Upside and Down
Oct 1, 2007 12:00 PM, By Elaine Misonzhnik
Two years ago, home builders couldn't construct houses fast enough to meet demand. They transformed huge tracts of lands into millions of new single-family homes, emboldened by rapidly appreciating home prices. Meanwhile, in cities across the country skylines were dotted with construction cranes as new multifamily towers rose. Moreover, developers transformed older hotels and office buildings into condos.
To suggest that there was overbuilding then would have gotten you laughed out of any room. But that building boom came with a price — and not just because it contributed to the downfall of the housing market. The boom sent prices of construction materials skyrocketing. Some materials costs grew at double-digit percentage point paces. This, in turn, had a profound effect on retail construction. For one, new retail follows residential, so new construction created opportunities for retail builders. But there was another impact. Developers — if they wanted to build at all — had to act fast or else risk seeing project costs skyrocket in a matter of weeks or months based on how quickly materials prices changed.
But now — with the residential market thrust into chaos — a different picture has emerged. New housing starts declined 27 percent in the first six months of 2007 compared to the same period in 2006, according to Reed Construction Data. Single-family starts dropped 28.5 percent and multifamily starts fell 18.5 percent.
With only 1.49 million units starting construction since October 2006, the country's housing market is in its worst shape since 1997, Reed researchers estimate.
On the downside, a slowdown in housing usually does not bode well for retail. The appetite for new development dissipates. Moreover, faced with a housing crunch, consumer spending remains a concern. This time, however, there is a silver lining. Suddenly materials prices have taken an about-face. On many items, such as gypsum, plastics and ceramic tile, prices have dropped. On cement and precast concrete, prices are still rising, but not nearly as fast as before. And there aren't as many shortages occurring.
Retail developers can now enjoy stabilized construction pricing. As of July, prices for commodity construction materials were up only 0.5 percent from a year ago, and down 0.4 percent from June, according to Reed. In the second quarter of 2007, the price for construction of shopping centers remained flat, says Brian Smith, chief investment officer with Regency Centers, a Jacksonville, Fla.-based REIT with $1.3 billion of new space currently under construction.
By more generous estimates, however, the cost of commercial construction may have gone down as much as 10 percent compared to 2006, says Scott Loventhal, director of development with Garden Commercial Properties, a Short Hills, N.J.-based real estate owner with more than 25 million square feet of commercial space in its portfolio. Garden Commercial is a subsidiary of Garden Homes, a residential developer, and based on the slowdown in the firm's residential business, Loventhal doesn't expect to see an improvement in the housing market at least until the spring of 2009.
Which way is up?
The drop in the price of gypsum products, which are used in both residential and commercial construction and which came down in value 17.3 percent compared to a year ago, is one of the most notable changes so far, according to Reed data. Also going down are prices for engineered wood products, which have decreased 9.4 percent from last year; plastics, which posted a 2 percent price decrease; and softwood lumber, which posted a decrease of 5.3 percent.
When it comes to other commercial construction materials, however, such as concrete, there hasn't been much of a change, though price increases have moderated compared to the previous three years, says Jim Haughey, chief economist with Reed. Precast concrete is up 4.9 percent compared to last year, cement is up 4.7 percent and sheet metal is up 2.3 percent. However, those increases are modest compared to the jumps experienced in the recent past. In 2005, for example, prices of concrete products rose 17 percent.
Looking forward, over the next 12 months construction prices will increase an average of 3 percent to 5 percent, estimates Kenneth Simonson, chief economist with the Associated General Contractors of America (AGC), compared to annual increases of 6 percent to 9 percent experienced over the past three years.
