Major economic indicators point to healthy growth for the remainder of 2015. Non-residential construction spending has rebounded nearly 50 percent from its most recent bottom in 2011, with a total volume growth of 17 percent in 2014. Year-over-year growth is currently 21 percent. Though commodity and energy prices were lower in the first quarter of 2015, the construction sector is nearing full employment, which will drive significant wage increases regionally.
Capital construction cost increases for 2015 are now trending toward 8 percent—depending on location—with regional costs escalating between 3 and 8 percent.
Seasonally fluctuating construction unemployment of between 5 and 12 percent is expected to put upward pressure on labor costs similar to 2004-2007.
Construction Costs
Construction costs have trended toward a 3.1 percent annually compounded escalation rate for the past 29 years. Year-over-year CPI inflation is now trending below the Federal Reserve’s long-term targets following the recent decline in energy prices.
According to Blair Tennant, a project manager and cost engineer for Vermeulens, the rate of construction cost escalation is related to the federal goal of achieving an annual inflation rate of 2 to 3 percent, and the monetary policies used to achieve this. With the removal of quantitative easing by the Federal Reserve, we have officially reached a self-sustaining phase of the current economic expansion.
Key indicators support stable construction growth over the short term, with regional labor shortages driving construction prices above the construction cost trend line in local markets.
While inflation is expected to remain near its current low level for the short term, the Federal Reserve expects it to rise gradually toward 2 percent over the medium term, as labor markets improve and recent cost reductions in energy and import prices disappear.
Construction Volumes
Construction dollar volume is the number one factor for construction costs, because bids increase as contractor opportunities and project backlogs grow.
Non-residential construction spending has rebounded 47 percent from its most recent bottom, while residential dollar volume is currently up 57 percent from its bottom in July 2011.
Existing home inventories have remained steady and are currently holding at 4.5 months of supply. Eased credit conditions for first-time buyers, low vacancy rates, long-term employment, and income growth are expected to increase household formation.
AIA Billings
The Architectural Billings Index (ABI) is a key indicator of expected construction volumes nine to 12 months in advance. A score greater than 50 indicates growth.
After a weak first five months, billings at architecture firms hit 55.7 in June 2015—the strongest surge of national activity since the last recession—driven largely by new activity in the institutional market. While every region reported growth in June, firms in the Midwest grew the most (57.2), with firms in the northeast experiencing their first uptick in 9 months (50.4).
Labor Demand
The construction sector has added more than 140,000 jobs in 2015, pushing unemployment rates to 6.3 percent in June, down from a rate of 8.2 percent a year ago and 9.8 percent in 2013.
Total jobs in the U.S. economy continue to growth at a healthy rate—averaging roughly 250,000 per-month for the last year.
Job growth can continue at 250,000 jobs per month for three years before reaching the upper end of the target range. At 350,000 jobs per month, the upper range will be met in two years.
Labor capacity utilization is calculated by comparing the ratio of current construction employment to peak construction employment, and allowing for a sustainable rate of growth. A utilization rate of greater than 85 percent (yellow) will begin to put upward pressure on construction labor costs. Of the 20 largest cities (by GDP) in the U.S., 55 percent have warmed to an either yellow or orange labor utilization rate in the past year.
Looking Ahead
Regionally, inflation is expected to increase at greater rates. This includes urban centers like Denver, where construction labor utilization now represents 65 percent of the state’s available labor force, which has the result of also pushing Wyoming construction costs up.
Nationally, construction prices are firm and increasing past the trend line for the near to mid-term as construction volume increases, and labor capacity narrows.
By Johnathon Allen
This report is based on the Vermeulens Q1 2015 Market Outlook report.
