Anderson Predicts Continued Upward Trend in Material, Labor Prices for 2011

November 1st, 2010 by Editor

In a forecast of building material trends in 2011, Julian Anderson, president of Rider Levett Bucknall, had simply this to say about lumber: “Start thinking about construction activity.” Bolstered by a graph that indicated that lumber prices had sunk to low levels, as a result of the material’s reliance on residential construction, Anderson added, “That tells us anything to do with housing ‘sucks.’”

That might well have been the theme of the presentation, given as part of the McGraw Hill Construction Executive Outlook Conference, which took place October 28-29 in Washington, D.C.

Unlike some of the other materials Anderson overviewed for his audience of construction materials, materials such as cement and copper that find use in other industries, he said, “The use of lumber in the United Sates is geared around two things, new housing and remodeling.” He added, “We hear talk in every recession about using steel in housing.”

In shifting to a look at steel pricing, he noted, “Demand for steel, globally, is outpacing the relatively stable U.S. demand.” Statistics showed that even as U.S. consumption of steel (in nonresidential construction and other industries) declined nearly 15 percent from 2006 to 2008, world production showed small increases, about 6.4 percent, in that same period. The steel producer price index, he added, “grew mightily.”

Anderson further predicted that commodities will face ongoing price increases, driven by global demand and scarcity.

Regarding labor, Anderson commented that it was clear that “Other than manufacturing, the construction industry has been among the hardest hit [for unemployment], no doubt about it.”

He noted that architecture firm employment peaked in June 2008 at approximately 225,000; by August 2010 that employment number was closer to 166,000.

He also cited the September Architectural Billings Index, released by the American Institute of Architects, which showed, for the first time since January 2008, a growth in design activity. “It’s key to watch this because unless the architects are busy, the rest of the world won’t be busy,” Anderson said.

Although construction employment is low, Anderson pointed that employee costs follow their own trend. If labor was a material, costs would have decreased 10 to 15 percent by now, Anderson pointed out, but instead it continues to move slowly upwards. Somewhat encouragingly, Anderson said that, unlike manufacturing, construction employment will recover and see growth over the next ten years. He predicted that productivity will be the first thing to increase, adding, “it probably already has,” as employees are asked to “do more with less.” That will be followed by expansion of the work week, then some temporary hires and, finally, permanent hires.

“The duration of the recession will impact the number of ‘survivors’ across the construction industry, leading to a permanent decrease in capacity, which will sow the seeds of future upward price pressure,” Anderson said. He elaborated, “We’ll have not enough people to do the work so prices spike.”

Regarding subcontractors such as glazing contractors specifically, Anderson noted that “bonding capacity may put upward pressure on subcontractor bids for a time.”

He elaborated that “as subcontractors shrink in many markets … their businesses reduce. So too, at some point, will their bonding capacity.” He added, “There likely will be trouble finding subcontractors with appropriate bonding capacity during an upswing.”

For 2011, Anderson sees a continued upward trend in labor and material prices, buffered by continued competitiveness among contractors, resulting in continued suppression of prices at bid.

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