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An update on US and Houston construction costs and delays

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“If clients are willing to select alternative materials and methods to aid with lead time concerns, we have been successful in keeping projects on schedule and on budget.”

 

Colliers Houston Design + Construction Advisory Services

 

Our last report on this topic was July 2021, when we experienced a huge surge in construction costs and delays. The dust has settled a bit, but cost increases and delays continue to be problematic to anyone in the middle of or about to start a commercial or residential construction project. Turner Construction’s Vice President, Atillio Rivetti, says “material and labor cost escalation continues to be driven by volatile fuel prices, instability in Europe and global supply chain impacts.“ With a shortage of skilled labor and uncertainty of prices for key materials, contractors are being more selective about the projects they pursue, avoiding riskier jobs. “Some materials prices have fallen recently but others appear headed for further increases,” said Ken Simonson, the American General Contractor Association’s Chief Economist. “Producers of gypsum, concrete and other products have announced or implemented new increases. In addition, the supply chain remains fragile and persistent difficulties filling job openings mean construction costs are likely to remain elevated despite declines in some prices.”  In this article, we will  re-examine the average historical and current costs.   

As the following chart shows, the spread between bid prices and costs has narrowed since its peak in June 2021.

Cost vs Bid prices photo

 

Turner’s Building Cost Index is determined by the following factors considered on a nationwide basis: labor rates and productivity, material prices and the competitive condition of the marketplace. Below are two graphs illustrating the history of the index (annual average) and the percentage change in the index, through the Second Quarter of 2022. From 2013 to 2021, the annual increase in this index has been 3.6%. But, in 2021, this index increased 4.5% and another 4.3% through the Second Quarter of 2022.

Average Turner Cost Index

Change in Turner Cost photo

Costs of many construction materials have continued to increase at high levels over the past year.  The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. Inputs and Components to Construction increased 15.1% over the 12-month period ending June 2022. Some commodities in construction have declined or leveled off, but many are still posting over 20% increases.

Increases in Producer Price Photo

 

The price of steel and lumber have both come down from the peaks of 2020 and 2021 and both are now priced at near pre-pandemic levels. 

Steel Rebar Photo

 

Lumber Graph Photo

 

Construction spending continues to rise with a slight recent decline. Residential housing starts fell significantly in May and June, but this may be just a cyclical decline. At the same time, 30-year fixed mortgage rates have risen to 4.65%, compared to a 2021 average of 2.96%.

Total Construction spending photo

 

 United Housing Starts Photo

30 year fixed rate photo

From 2008 to 2020, the CPI index (U.S City Average for All Urban Consumers) increased at a compound annual rate of 1.80%.  From 2020 to 2021, this index increased 7.04%. More recently, the CPI Index has reached an historic high, as the 12-month change in this same index from June 2021 to June 2022 was 9.1%, the largest increase since the end of 1981. Much of this increase is fueled by higher prices for gasoline, housing and food. The core CPI, which excludes more volatile food and energy costs, posted an increase of 5.9% from June of 2021 to 2022. However, along with the Federal Reserve hiking interest rates, many economists believe this is a temporary spike and inflation next year will return to around 3%.

Source: Freddie Mac

 

Houston Construction Costs

The above information addresses national indexes and factors. What about Houston? Kirksey Architecture has conducted an annual construction cost survey for Houston since 2008. This survey provides a range of office building and interior costs in the market. Note, these costs do not include soft costs, such as architectural, engineering and inspection fees. They also do not include the cost of land or developer’s profit. However, to get an overall indication of cost increases and simplify the comparison, we have graphed the median costs for the ranges provided each year. 

Median Hard Construction Costs Photo

On a percentage basis, the increase in costs in 2021 is significant, compared to the overall average.

Compound Annual Growth Rate Photo

Yet, this may not show the real cost increases that have occurred. According to O’Donnell/Snider Construction (OSC), a Houston contractor, the cost of new nonresidential construction increased nearly 19% over the 12 months from May 2021 to May 2022 and are up 47% since the start of the pandemic.   

Through 2020, the cost for interior buildout has increased more rapidly than hard construction costs, with office space buildout increasing 2.9% to 5.9% per year (depending upon the quality of the finishes) and the cost of a fitness facility, conference center and employee dining facility all posting increases of 7.8% to 9.5% per year. From 2020 to 2021, the increases are much higher, ranging from an 8.0% increase for a fitness facility to 18.3% for furniture.

Meidan Interior Hard construction costs photo

CAGR Photo

 

Note: The compound annual growth rates (CAGRs) above are provided from the earliest year reported by Kirksey Architecture to 2021.

The last two volatile years have been extremely difficult for the construction industry. According to DPR Construction’s Market Conditions Report Q2 2022, “The pandemic and lockdowns, production shutdowns, cargo backups, container shortages, inventory shortfalls and demand surges have made timely receipt of materials challenging. Many believe it may take years to normalize and regain the predictability of our once-reliable, rarely considered supply chain.”

Sources:

www.kirksey.com/insights/resources

https://www.dpr.com/uploads/Documents/Market-Conditions-Report-Q1-2022.pdf

https://www.turnerconstruction.com/news/item/b4df/Material-and-Labor-Cost-Escalation-Continues-to-Drive-Increases-in-Construction-Costs

www.freddiemac.com/pmms/pmms30.html

www.bls.gov/web/ppi/ppi_dr.pdf

https://tradingeconomics.com/commodity/steel

https://tradingeconomics.com/commodity/lumber

https://www.agc.org/news/2022/07/14/construction-input-costs-jump-11-percent-may-june-adding-pressure-contractors-despite-recent-decline-0

 



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