Construction Material Costs Expected to Rise

Be prepared for an increase in construction materials costs in the first quarter of 2010. At least that's what the most recent producer price index (PPI) seems to indicate. The federal data from November shows sharp increases in key materials, including copper and brass mill shapes, steel mill products, and insulation materials.

“Public agencies and private owners contemplating construction projects should treat the PPI figures as a warning shot because prices for many materials have stopped falling and are poised for increases,” says Ken Simonson, chief economist of Arlington, Va.-based Associated General Contractors of America. “Construction materials such as petroleum-based products including diesel fuel and asphalt and copper and steel are all vulnerable to price hikes. Copper, for instance, has shot up in the last three months and is now trading at almost triple the rate of a year ago.” 

The November PPI for inputs to construction industries—a weighted average of all materials used by contractors—had fallen 2.3 percent over the past 12 months but was flat over the past three months and rose 0.6 percent from October to November alone. Specifically, significant one- and three-month increases in the price indexes include diesel fuel (+ 6.3 percent over one month and +6.4 percent over three months); copper and brass mill shapes (+4.6 percent and +11.3 percent); steel mill products (-1.6 percent and +4.1 percent); aluminum mill shapes (0 percent and +1.3 percent); and insulation materials (+0.3 percent and +0.6 percent).

"All of these items had dropped in price compared to a year ago but the declines have bottomed out or reversed," Simonson says. "More increases are likely soon, as the dollar loses value and construction picks up in key foreign markets."

His advice for multifamily developers? It’s a good time to invest in upgrading existing properties. “You can [still] get inexpensive materials and abundant labor, and you need to make your place attractive in order to hold on or bring in new occupants whether they are tenants or condo buyers.”

If developers are lucky, these inexpensive materials might be available longer than the PPI index indicates. "I expect that, in aggregate, material costs may increase a few percentage points in 2010 but this will continue to be offset by reduced labor cost as unemployment in the construction industry remains north of 20 percent," says Mike Schlegel, president of Greenbelt, Md.-based Bozzuto Construction Co. "I do not expect to see any sharp increases in demand for construction materials until we are well into 2011.  Even if we do experience a sharp recovery, it will take the private sector six-plus months to get projects closed and started.  There is plenty of excess capacity in the material and labor market to absorb any short term increases in demand."