An informal survey by the Associated General Contractors two weeks ago suggested projects are being trimmed or cancelled because of rising material prices. Economist Serena Tse of GE Capital Solutions says the ravages of inflation on overall construction activity so far this year are limited.

Tse says non-residential construction is strong and the sector where material price inflation may matter most—offices—won’t be a significant factor in every office project.
Non-residential construction, Tse notes, is showing double-digit growth across virtually all sectors. For example, in the second quarter of 2006, commercial work is up 16.5%, offices are up 18.4%, % and power is up 27.7%. Manufacturing is up 32.6%, a big jump.

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  • “Right now we’re seeing a very favorable non-residential construction cycle on the manufacturing side as the result of pent-up demand from very low cap-ex spending in 2001-2003 as well as on the commercial side as a direct result of the recent residential housing boom,” says Tse.

    Still, material costs are a very big issue. “They’re having an impact—particularly in the office sector in certain regions, where supply and demand has created a situation where prevailing market rents are such that developers are challenged to achieve returns,” she says.

    For commercial projects, especially in situations where land is at a premium, zoning regulations are particularly difficult or there is proximity to new residential development, “contractors and developers have been able to achieve prices/rents to offset the rising costs,” Tse adds.

    Inflation is selective, too, slowing for some materials and types of construction and roaring ahead in others. Recent numbers from the U.S. Bureau of Reclamation bear this out.

    Burec released its latest construction cost indexes Sept. 20 showing a slight decline in inflation for the agency’s water and power projects. The July composite cost index increased 1% during the quarter, down from the 1.7% rate posted during each of the two previous quarters.

    On a year-to-year basis, construction costs were up 6.4% for the year, down from a 6.8% rate recorded in July 2005. However, costs for concrete and earth dams are running far above average. BuRec’s July index for concrete dams was up 10.4% over a year ago, while the cost of earth dams rose 9.9%.