09 Aug Lack of Capacity is Driving up Cost
The Federal Government inflation information clearly does not match current Construction industry pricing where everything is rising. Engineering News Record reported that the year over year growth in prices is 3.4% – significantly higher than the Federal Government inflation rate of 1% (the government continually is adjusting this statistic down). In the past 12 months, private development volume of work increased by 9.6%, led by hotel development at 27.9% and followed closely by office development at 26.5%.
The key driver of the cost increases is based on the relationships learned in ECON 101 – Supply and Demand. This last year we correctly projected the Atlanta construction market would exceed its capacity of available construction and subcontracting firms and available skilled labor. Subsequent newsletters broaden this forecast to include many areas throughout the southeast. This shortage is also playing out in the rest of the country.
Contractors are telling us they are not able to find skilled labor for most trades in the south east. We keep hearing the need for plumbers, electricians, and drywall crews to name a few. If a subcontractor is not busy – check them out thoroughly – there may be a good reason.
In previous newsletters we projected that manufactures would reach capacity and start increasing prices and lengthen delivery times. All of this has become a reality affecting owners and contractors in the industry.
For example – most projects require elevators or escalators. There are six major companies and each are now indicating a 4 month delivery time for the equipment. Installation times vary based on the availability of the crew. A common practice is for each company to demand up to a 50% down payment before they start production.
Additionally recent steel pricing has been at $4,000 to $6,000/ton with extended delivery times and longer than normal shop drawing durations. ENR statistics reference steel costs have increased only 1% over the last year, however our experience for small orders reflects closer to a 5% rise. Resteel pricing has also risen by 2 to 3 percent over last year.
Financing is not any different. Private projects are driven by demand and available financing. Our experience has been that the available financing will take precedence and control the deal flow. One of the outcomes of the 2008 financial crisis was that the Federal Government placed construction lending limits on the banks. These limits carry with them significant fines should the lender exceed their limit. When speaking with our lending clients they have shared that they are at or close to their capacity for all types of construction loans.
Recently at a regional meeting of the Atlanta Federal Bank, participants were asking for relief from these regulations as each were close to reaching their limits and therefor will not be able to continue lending for new construction. This fact coupled with a significant amount of CMBS loans maturing in the next 18 months are forcing banks to closely manage their lending opportunities.
Resulting outcome – Banks will not be aggressive in placing new construction loans for the next 18 months. This trend has already started and our clients are feeling the pinch.
Stay tuned as we look for other leading indicators that forecast the future for the construction industry.
Solis Hotel Two Porsche Drive, Atlanta, Georgia