Builders hang turnaround on material pricing drops

Developers planning projects may want to get started, as the long-term drop in material prices may be winding down.

March data from the U.S. Department of Labor's producer price index showed construction material prices in March dropped by 0.6 percent from February, marking the sixth consecutive month of declines, and prices are down 1.9 percent from March 2008.

For example, fabricated structural metal products were down 0.8 percent for the month, while year-over-year prices for nonferrous wire and cable are down 23.5 percent.

Geoffrey Butler, principal at Butler, Rosenbury & Partners, said the multiple months of declining costs is attributable to excess material inventory.

"There was a lack of demand - this recession we've been in, at least on the construction side, has been going on for about a year now - yet they had all these plants producing that material, so there was a huge inventory buildup," Butler said. "They dropped the prices to try to mitigate that and get inventory sold."

Kent Phillips, vice president of sales for Herrman Lumber, said he has seen prices for wood products - lumber, plywood, oriented strand board - drop steadily the last two years, due mostly to decreased demand from the declining residential construction sector.

Softwood lumber is down 3.5 percent on a monthly basis and more than 11 percent over the last year, according to the Labor Department.

"Wood is a commodity item. It's driven by supply and demand - it's a moving target," Phillips said. "It is sawn and milled and shipped, so those costs are inherent to the product, but the base price of the product generally is driven strictly by supply and demand."

Getting started

Lower prices, in part, prompted Drury University to move forward with construction on the O'Reilly Family Event Center. The school's board of trustees voted earlier this month to begin construction, despite not yet having raised the necessary funds for the $13.5 million project.

Pete Radecki, Drury's vice president of operations and sustainability, said Drury is closing in on its fundraising goals for the center. While he wouldn't disclose the total amount that has been raised, Springfield's O'Reilly Auto Parts family has given $6 million for the center, and the Oklahoma-based Mabee Foundation also pledged $1 million in a challenge grant, which has been matched by other donors.

Killian Construction is general contractor for the facility, which will host men's and women's basketball games as well as special events.

Radecki said project bids have come in lower than expected, though it's hard to tell how much of that decrease is due to lower material prices as opposed to other factors such as labor and transportation costs. Most contractors require at least part of the total project cost to be paid up-front.

"We get bids as lump sums, but I'm sure it's driven largely by materials," Radecki said. "I would say that without the lower costs, we wouldn't be in a position to launch the project."

Those in the trade assert that despite the negative news about the economy, especially the construction markets, now is a great time to start a major construction project - if funds are available.

"All the suppliers are doing the best they can to cut their profit margins and get the sales, but they're not going any lower," Butler said. "What will happen going forward is as the banks loosen their standards, very quickly we'll see some escalation in prices because demand will exceed supply. That could happen any time in the next year."

Data from the U.S. Census Bureau shows that demand already is starting to increase; total nonresidential construction spending increased 0.5 percent in February compared to January, while private nonresidential construction spending was up 0.3 percent. Both gains were the first in four months.

Predicting the bottom

If expert predictions are correct, Drury is getting into the construction process at just the right time. Herrman Lumber's Phillips said wood prices, which are at their lowest levels in nearly 20 years, are bottoming out as manufacturers close plants and slow production in an effort to sell off extra product.

"There have been a significant number of plant closings in recent months by some of the larger wood producers in U.S. and Canada, and so supply becomes limited," he said. "Production has now caught up with demand and material prices are now starting to climb. We believe it already has hit bottom."

Prices of particle board, for example, were up 0.1 percent in April to $387.24 per thousand square feet, according to McGraw-Hill Construction.

That's also the case for copper materials, according to John Chelesnik, sales manager at Harry Cooper Supply Co. He said copper prices have been steadily increasing recently - up 30 percent in the last six weeks - though it's unclear whether that is caused by increased demand or decreased supply.

He also noted that prices are nowhere near as high as their peaks from a year ago - and they're not likely to go lower.

"If you have the wherewithal or you can borrow the money, this would be a tremendous time to do a project," he said. "Pricing is better than it's been in four or five years. How long that will last, I don't know, but copper prices have been steady for several weeks, and they're a pretty good indicator."

Joe McCarty, chief lending officer for Empire Bank, said that while it is harder to get funding for speculative projects such as strip centers, owner-occupied commercial construction loans can still be obtained.

"I have been aware of some projects recently where there is significant cost advantage of starting now," McCarty said, noting one recent unnamed project where the best bid came in 30 percent below what had been anticipated. "Clearly from that standpoint, it's advantageous - interest rates are low - and at least at our bank, loans are available."[[In-content Ad]]