"I think it will be a lot harder for developers to absorb those kinds of increases this year," Simonson says. "I can't tell you exactly how many projects will be delayed or canceled or redesigned but I am sure we will hear more of that." The last time PPI inputs increased to such as significant degree was in 2004 and 2005. "But then, owners were eager to get the job done and accepted" the higher costs.
This cycle, he says, material cost pressures will be much greater than labor cost pressures in most instances. "There is a greater availability of subcontractors that are no longer doing residential work who can shift to commercial." Specialized labor for industrial and high-rise projects might be the only exception, he says.
The costs may take some off guard as historically public agencies have used a single figure--the CPI--for budgeting the acceleration of wages and construction supplies. This year Simonson says the CPI is expected to rise by 2.5% to 3.5%. In non-inflationary times the CPI is an acceptable substitute for the PPI. This year, though, "anyone who thinks the CPI will be a good guide for construction costs will be in for a shock."
Furthermore Simonson also predicts that 6% to 8% growth rates for construction input rates will last beyond 2008: First, many construction inputs, such as diesel fuel, steel and copper are in demand worldwide. Second, construction will always be dependent on physical delivery of heavy, bulky, relatively low-value materials for which transportation and fuel costs are a major part of the delivered price.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
