Reversals of Fortune (1/15)
Jan 15, 2009 10:21 AM, By Elaine Misonzhnik
As the U.S. real estate market continues its downward slide, commercial construction firms are suddenly finding themselves on the other side of the looking glass. For the past several years, builders of retail space benefited from a booming market as retailers expanded and developers built shopping centers, lifestyle properties and mixed-use complexes wherever there was an empty patch of land. The biggest issue for contractors had been inflation in materials prices brought on, in part, by tremendous global demand. That trend came to a head in early 2008 when the price of a barrel of oil eclipsed $140 as part of a broad run–up in prices in all sorts of commodities.
Now, however, the situation has reversed.
Commodities prices have fallen precipitously from 2008 peaks. The price of a barrel of oil is now down around $40 and the costs of asphalt, diesel fuel and structural steel have also dropped significantly. In the month between October and November 2008, the most recent period for which data is available, the price for asphalt paving mixtures and blocks decreased 15.3 percent, according to Reed Construction Data, a Norcross, Ga.-based construction data provider, while the price of diesel fuel fell 20.3 percent. Precast concrete prices declined 0.7 percent month-over-month in November, while prices for fabricated building steel dropped 4.6 percent.
Prices for those products that are still registering gains, including gypsum and cement, have moderated significantly, with increases ranging from 1.5 percent for cement to 0.7 percent for gypsum. Overall, the construction materials price index fell 3.2 percent in November, reports Reed Construction Data. “There was a lot of panic in the construction industry in the early part of [2008], but now they are buying things at less than they bid for,” says Jim Haughey, chief economist with Reed. “We’ll probably see a few more declines this year and much more modest increases next year. It’s going to make the construction budget stretch a little further in the coming months.”
However, that seeming good news has been tempered by the fact that work has dried up for retail contractors as a result of the sharp retail pullback. Shopping center developers and retailers are postponing or canceling new projects, leaving less work to go around for retail contractors.
New construction starts in the commercial sector from November 2007 to November 2008 fell 13 percent, according to the Associated General Contractors of America (AGC), a national trade group. That’s not as sharp as the pullback in residential, however, where starts are down 23 percent. Another measure, the American Institute of Architect’s Architectural Billings Index, is also down sharply. In November, the index fell to an all-time low of 34.7. This represents a very steep drop from October levels, which already were well down from levels earlier in the year. (Readings below 50 in the index indicate a decline in activity.) As a result, many contractors are finding themselves in dire financial straits. And since borrowing money for supplies has become much more difficult and most industry insiders expect further declines in new construction starts next year, buying materials in advance just because they are cheap no longer makes sense, says Haughey.
Waiting for the paycheck
If that’s not enough, the sudden precarious state of some retailers and developers is also hurting contractors. For example, B.R. Fries & Associates, a New York City-based construction firm, recently got stuck with a $1.2 million bill when Steve & Barry’s, the discount apparel chain that filed for Chapter 11 bankruptcy in July 2008, pulled the plug on a new store project in New York only four days before it was scheduled to merchandise the property. “We are filing a lien on the property and I am working hard on the creditor’s committee, but we don’t have much hope of getting any money from Steve & Barry’s,” says Barry R. Fries, CEO of the company.
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