Scarcity not an issue … for now

Filed under: News |

As the homebuilding industry takes a breather from the breakneck pace of the last three years, commercial construction companies are moving at warp speed to keep up with demand for Pikes Peak region retail, office and service company construction.
Ken Simonson, chief economist for the Associated General Contractors association, cites a national 3 percent decline in residential construction, while non-residential construction contracts have risen by 3 percent. In El Paso County, single family permits were off by more than 35 percent in December compared to a year earlier, while non-residential contractors during the same period were experiencing almost a 35 percent increase in activity.
Manufacturing, energy and power, business and leisure travel, and hospitals are adding facilities at a rate that should sustain further growth in construction jobs.
“One of every seven new hires taking place in the economy currently comes from the construction sector,” Simonson said in an AGC report. “It’s a very unbalanced market across the entire country right now.”
U.S. Bureau of Labor statistics, however, show that while construction employment in Colorado has been sluggish, increasing just 1 percent from December 2005 through Nov. 30, 2006, the state’s prospects for recovery are strengthened by rapid population growth.
“Colorado is currently the eighth-fastest growing state with 1.9 percent annual population growth,” Simonson said. “That’s almost double the national rate of 1 percent.”
Specifically, Simonson sees Colorado Springs as one of the Mountain West metropolitan areas most likely to see the beginning of a residential construction rebound by late 2007.
The availability of key new home materials, such as lumber, copper, gypsum wallboard and concrete, has stabilized. Builders faced 16 percent to 550 percent price spikes for steel, cement and petroleum-based products between 2004 and 2006.
As recently as early 2006, in the aftermath of numerous Gulf Coast hurricanes, damage to natural gas pipelines and petroleum rigs caused the cost of polyvinyl chloride pipe and materials to skyrocket, if they were even available.
Regionally, cement and concrete were in short supply. Only lumber and natural gas defied industry trends, with prices remaining fairly stable since 2001.
In fall 2005, Colarelli Construction Co. President Vince Colarelli expressed concern about the limited availability of cement and how having to wait for supplies would negatively impact project scheduling and budgets.
Today he says the situation is much better for commercial construction companies. “With homebuilding slowing down, we have no problem getting lumber, copper or concrete,” Colarelli said. “Even steel hasn’t been that hard to find, but costs remain higher than a year ago. And we’re not seeing the huge price spikes.”
In a November AGC report, Simonson cited Bureau of Labor statistics that show some construction costs dropping from their prior annual highs.
Asphalt, for example, used on driveways and new subdivision streets, dropped 12 percent to 14 percent between Sept. 1 and Nov. 30 last year, after increasing steadily through 2005. Where some copper and brass materials saw 50 percent to 60 percent increases during a period from November 2005 to November 2006, during the past three months, prices have fallen between 1.9 and 6.6 percent.
Likewise, steel prices have dropped more than 6 percent since September, and gypsum products, which include drywall and wallboard, decreased by more than 8 percent. The Producer Price Index shows a 22.3 percent price decrease in domestically produced crude oil since Nov. 1, after four years of double-digit increases.
Colarelli expects the labor pool to continue to tighten as commercial and industrial contractors compete not only to get jobs, but also to recruit and train employees on specialized commercial techniques and equipment.
“There isn’t much overlap between subcontractors who specialize in residential and commercial or industrial construction,” said Mel Cramm, chief operations manager for Torix General Contractors.
Torix has been awarded more than $230 million in local military contracts during the past five years, said spokeswoman Holly Coco. As much as 80 percent of the company’s business has come from military and government work. In many cases, bids and project estimates are made several years before jobs are completed, and during the interim, the cost of some materials has increased as much as 60 percent price.
Pete Grant, Torix estimating department manager, said such price increases posed a serious dilemma for the 14-building Rolling Pins barracks renovation project — scheduled for Fort Carson, following the base realignment and closure announcement.
“Our original estimates were based on the cost of building materials in 2002,” Grant said. “As a result, we huddled with Bill Armstrong’s contracting team at Fort Carson and look at a number of value engineering options to offset the spiraling costs.”
Fort Carson Administrative Contracting Officer Rob Mills said the experience was an eye opener.
“Our original estimate was that each new building would run close to $9 million before materials costs started rising so fast,” Grant said. “One option we looked at replaced a traditional construction approach with a pre-manufactured metal building that would save time and materials costs. Once in place, Torix and its partner, JKT, a tribal construction company, were able to demo the old interiors, and we were able to bring each one in for close to $5.4 million, saving the military and the taxpayers millions of dollars.
All contractors interviewed agreed on two things: resourcefulness and value engineering is the wave of the future and steady prices won’t last forever. The volatility of petroleum prices alone will keep estimators guessing, and crude oil figures into everything from materials delivery to resins and glues used to install carpet, Grant said.
In the meantime, residential construction companies are sharpening their pencils and preparing for the next homebuilding upswing, ever aware of the importance of construction materials to the bottom line.
Doug Stimple, president of Classic Cos. estimates the cost of a home as “50 percent labor and 50 percent materials.”
“The average new home in Colorado Springs today runs between $125 and $150 per square foot, and you can find entry level homes for $110 per square foot in some communities,” he said, adding that the cost of core elements such as steel, copper, lumber and gypsum have leveled and should support new home affordability — for now.
With 12 active new home communities currently in operation, he is optimistic that 2007 will lead to a brighter 2008.
“Once the market comes back, we’ll be ready — and we’re already beginning to see it,” Stimple said. “The good news is there’s a good base of workers available and no shortage of materials. But construction costs can change overnight, and we’re continually looking at ways to implement best practices and value engineering.”