Development Magazine Summer 2015

Construction Materials Price Trends

THE BUREAU OF LABOR STATISTICS (BLS) now issues five producer price indexes (PPIs) each month that track the cost of new nonresidential (warehouse, office, industrial, school and health care) buildings. All of these indexes rose at annual rates of 7 percent or more in the 2006-2009 period. In contrast, increases from March 2014 to March 2015 ranged from 2.6 percent for office construction down to 1.2 percent for health care construction.

Numerous materials have contributed to the recent moderation. Most dramatically, the PPI for diesel fuel plunged 39 percent over the past year. The index for steel mill products slid 4.8 percent, while copper and brass mill products such as copper wiring, pipe, flashings and brass fixtures slumped 7.1 percent.

These products are shipped globally. Weakness in the economies of Europe and Japan, the slowdown in China’s growth and the appreciation of the dollar all have exerted downward pressure on prices for these materials.

In contrast, gypsum wallboard and concrete do not usually travel long distances. There are typically only a few suppliers in any region. As construction demand has grown, these vendors have generally been successful at pushing through price increases. Even lumber and plywood, although easier to ship, tend to experience price spikes.

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Gypsum makers imposed double-digit percentage increases in early 2012, 2013 and 2014. Despite a small retreat in March 2015, the PPI for gypsum products was up more than 50 percent from its low point in 2011. Wallboard is an important component in most building construction and renovation projects. Although new retail and office construction markets have remained sluggish, there has been lots of remodeling demand for gypsum, as well as strong demand from apartment builders.

Lumber and plywood, on the other hand, are used primarily in single-family homebuilding. When that market began to revive, the PPI for lumber and plywood jumped at double-digit rates for most of 2013 and 2014. Now, however, more lumber mills have opened, while housing starts have increased only fitfully. As a result, the PPI for lumber and plywood has begun to sink, falling 4.4 percent from March 2014 to March 2015.

The days of mild construction price changes may be limited. Construction spending is likely to rise by 6 to 10 percent in each of the next three years, slightly more rapidly than the 5.5 percent recorded in 2014 and 5.6 percent in 2013. Materials costs overall should continue to be relatively well behaved, but a few items — including concrete and glass curtain walls for office or apartment buildings — that experienced price spikes or delivery delays in recent months are likely to present more widespread problems in the coming year.

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