Earlier this week, Federal Reserve Chairman Ben Bernanke said that a sustained surge in oil prices could mean weaker growth and higher inflation. Still, the Fed chieftan said he didn’t feel concerned about the recent spike in oil. Multifamily developers didn’t need to hear Bernanke’s testimony to the Senate Banking Committee (where he also said that the economic recovery was becoming self-supporting, even though job growth is still way too slow) to know how skyrocketing oil prices could affect their business. Oil prices are now over $100 a barrel, prices not seen in years.
“Oil products are prevalent in our business,” says Jim Butz, president and CEO of McLean, Va.-based Jefferson Apartment Group, which projects breaking ground on 1,100 units in 2011. “[The increase in the cost of oil] will have a significant impact on the cost of construction.”
Diesel, commonly used to fuel large-production construction equipment, is the product most directly affected by a surge in oil prices, but other products are affected as well. High oil prices can lead to surcharges in deliveries as well as push up the price of raw materials such as concrete, insulation, and waterproofing materials. East Rutherford, N.J.-based Allied Building Products is projecting increases of more than 10 percent for a host of its products. Meanwhile, products such as Sheetrock brand Gyspsum Wallboard products are seeing 25 percent increases. And wire products have risen by more than 10 percent.
With most construction-related and raw materials seeing 5 percent to 10 percent price increases, the trickle-down affect is even being seen on consumer-centric products such as appliances because of the increased costs of plastics and transportation. “Gas prices have moved up very fast and with it, so have product prices,” says Ken Simonson, chief economist for Arlington, Va.-based The Associated General Contractors of America. “It’s also affecting many petrol chemical-based products—insulation materials, waterproofing materials, and plastics. I do expect in the short term that construction material costs will be higher because of what’s going on [in the Middle East].”
For some, the turmoil is already wreaking havoc. Marc Padgett, executive vice president with Jacksonville, N.C.-based Summit Contractors Group, which projects starting 1,502 units this year, has definitely noticed the price increases. “The cost of copper, flooring, and all of our petroleum products such as Romex brand wire and PVC pipe are rising with fuel costs,” he says. “Since all roofing material is asphalt-based, that increase will be huge, too.”
Despite these jumps, Simonson remains confident that oil prices won’t wreak much havoc with the early stages of the construction recovery. “It’s not inevitable that prices will stay higher,” Simonson says. “The Saudis say they will replace lost production. If the regime change occurs [in Libya] without damage to oil fields, we may have a regime that is open to increased production, which would push prices down below where they were a few months ago.”
Even if prices do stay high, Butz points out some advantages to that. “The impact it would have on the financial markets fairly significant,” he says. “Oil is definitely a concern. It drives construction costs up and changes the capital markets. But on the positive side, when we went to $4 per gallon gas, more people wanted to live closer-in to employment nodes, which drives people into denser products, and that means they'll end up in condos or apartments.”