Upside and Down
Oct 1, 2007 12:00 PM, By Elaine Misonzhnik
Still, the volatility in the oil markets can cause a spike in the price of plastics, paints, rubber and steel at any point, in addition to driving up the cost of site work that relies on fuel-guzzling road machinery, such as excavation trucks. As of July, the price of diesel fuel used for construction work was up 1.7 percent year-over-year, according to AGC, but on Sept. 13, crude oil prices rose more than 2 percent in one day, to $79.91 a barrel, and analysts worry that they will continue to climb higher because of the increased demand for energy in China and India.
Plus, “some of the decreases [in construction materials prices] are offset by higher wage rates for labor for nonresidential building contractors,” Haughey says. “Wages have gone up for nonresidential subcontractors because their skills are different” than those of residential builders.
As of August, average hourly earnings for construction work were up 4.5 percent compared to the same period last year, while earnings for all private production workers were up only 3.9 percent, according to the Data DIGest published by AGC. The wage rate for subcontractor labor went up 4.2 percent compared to last year, estimates Haughey. This suggests that contractors are still bidding up wages, Simonson writes, even though the contractors lost approximately 96,000 jobs since September 2006.
The slowdown in the residential sector has freed up those subcontractors who can be used for site work — in AGC's estimates, up to 400,000 residential workers switched to commercial projects this year. But laborers who specialize in retail development are still hard to come by, according to Walter Bagley, director of construction with Edens & Avant, a Columbia, S.C.-based retail developer with a $1 billion construction pipeline.
Retail developers worry about more than just the labor prices, however. As a rule, retail follows rooftops, and a decrease in the number of new residents in certain areas means a slowdown in new retail construction and, possibly, scrapped projects. This year, overall spending on retail job sites is going to rise 13 percent compared to 2006, according to Reed, but in 2008, that figure is expected to drop to 5 percent, with $37.8 billion in new projects. “That is just a little more than the construction cost increases,” says Haughey, who expects the pace of new retail development to slow down.
Shrinking pipelines?
Still, that's ahead of the figure for commercial building overall, which is forecast to increase 3.8 percent from 2007 to 2008, with $103 billion in new projects.
A big factor in how things play out could be retail sales. Retail sales have averaged growth of 2.4 percent in 2007 on a same-store basis, down from 3.6 percent last year. They could fall further depending on housing. But even if retail sales plunge, the fallout won't be felt equally. While the slowdown in the residential sector is likely to affect developers of neighborhood and community shopping centers in up-and-coming markets, those whose pipeline is concentrated in primary areas with established populations should emerge unscathed, says Smith.
“As home building slows down, it will slow down retail,” says Steven Rivers, senior vice president with Hardin Construction Co. “But the Southeast is still pretty active, and out West, places like Arizona and Nevada still have a large influx of population, so I think they will keep up. Where we are, in Orlando, we had such a large inventory of new homes come in that the retail is still catching up to the new rooftops.”
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