Materials Costs Push Construction Starts Down in July

Construction starts fell 3% in July to a seasonally adjusted annual rate of $854.8 billion, according to Dodge Data & Analytics.

All three major sectors—residential, nonresidential building and nonbuildings—moved lower in July. Richard Branch, chief economist for Dodge Data & Analytics, says construction material prices continue to weigh on starts.

“Lumber and copper prices have fallen in recent weeks; however, steel, plastic and other construction-related products are continuing their ascent, “Branch said in a prepared statement. “These increases will continue to impact construction starts over the coming months, somewhat muting the impact of stronger economic activity.”

Branch says the rising number of COVID-19 cases due to the Delta variant could also weigh on starts. “While we don’t expect significant business restrictions in response, it is a risk that cannot be fully discounted,” he said. “On the upside, projects entering the planning stage remain at levels not seen in several years and forward progress on an infrastructure program and the federal budget provides hope that brighter days are ahead.”

Nonbuilding construction starts fell 1% in July to a seasonally adjusted annual rate of $171 billion. In July, environmental public works starts dropped 25%, highway and bridge starts increased 11% and utility/gas plant starts rose 25%. Miscellaneous nonbuilding starts remained at the same level.

For the 12 months ending July 2021, total nonbuilding starts dropped 2% lower than the 12 months ending July 2020. Environmental public works starts jumped 32% higher, while utility and gas plant starts fell 18%. Highway and bridge starts nudged up 1% and miscellaneous nonbuilding starts dropped 25% through the first seven months.

The $728 million I-6 project in Indianapolis, the $315 million Kew Lake Water Supply project in Enid, Oklahoma and the $300 million Cavalier Solar Farm in Surry County, Virginia, were the largest nonbuilding projects to break ground in July.

Nonresidential building starts dropped 1% in July to a seasonally adjusted annual rate of $283.8 billion. A decline in the warehouse, office and retail sectors pulled commercial starts down 19%. However, hotel starts rose. Gains in healthcare, recreation and transportation drove institutional starts 11%. Manufacturing starts almost doubled from June’s level.

Nonresidential building starts were 8% lower for the 12 months ending July 2021 compared to the 12 months ending July 2020. Commercial starts dropped 8%, institutional starts fell 5% and manufacturing starts dropped 26% in the 12 months ending July 2021.

The $1.5 billion JP Morgan Office Tower in New York, the $1 billion Inglewood basketball arena in Los Angeles, and the $825 million REG Geismar Biofuels Plant in Geismar, Louisiana, were the most significant nonresidential building projects to break ground in July.

Residential building starts hit an adjusted rate of $400 billion in July, a 6% drop. While single-family starts lost 6% in July, multifamily starts dipped 4%. For the 12 months ending July 2021, total residential starts jumped 23% higher than the 12 months ending July 2020. Single-family starts increased 29% and multifamily rose 8% on a 12-month sum basis.

The $223 million second phase of the Sendero Verde project in New York, the $203 million Chestnut Commons in Brooklyn, NY, and the $194 million 100 Flatbush mixed-use project in Brooklyn, NY, were the most significant multifamily projects to break ground in July.

In a recent video, John Chang of Marcus & Millichap pointed out that the shortage of labor also weighs on the development of all real estate types.

In construction, for instance, builders are competing for a limited pool of talent, which is causing wages to rise. “As of July, average hourly earnings were growing at 4%—about one and a half times the normal rate,” Chang said. “That puts upward pressure on inflation and not the transitory type. For July, headline inflation held steady of 5.3% while core inflation, which doesn’t include food or fuel costs, actually eased a bit to 4.2%.”