The four graphs and single table below encapsulate some of the key results from RSMeans’ Construction Cost Index (CCI) calculations for the latest quarter ending in April, 2009. The overall CCI for the United States as a whole has slipped into decline. The quarter-to-quarter change was -2.0%, which translates to -7.9% on an annualized basis. The total index decline was all due to materials, as installation rates stayed high.

Material and Labor

Material prices were +1.6% year over year, but -4.9% quarter to quarter. The largest sub-component changes came in: metal joists and decking (-18.9% quarter to quarter); concrete reinforcing (-17.6%); plaster and gypsum board (-7.2%); structural metal framing (-6.9%); and electrical, communications and utilities (-5.8%).

Despite the wave of layoffs in the construction industry, installation or labor costs continued to rise at a good pace. The installation sub-component index was +5.7% year over year and +1.8% quarter to quarter. One reason for the strength was internal to RSMeans, in that there has been an effort to obtain more accurate measures on labor rates in some cities and to upgrade reporting standards and specifications.

The stage of the cycle is also playing a role. While construction starts in non-residential building and engineering construction are falling into rapid decline, at least until the publicly-funded infrastructure-stimulus wave is felt more clearly, there remains a solid carryover of work at the job site. Much of this work, particularly in the civil/heavy engineering category is more highly skilled and, therefore, higher paying.

Falling Construction Costs are Highly Unusual

The present circumstance of falling construction costs overall is highly unusual. There are already indications that this may be short-lived. Almost all construction building products have a commodity base, either as an input or in the form of providing heat as part of the production process. Then there is the matter of transportation costs. The price of oil is on the rise and base metals are inching upward as well.

There is a suspicion that China is stockpiling cheap raw materials. But the Chinese domestic economy is starting to wake up nonetheless. Also, other factors such as just-in-time inventory suggest that the material price turnaround could be faster than in previous periods of cyclical recovery. (story continued below)

*Year over year is quarter versus same quarter, previous year.
**Annualized is quarter to quarter compounded for annual growth rate (i.e., (Q_t/Q_t-1)⁴-1).

Construction Cost Index – U.S. Total

Materials Sub-component of CCI	Installation/Labour Sub-component
30-City Average Hourly Labor Rates for Skilled Workers (20 Trades) (Including Fringe Benefits)

Percent changes are mid-year to mid-year (except Apr 09 is versus Apr 08).

Data source: Reed Construction Data - RSMeans .Charts: Reed Construction Data - CanaData.

 

Ranking of City Construction Cost Percentage Changes

As for the table below, it is usually useful to look for patterns in the numbers. Unfortunately, except in the broadest of strokes, little of abiding significance emerges from the percentage changes. Annualized quarter-to-quarter construction costs in the 51 cities shown have recently ranged from 0.0% (Tampa) to -11.4% (Memphis). Moreover, the changes are scattered all over the place geographically and according to economic conditions. Nevertheless, the following is an attempt to provide some structure.  

When considering urban centers, it is useful to group them into the 10 categories below. Many cities overlap between these designations, but there are still some industrial sectors that dominate in the regional economy. The ranking as to how the cities are currently performing (e.g., in terms of employment growth and unemployment rates) flows generally from top (1) to bottom (10). Longer-term prospects may be a different matter.

(1) Energy centers in oil and natural gas. With the exception of Denver, these are primarily in Texas (Dallas and Houston), Oklahoma and Louisiana. They are also propelled by immigration from and trade with Mexico or by hurricane-relief efforts (New Orleans).

(2) Cities with an agricultural focus in the heartland (St. Louis, Kansas City, Minneapolis). 

(3) High-tech and/or knowledge-based centers (Seattle, San José/San Francisco, Boston, Philadelphia)

(4) Government and military centers (Washington, Denver, Sacramento, San Diego, Norfolk)

(5) Banking, brokerage and insurance centers (New York, Charlotte, Stamford, Hartford, Baltimore)

(6) Recreation, entertainment and retirement centers (Las Vegas, Los Angeles, Phoenix, Miami, Orlando). Several of these are also being transformed by immigration.

(7) Trade-with-Asia ports (Los Angeles, Portland, Oakland)

(8) Durable goods and heavy industry (Chicago, Detroit, Cleveland, Pittsburgh)

(9) There are also some cities with stand-alone qualities (e.g., Atlanta as a head office center and Salt Lake City with its large youth component and rising population).

(10) Specifically related to residential construction markets, there are some cities (e.g., in Florida, Arizona, Nevada and California) with extreme excess inventory. Heated speculation during the good times and oversubscriptions to sub-prime mortgages has left an overhang of vacant and foreclosed housing stock that will take years to clean up.

Based on RSMeans' Construction Cost Indices (CCIs) for each city.

Data source: RSMeans (www.rsmeans.com).
Table: Reed Construction Data - CanaData.