RSMeans’ Construction Cost Index (CCI) for the nation as a whole declined 2.4% on an annualized basis from October 2008 to January 2009. The materials sub-component index declined 6.5%, while the installation sub-index (which is basically labor) increased 3.6%. At the same time, the year-over-year performances of these measures were all still quite positive: +6.7% for the total index, +8.8% for material costs and +3.9% for labor charges.

However, the year-over-year changes were residual or leftover effects from the first half of last year. Construction costs rose strongly through July 2008 in large part because that was the peak month for international commodity prices in their latest boom cycle. Since then, most major commodities have fallen by more than 50% in value.

Construction Cost Results for 50 of the Largest Cities in the U.S.
The tables that accompany this report set out the latest CCI results for 50 of the largest cities in the United States. Among the major urban centers shown, only three had construction cost increases in the latest quarter — Minneapolis (+3.4% quarter to quarter annualized), Pittsburgh (also +3.4%) and Honolulu (+3.0%). Every other city had a decline, ranging from -0.2% for Miami to -4.9% for Nashville.

What is particularly interesting is to compare construction cost changes with other measures on economic activity levels in the same urban centers. A number of cities with the largest declines in house-building activity, as reflected in existing home price declines, have also recorded large construction cost drops — Phoenix (-3.9% annualized), Tampa (-3.8%), Las Vegas (-3.7%), Los Angeles (-3.2%) and San Francisco (-2.8%). In these cases, the lack of accommodation demand has influenced supply side factors.

Where Construction Costs are Highest and Lowest
As for the question of where it is most expensive to build, there is an interesting tie-in with local labor markets. Many of the largest urban centers — New York, San Francisco, Boston, Philadelphia and Chicago — bear the highest construction costs. Historically, these cities have both lower unemployment rates relative to the rest of the country, mainly because of their diversification, and healthy year-over-year employment gains.

However, another pattern has come to the fore at this time with respect to labor markets and construction costs.The strongest labor markets lately have been in the south. In particular, cities in Texas have been combining employment growth with declines in unemployment rates. Texas is fueled by energy production. In oil markets, lower prices are providing some spur to demand. In natural gas, new finds and new technologies (i.e., horizontal drilling) are reviving exploration and development. The hot new play is the Barnett Shale natural gas field which extends from north-central Texas into Oklahoma.

The southern regional cities with the lowest unemployment rates are Oklahoma City (4.6%), Austin (5.2%), San Antonio (5.3%), New Orleans (5.4%), Houston (5.5%) and Dallas (5.8%). Many of these cities are also among the lowest for construction costs in the country, according to RSMeans. This is the opposite of the accepted norm.

Elsewhere in the country, it is cities with the highest unemployment rates where construction costs are often the lowest. Two prime examples are Tampa, where the unemployment rate is 8.3%, and finance-sector-dependent Charlotte, where the unemployment rate has nearly doubled over the past year to 8.9%.

Material Costs — Market Influences and International Factors
Specific material costs have fallen most either due to their positioning in markets that are especially weak — plaster and gypsum board (-10.4% year over year) in residential — or due to their underlying commodity base having a particularly marked drop in price — concrete reinforcing (-10.4% quarter to quarter), structural metal framing (-7.9% quarter to quarter) and electrical, communications and utilities (-6.4% quarter over quarter).

The latter have been due to dramatic fallbacks in steel and copper prices. There are several ongoing aspects to the steel price moderation. Iron ore and coal prices are collapsing as Chinese demand for steel goes into a tailspin. And in the international marketplace, transportation costs have fallen along with plunging oil prices. This means that steel imports are arriving in North American from offshore at bargain prices.