With all of the cranes visible across the Denver skyline, one might easily presume there is no end to the abundance of construction activity the metro area has experienced the past few years. Many of us may also be wondering if we are facing a potential slowing of activity or worse.
Though it’s not possible to predict a certain future, a look at lagging economic indicators over time can provide us with insight to help mitigate risk on planned projects in the near and longer terms.
For the past several years, our preconstruction department has been working with approximately 30 different subcontractors and suppliers on a quarterly basis to develop construction cost index specific to the Denver market. Two trends we’ve seen from a review of our quarterly cost index updates that seem to be offsetting each other are a stabilization in labor and materiasl escalation. The first trend mitigating costs is that labor workforce pressure we’ve experienced since the peaks of the first and second quarters of 2014 is abating.
The recent downturn in the oil and gas market has stemmed the flow of skilled labor leaving construction. This along with programs such as the Construction Careers Now! at Emily Griffith Technical College have helped to stabilize the volatility in the labor pool that we’ve seen the past few years. We’ve also seen signs of the construction labor pool returning to the local commercial market from residential and multifamily markets.
Offsetting the labor trend, however, is a recent escalation in the cost of materials. One of the most impactful includes the rise in steel costs. Steel escalation has the potential of affecting many facets of construction, from infrastructure piping and structural steel to interior gypsum board framing. Steel also can be a leading indicator of a rise in cost of other metals such as copper and aluminum.
Some of the materials cost increase may be an impact of speculation about government investment in massive infrastructure projects, and history has shown that vertical construction materials costs can suffer some aftershocks from a major bump in infrastructure construction. However, an analysis of actual data and volume in manufacturing and production reflects a leveling off of materials costs. Overall this can be encouraging for owners looking for more stability in predicting building costs and minimizing risk to their investments. We do not expect the severe overall cost escalation of 6.1 percent we saw locally in 2016 to repeat itself in 2017. However, the market does portend to remain healthy in the near future and we recommend owners plan for a 3.5 to 4 percent increase in construction costs in 2017.
Local cost index information for multiple cities across the U.S. can be found at http://www.mortenson.com/company/news-and-insights/construction-cost-index