The depth of the current recession is best measured by declines in construction costs, and they have taken their biggest tumble since the Great Depression of the 1930s. McGraw-Hill Construction forecasts that the recession will tighten its grip on the nonresidential building markets next year despite the best stimulus efforts. It is forecasting the dollar value of nonresidential building starts to fall another 2% next year, following a 30% decline in 2009. Even with a predicted 32% increase in housing starts in 2010, the deteriorating nonresidential building market and double-digit unemployment will keep construction costs on a short leash in 2010.

Recession Spreads To Nonresidential Buildings: Little Room For Costs To Move

With that background, ENR is forecasting that its Construction Cost Index will increase 2.3% next year, while the Building Cost Index will increase 1.3%. A year ago, ENR predicted inflation measured by the CCI would fall from 5.7% in 2008 to 1.2% this year. The CCI actually ended the year with a 1.1% gain. The same forecast predicted the BCI would decline 0.5% this year, after a 5.3% increase in 2008. After some ups and downs, the BCI ended 2009 at the same level it started.

The Forecast Formula

The accuracy of ENR’s forecast is heavily influenced by union wage settlements, which account for 80% of the CCI and 65% of the BCI. This year, the average union wage and benefits settlements increased 2.7%, according to the Construction Labor Research Council, Washington, D.C. The labor component of ENR’s CCI also increased 2.7%, while the labor component of the BCI rose 3.1%.

These increases were well below the 4.6% averaged in 2008, says CLRC. “This year’s lower increases were partially the result of over 10% of the contracts having freezes or reductions,” says Robert Gasperow, CLRC president. This year’s results also were characterized by fewer multiyear agreements, he adds.

Of the 178 settlements tracked by CLRC, which covers 152,830 workers, the average negotiated increase for next year is 3.6%. Normally, this is a good benchmark for forecasting ENR’s wages. However, with fewer second-year agreements on the books and with construction unemployment stuck in double digits, ENR believes wage settlements next year will be lucky to match this year’s gains. As a result, ENR is forecasting the labor component of the CCI to increase 3.3% next year, while the skilled-labor component of the BCI is expected to increase 3.0% in 2010.

ENR Forecasts That Its BCI and CCI Indexes Both Will Rise Slightly in 2010.

The materials side of the cost-index equation is mixed. Most market forecasts for 2010 call for the housing market to rebound back to 2008’s level after hitting bottom in 2009. This should give lumber prices in the indexes a temporary boost. However, the deepening of the nonresidential building market recession will continue to undermine the indexes’ other two materials prices: structural steel and portland cement. In balance, ENR is forecasting a 1.9% decline in the materials component of both of its indexes next year. This follows a 5.6% decline in the materials component during 2009.

Real labor costs in 2010 may even be more moderate. “Competition is fierce, and companies are looking to cut costs in the one place they can––manpower,” says Karl Almstead, vice president at Turner Construction Co., New York City, and also responsible for putting together the Turner building-cost index. The Turner index, which measures the selling price of construction and reflects competitive bids, is down 12.6% since the beginning of the year. “These are the biggest decreases we have recorded since the Great Depression,” says Almstead.

“Everybody is looking at that big variable—labor costs—and thinking they can cut something,” says Almstead. “Some of that productivity is real because firms have a better selection of workers. With unemployment so high they are not forced to go to the bench all the time. But some of it is wishful thinking, and, come next year, if they can’t make those productivity gains before the markets turns back up, there will be a lot of people struggling to stay alive.”

Spikes and Slumps

Structural steel accounts for 24% of the BCI and 13% of the CCI. ENR’s steel component fell 5.6% this year, and 2010 should be equally tough.

Prices for reinforcing bar and steel plate and sheet fell to their lowest levels since 2004, but structural prices have been “stubbornly high,” says John Anton, steel analyst for Washington, D.C.-based forecasting firm Global Insight.

“Given how much scrap prices have fallen and how much demand is down and how much unused capacity there is in the industry, structural-steel prices should have fallen below $600 a ton, but they are holding at around $640 a ton,” says Anton. He predicts that after some fluctuations to rebuild inventory, structural-steel prices will fall 4.7%, to $610 a ton by December 2010. ENR’s forecast calls for steel prices to decline another 4.8% next year.

Lumber prices will get an initial boost in the first half of next year as the housing market rebounds from this year’s low point. This would reverse four years of falling prices. However, it won’t take long for the lumber industry, which is currently operating at 70% of capacity, to gear back up, leaving prices at the end of next year close to where they currently are, says Robert Berg, lumber economist for the Bedford, Mass.-based forecasting firm RISI. ENR believes its contractor prices will lag behind the decline in mill prices and is forecasting its lumber price to end 2010 5.2% higher than this year.

Cement prices also will have little room to grow. The Portland Cement Association, Skokie, Ill., forecasts cement consumption next year will slip another 0.7%, after plunging 50.3% this year. Global Insight is forecasting cement prices to decline another 0.9% in 2010. ENR’s forecast also calls for a 0.9% decline in cement prices.