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Construction Health Update: Reducing Fee Erosion and Boosting Productivity is as Crucial as Ever


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As of Monday, February 27 our national Construction Health Indicator score 81.1.

According to Dodge Data & Analytics’ 2017 Dodge Construction Outlook, total U.S. construction starts for 2017 are projected to advance five percent to $713 billion. But as input prices and labor supply continue to restrict profit margins, companies should continue to focus on reducing fee erosion and increasing worker productivity. 

Investments 

Homebuilders are expected to have another good year in 2017 as competitive mortgage rates, affordable home prices, and an improving economy all point to the continued gradual recovery of the housing market. 

 Nationwide, housing starts reached a plateau this month, inching down only slightly by 0.2 percent to a seasonally adjusted annual rate of 907,000 units, according to newly released data from the U.S. Department of Housing and Urban Development and U.S. Census Bureau. 

Of that percentage, single-family housing construction rose 0.3 percent in February while multifamily starts edged 2.5 percent lower to a 312,000-unit pace.

Regionally, housing starts and building permits were varied:

  • In the Midwest, housing starts gained 34.5 percent while permits declined 11.8 percent

  • In the South, housing starts rose 7.3 percent and permits rose 9.9 percent.

  • The Northeast saw a decline in housing starts by 37.5 percent and an increase of permits by 6.3 percent

  • Meanwhile in the West, the Construction Health Indicators most prosperous overall region, witnessed declines of housing starts by 5.5 percent and increase of building permits by 17.9 percent.

Seasonally, numbers like these are to be expected, but housing starts in the West have suffered from unseasonably wet weather conditions.

At the U.S. level, commercial and multifamily construction starts in 2016 were reported at $186.3 billion, up 7 percent from 2015.

According to Dodge Data & Analytics most U.S. metropolitan areas for commercial and multifamily construction starts showed sizeable gains last year with one exception. New York City, which has historically been the top metropolitan market by dollar amount in recent years, retreated 15 percent to $29.8 billion following a year with a 67 percent surge in 2015.

The top three metropolitan areas for commercial and multifamily construction in 2016 were: 

  • Los Angeles, CA: With help from data centers and shipping warehouses, the city posted $9.8 billion worth of construction starts, up 44 percent from 2015. 

  • Chicago, IL: Thanks to a surge in the Windy City – brought on largely by companies relocating to the area and bringing demand for new office and residential space with them – the city posted $8.3 billion in construction, up 34 percent

  • Washington, D.C.: BEtween affordable housing and mixed use projects the nation’s capitol is responsible for $8.1 billion in construction, up 35 percent.

Commodities and Materials

Construction input prices collectively rose by 1 percent on a monthly basis and 3.8 percent on a year-over-year basis, according to analysis of U.S. Bureau of Labor Statistics data released by the Associated Builders and Contractors. This represents the fastest year-over-year rate of materials price inflation since the beginning of 2012. 

We have increases in natural gas prices to thank for that, which expanded 23.6 percent for the month and are up 81.8 percent year over year. Crude petroleum prices also slipped 5.5 percent for the month, but are up 77.5 percent for the year. 

Homebuilders should be wary of growing uncertainty over our nation’s trade relationship with the Canadian lumber industry.  The longstanding dispute has forced softwood lumber prices up 3.7 percent, according to the National Association of Home Builders with few signs of retreating. The Random Lengths Framing Lumber Composite Index rose from $366 on Feb. 3 to $391 on Feb. 10 — the most in a single week since August 2003.

Other culprits –all of which are suffering for geopolitical reasons – that are squeezing buildings margins over the past year are:

  • An increases in the cost of copper and brass mill shapes which are up 19.9 percent

  • Steel mill products which rose 11.4 percent

  • Diesel fuel, which contractors use directly and also pay for through surcharges on the thousands of deliveries to construction sites, jumped by 34.8 percent.

Labor

Construction employment totaled 6,809,000 in January, an increase of 36,000 from the upwardly revised December total and an increase of 170,000 or 2.6 percent from a year ago. 

Many companies were able to attract these workers by increasing average hourly earnings by 3.2 percent over the past year to $28.52 per hour. That makes construction wages the fastest increasing income rate over all private sector workers and are now nearly 10 percent higher than the private sector average of $26.00 per hour.

In a survey that the Associated General Contractors released in January, 73 percent of the 1,281 participating contractors said they planned to add to their headcount in 2017. But an equally high percentage said they were having trouble filling hourly or salaried positions. 

Since end-of-month openings in construction have been at 17-year highs, according to recent government data, hiring managers should focus on increasing the efficiency of their new hires. Not on increasing salaries to attract new talent.

That’s all we have for now. Keep building and we’ll keep crunching the numbers. Check back here daily as numbers refresh and we’ll continue to translate this into meaningful digests that will help you make informed decisions all week long.

Click here for recaps from Construction Health Updates from past weeks.

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