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October 2018: October 2006 Redux?


Taylor R. Boyd

U.S. Construction Statistics Compared


Here are images from two slides that I used in a pharmaceutical industry construction cost presentation in October 2006. I was drawing attention to the near-20% annual decline in privately-owned housing starts in the U.S. We all know what followed, as the housing industry led the rest of the economy into a deep recession from which we have only recently come back.


Construction comprises a significant  portion of the U.S. economy, and residential  construction has commercial effects that extend well beyond the actual physical buildings. According to the U.S. Bureau of Economic analysis, the annual U.S. GPD was 20.4 billion in the 2nd  quarter of 2018, and  the Census Bureau had annual construction spending of $1.3 billion in June 2018, about 6.4% of the total. 42% of the construction total was for residential projects.


2018 Decline in Housing Starts


Similarly, August 2018 Housing Starts statistics show the continuation of a 5-month decline, down 9% from the peak in March. Could this be an indicator of economic trends to come? Of course it is too soon to tell, but it might be wise to consider the possibility.


Recent articles report that despite “years of breakneck price increases,” “new [residential] construction is slowing, not picking up” (New York Times, “Housing Market Slows, as Rising Prices Outpace Wages,” September 29, 2018,) and that the “U.S. housing market, already struggling with tight inventory and rising building costs, faces a fresh headwind as 30-year mortgage rates rise close to the 5 percent threshold for the first time in years (New York Times, “U.S. Housing Market Faces '5-Percent' Test,” October 1, 2018.)


Construction Cost Implications


Anecdotally, construction cost consultants are reporting surging prices as market growth continues. For those of us with long enough memories, there is an echo of the pre-recession increases of 2004-2006, when adding escalation factors to keep up with inflation was nearly impossible. There is a sense that contractors can foresee changing demand and are attempting to maximize their profits while the getting is good. In their 2018 3rd quarter cost report, Engineering News Record reports that most “executives of large construction and design firms… believe market growth will continue at least until mid-2019,” “But beyond that, the execs are less optimistic.”


If there is an upside to all this, it may be that a decline in market demands, even if it is not catastrophic, could present opportunities for building owners to realize discounts as contractors trim their margins to maintain viability. Some significant cost savings were realized on projects in 2007 and 2008 that just happened to be in design when the downturn began. October 2018 just might be a good time to take another look at those capital budgets and line up design teams.

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