Non-residential construction volumes and pricing continued their upward trend in the second quarter, with prices increasing an average of 2 to 4 percent in the first half of 2013. These factors, along with growing market confidence and a narrowing labor supply, will continue to push new construction costs closer to the trend line for the near to medium term.
According to Vermeulens, construction prices are on track to surpass the trend line in 2014, repeating long-term patterns. Federal reductions in spending could slow institutional growth and soften future price increases; but these impacts are expected to be slight.
Construction Costs
Latest data shows that all market sectors are gaining recovery momentum. Prices on institutional/commercial/ industrial (ICI) construction projects increased an average of 2 to 4 percent in the first half of 2013, depending on location. Vermeulens saw a 5- to 6-percent increase in 2012, and a 3-percent uptick in 2011. All combined, selling prices have increased 13 percent from their recessionary bottom.
A stronger U.S. dollar and improved supply have stabilized commodity prices. As inflation in commodities and other sectors slows to a moderate pace, and interest remains low, volume will grow at a higher rate, but changes in fiscal policy could work against this.
“Current indicators support steady growth, though some shortages in local markets are driving prices more rapidly back to the construction cost trend line,” says Blair Tennant, a project manager and cost engineer for Vermeulens.
Construction Volumes
Non‐residential construction volume has increased 9 percent from the bottom in March 2011.
“The increase in construction volume, along with continued increases in the AIA Billings Index, suggests that the non‐residential sector continues to be stable,” says Tennant.
Construction volume is the number one driver of costs, because contractor opportunities increase as project volumes and backlogs grow, which leads to higher bidding.
Recovering capital markets continue to support construction demand. Infrastructure spending—which peaked in August 2009, and then fell by 12 percent to its bottom in February 2010—has since rebounded 3 percent. New fiscal policy will be an important driver in this sector.
AIA Billings
Architectural billings are a key indicator for future construction volume. The second-quarter pace of billings at firms across the country slowed slightly from May, but continued to rebound after a brief one-month decline in April.
Inquiries into new work remained strong nationwide, and architectural firms reported an increase in the value of new contracts for the sixth month in a row.
Average backlogs for architecture firms in June remained at five months, which is unchanged from March. Backlogs have been inching up incrementally since the AIA began tracking this information on a quarterly basis in late 2010, but they remain relatively modest.
Construction Employment
Growth in construction activity nationwide has led to a prolonged increase in demand for construction labor for the first time since 2007, with increased labor demands in 30 states.
“Workforce attrition will end the labor cost reductions we’ve seen in the past few years,” says Tennant. “But there will still be enough labor capacity to support non‐inflationary growth.”
Construction Industry Confidence Index
The Construction Industry Confidence Index (CICI) survey, which measures executive sentiment about current and future market conditions, rose to a record 69 points (on a scale of 100) in the second quarter of 2013, with more available bank financing having a significant impact.
More than 46 percent of the 310 executives of large construction and design firms responding to the survey believe the market is growing. Strong confidence also increases contractor margins.
The CICI survey also asked construction executives if their clients' access to capital for project financing has improved or gotten worse in the past six months. In the second quarter, 37 percent said project financing was easier or much easier than it was six months ago, up from 31 percent in the first quarter,
For the first time, all market sectors in the survey had a CICI rating above 50, indicating strong expected market growth over the next 18 months.
Looking Ahead
Continued construction activity will push prices above the ICI trend line in the near future. If markets reach the 8-percent-per-year rate, non-residential construction prices will surpass the trend line in 2014.
“Based on the most recent data, institutional owners can expect capital construction costs to move closer to the trend line for the near to medium term,” says Tennant.
By Johnathon Allen
This report is based on the Vermeulens Q2 2013 Market Update report.
