March 13, 2009

Falling Material Prices Make a Builder’s Market—Minus Credit
Is there an upside to this economic downturn? Not yet

by Zach Mortice
Associate Editor

Summary: Severe reductions in demand caused by the current economic crash have begun reversing the steep increases in material prices experienced in the last several years. Though this has dropped overall building price tags significantly, tight credit markets and hesitancy to make capital expenditures have stymied clients’ and owners’ efforts to capitalize on these lower rates.

Slackening demand is finally reversing long-established increases in construction material prices, creating a market where a dollar can stretch further than in years in the newly globalized design and construction industry—if only the frozen credit market and widespread fear of capital expenses hadn’t meant that owners and clients lack that original dollar to stretch.

In the face of a projected 11 percent decline in construction activity in 2009, dropping material prices aren’t standing up to be much of a mitigating factor for clients and architects looking to move stalled projects forward. Large firm principals, cost estimators, and building industry economists say falling material prices aren’t much of a silver lining in this current cloud of recession. “As good as this story is, it’s still swamped by the generally grim economic news,” says Ken Simonson, chief economist with the Associated General Contractors. But, “I think it’s a great time to be doing construction. Not only are material costs down, but you have your pick of competent contractors.”

Architects and economists point to the sluggish credit market as the prime culprit restraining clients and owners from taking advantage of lower prices. John Cross, vice president of the American Institute of Steel Construction, calls these material price drops “advantageous” but says “it hasn’t really unfrozen the credit markets, and that’s where we see the bind.”

Estimates of overall construction cost decreases range from 10 to 20 percent. Simonson predicts that material prices will drop as much as 4 percent in 2009. Cross says he’s seen limited situations where lower costs of structural steel (which requires a $100 per ton drop for a corresponding 3 percent drop in the overall cost of a building) has made projects move forward, but they’re the exception.

And the clients that are building now are getting “great value” for their money, says Joe Brancato, AIA, managing principal at Gensler’s New York office.

“We are seeing signs of financially strong clients taking advantage of the competitive bidding environment,” says NBBJ senior cost estimator Noel Whorton.

A new marketplace
Beginning in late 2003 and early 2004, material prices began a historic rise, pushed higher and higher by rapidly developing economies in Asia, like China, India, and the United Arab Emirates. From December of 2003 to December 2008, the Producer Price Index (PPI) inputs for construction industries increased by 32.8 percent. Construction materials and component PPIs are compiled by the Bureau of Labor Statistics to measure fluctuations of material prices by material, building type, service type, and fuel type.

Since 2003, the market for construction materials has become more volatile as it evolves into an interconnected international presence. No longer are these prices set by simple domestic supply and demand rates, as supply chain variables, political stability concerns, shipping capacity, and more have been spreading risk throughout the market. Cross says the current model for material prices forecasting is more about mapping potential risks and price fluctuations and preparing for them than it is about observing self-contained changes in supply and demand. Indeed, Simonson calls for 6 to 8 percent price spikes in material costs beyond 2009, fueled by potential transportation bottlenecks and fuel price swings.

“What happened in November of 2003 was a total paradigm shift in terms of how pricing took place,” Cross says. “You just can’t manage a project from a cost standpoint the way you managed a project in 2002.”

The current trend of price retreats began in the fall, while the failure of numerous financial institutions began locking up credit markets. From September to December of last year, PPI inputs for construction industries receded by 8.3 percent. From November to December, prices dropped by 2.5 percent, and, from December to January, prices came closer to stabilizing with a 0.3 percent drop.

Some architects read this as a sign that material prices may not drop much further, but most agree that no matter how much cheaper materials become, they won’t return to pre-2003 levels.

Since fall, steel mill products have dropped by roughly 20 percent. From January of 2008 to January of 2009, plywood and lumber prices dropped by 7.3 percent, and copper and brass mill shapes decreased by nearly a third. Most individual materials prices are dropping or lying flat, at least as of December 2008.

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From the AIA Bookstore: Material ConneXion: Innovative Materials for Architects, Artists, and Designers edited by George Beylerian, Andrew Dent, and Anita Moryadas (John Wiley and Sons, 2006).