of construction trades are unionized < 2% increases vs. ± 5% historically Bulk of increases are going to fund pension liabilities NAIOP. Do not distribute or reproduce without permission. 7

8 Material Costs Fuel and metal prices spiked in early 2011 due to political upheavals in the Middle East Current worldwide economic slump has flattened out prices Asian markets recovering more quickly, will drive up material costs As federal government infuses cash to stimulate economy, the dollar will lose value = Inflation? NAIOP. Do not distribute or reproduce without permission. 8

9 Ken Simonson Chief Economist, AGC The noise has died down over diesel, steel and copper prices. Now the attention has shifted to asphalt, plastic, roofing and insulation. NAIOP. Do not distribute or reproduce without permission. 9

10 Year Over Year Material Price Increases Diesel fuel +50.0% Copper ores +45.4% Iron & scrap steel +29.5% Cement -0.8% Prestressed concrete -2.3% Gypsum board products -3.8% AGC: Overall material costs up 3% to 8% in 2011 (Source: Reed Construction Data) NAIOP. Do not distribute or reproduce without permission. 10

11 Cost Increase Example Assumptions $20 million building in 2010 Labor = 40% of contract, 2011 increase = 2% Materials = 60% of contract, 2011 increase = 8% $20MM x 40% x 2% = $160,000 $20MM x 60% x 8% = $960,000 $1,120,000 / $20,000,000 = 5.6% increase NAIOP. Do not distribute or reproduce without permission. 11

12 2011 Escalation Reports Engineering News-Record (ENR) reports a Building Cost Index increase of 3.3% from October 2010 to October 2011 Turner s Building Cost Index shows a slight 2.01% increase from Third Quarter 2010 to Third Quarter 2011 The producer price index (PPI) for inputs to construction industries has climbed 8.9% year-overyear as tracked by the Bureau of Labor Statistics (BLS) This PPI is a weighted average of the cost of all materials used and consumed by contractors NAIOP. Do not distribute or reproduce without permission. 12

13 So why are Construction Costs Flat? GCs and subcontractors have cut profit margins to the bone Some GCs are bidding below cost GCs hope to squeeze it out of subs during negotiations Or, use change orders to create a profit at the Owner s expense Only A team staff is left = higher productivity Companies are trying to survive until the market improves NAIOP. Do not distribute or reproduce without permission. 13

14 What Happens When Construction Does Improve Many have burned through cash stockpiled from good years Banks will reduce / drop lines of credit because of depleted cash reserves Small increase in workload will create cash flow crisis Result: GCs and subcontractors will go out of business NAIOP. Do not distribute or reproduce without permission. 14

15 Construction Escalation Federal reserve infusing cash into the economy Economic recovery elsewhere in the world Fewer contractors and subcontractors NAIOP. Do not distribute or reproduce without permission. 15

16 2012 Construction Cost Predictions The State of Kansas Facilities Management office is planning for a 2% increase in costs for 2012 In other market segments, the Ohio Department of Transportation is expecting 2012 to bring 3% building cost escalations NAIOP. Do not distribute or reproduce without permission. 16

17 Summary Construction industry remains depressed 2011 and 2012 will see many firms go out of business Costs in 2011 are flat compared to 2010 Expect ± 2% increase in cost of construction in 2012 NAIOP. Do not distribute or reproduce without permission. 17

18 Discussion and Questions? Remember to Rate this Session using: The Development 11 App on your iphone, BlackBerry or Android The Session Evaluation Form you received upon enter this session room. NAIOP. Do not distribute or reproduce without permission. 18

cost trends insights on construction costs

cost trends insights on construction costs In This Issue: The following cost trends are included in this issue. U.S. Construction Costs Leading Indicators of Construction Industry Spending Backlog Indicator