Grubb & Ellis’s Bach: Construction Costs May Be at Peak

The soaring cost of construction, spurred in recent years especially by the rising cost of inputs into the process–the energy needed, the costs of raw materials and so forth–may be at its peak, according to Robert Bach, senior vice president & chief economist at Grubb & Ellis Co., in his most recent Weekly Market Insight.The most recent such price-spur came early this summer as oil hit record levels, but nevertheless Bach expects that construction prices will level off or even fall in the not-too-distant future. As of mid-year 2008, according to the Bureau of Labor Statistics and Grubb & Ellis, non-residential construction costs are nearly 12 percent higher than a year ago. That compares with a nearly 10 percent increase in the Producer Price Index (PPI) over the same period, which measures wholesale inflation, and an increase just shy of 6 percent in the Consumer Price Index for urban consumers (CPI-U) over the same period. But what now for construction costs?”Prices are probably peaking right now,” Bach told CPN this morning. “The reasons are several-fold. The U.S. and global economies are slowing, and certainly U.S. construction activity is slowing down–that’s bringing down demand for construction materials.” Bach also pointed to recent declines in the price of oil and other commodities as factors restraining further construction-cost price spirals. Crude oil has fallen considerably since its peak of over $140 a barrel in July, though it fluctuates widely according to circumstance. This morning, oil prices (for light, sweet crude) inched up to $116.33 on the New York Mercantile Exchange from about $112 yesterday, as Hurricane Gustav headed for the Gulf of Mexico. “The global slowing of growth isn’t necessarily good news, but the cooling of inflation in the near term is, and not just for the construction industry,” Bach said. “It should allow the Federal Reserve to keep interest rates low a while longer.”