As tariffs loom, construction companies see rising costs

Construction prices have risen for 19 consecutive months, and industry executives in Arkansas don’t expect they’ll fall any time soon.

According to a May report by IHS Markit and Procurement Executives Group, the headline cost index rose 2 points from April to 63.8. It’s the 19th consecutive month the index has been greater than 50, which indicates prices are rising.

Components of the headline cost index include the prices of construction materials and equipment and subcontractor labor, and they have risen for 18 and 10 consecutive months, respectively. Between April and May, the index for subcontractor labor prices increased 2.6 points to 55.5, rising faster than the indexes for materials and equipment, up 1.7 points to 67.4, and the headline cost index.

Labor prices are rising in all regions of the United States, according to the report. Prices for fabricated structural steel, carbon steel pipe and alloy steel pipe increased in May and indicate that steel price increases are being widely felt. The index for concrete prices also jumped 3.6 points to 61.1, from April.

Over the next six months, construction prices are expected to continue to rise, the report shows. May was the 21st consecutive month that construction prices were projected to rise over the next six months.

Steve Clouten, president of the Central region for Nabholz Corp., said for the company, the rising prices are more of a result of increasing material costs rather than labor costs. The increase in oil prices has impacted petroleum-based products, said Clouten, who is based in Rogers. In April, the price for international benchmark Brent crude oil rose 37.9% to $72.11 a barrel, from the same month in 2017, according to the U.S. Energy Information Administration.

And, steel prices have continued to rise, and with the recently announced tariffs, their full impact on the price is uncertain. While he doesn’t expect prices to fall soon, Clouten said he doesn’t expect prices to rise at a large rate.

In Northwest Arkansas, Nabholz has openings for at least seven positions. The most difficult jobs to fill have been at the craft or skilled labor level. But the company has a strong workforce in the craft and project management positions, Clouten said.

A few of the largest projects Nabholz is working on in Northwest Arkansas include the five-story, over 700-room Stadium Drive Residence Halls at the University of Arkansas in Fayetteville; the four-story, 132,883-square-foot Training and Technology Center for J.B. Hunt Transport Services in Lowell; and the four-story, $35 million parking deck at Northwest Arkansas Regional Airport in Highfill. Projected completion dates for the projects are by the fall 2019 semester, October 2019 and this August, respectively.

COSTS UP AS MUCH AS 20%
Dennis Moore, CEO of Springdale-based Commerce Construction, said construction costs continue to rise as a result of a short labor pool and rising materials costs. The amount of steel used in a project is correlated to how much the price has increased for a project. Over the past year, project prices have risen 10%, but heavier projects, such as those with more steel or copper, have risen 20%.

The rising subcontractor labor costs are a result of a limited supply. Moore explained that a company needing another plumber but only has access to five plumbers out of 100 in Northwest Arkansas must entice one working for another company. Another option might be to attract a plumber to the area who lives in another market, such as Dallas.

Commerce Construction has had a stable labor force for 35 years, with no open positions currently, Moore said, adding the company has had a low turnover rate because of how it treats its employees and the benefits it offers. Conversely, all its subcontractors have open positions.

Some of the projects Commerce Construction is working on include the four-story, 38,000-square-foot office expansion at the headquarters for Ozarks Electric Cooperative on West Wedington Drive in Fayetteville and a 40,000-square-foot expansion for Fellowship Fayetteville on Arkansas Highway 112 in Fayetteville.

THIN MARGINS
Bill Roachell, president of trade organization Associated Builders and Contractors of Arkansas, said the owner or end user will face higher prices as the industry is highly competitive, and companies are operating on thin margins.

Some of the elements impacting price include government policies, such as immigration and tariffs on steel and aluminum, and issues with Iran that are driving up oil prices. Iron and steel prices have risen 11% year-over-year. Soft lumber prices are up 10%. Also, an improving economy has led to an increase in prices, and the recent tax cuts have indirectly impacted prices, Roachell said.

Labor costs are rising as companies struggle to maintain good workers, and they are required to pay more to hire them, Roachell said. As the economy has improved, they have the confidence to quit their existing job for a better-paying one. Average wages for construction workers run between $15 and $18 per hour.

“It’s crazy. You’ll have somebody leave for an extra $1 per hour,” Roachell said.

Companies that have been able to retain workers are offering good pay, benefits, bonuses and incentive programs for safety.

Prices are expected to continue to rise as new hospitals and schools will continue to be required. As they do, it could lead some to delay projects or build them in phases, Roachell said.

Associated Builders and Contractors of Arkansas has renovated its North Little Rock offices in phases. It’s expanding from a 1,400-square-foot office to a 7,700-square-foot office. It also has a 5,000-square-foot building for its electrical apprenticeship program, which started last year. In August, it will start offering a three-year masonry apprenticeship program. Those who complete the four-year electrical apprenticeship program are expected to earn between $50,000 and $60,000 annually, he said.

In March, Arkansas had the largest rise of any state in construction unemployment, up 2% to nearly 11%, from the same month in 2017, according to Associated Builders and Contractors. Arkansas was tied with Connecticut for the sixth-highest rate in the United States. In April, the construction unemployment rate fell slightly from March, but Arkansas was tied with New Mexico for the second highest unemployment rate of any state at 10%. Iowa and North Dakota were tied with the lowest rate at 2.2%. Alaska had the highest rate at 19.3%.

In the United States, the rate rose 0.2% to 6.5% in April, from the same month in 2017, according to ABC. The industry employed 262,000 more workers in April than it did in the same month in 2017.

“Colder-than-normal temperatures in the eastern half of the country, combined with above-average precipitation in much of the eastern third of the nation, were likely factors in somewhat slower construction activity in April and a slightly elevated national construction unemployment rate compared to a year ago,” said Bernard Markstein, president and chief economist of Markstein Advisors. “Employers are still reporting shortages of skilled construction workers, while building materials price increases hang like a cloud over future construction activity.”

REAL ESTATE IMPACT
Jordan Jeter, partner for Flake & Kelley Commercial Real Estate in Springdale, said rising prices have led to a correction taking place in the market and have impacted the number of deals that have been completed.

“Basically, nothing gets done,” Jeter said. “Something’s got to give.”

Over the past year, high land and construction prices have impacted the commercial real estate market. About a year ago, the cost to build a 14,000-square-foot shopping center in Centerton was only about $300,000 more than the cost to build an 8,500-square-foot shopping center there now.Between 2011 and 2018, the price to build the same-size home has increased 69.2%, from $65 a square foot to $110 a square foot.

In Northwest Arkansas, the issue is labor, Jeter said, adding there’s not enough. A labor shortage along with rising materials costs, such as steel and concrete, have been driving the price increase. When asked who will bear the rising construction costs, Jeter said a little bit of everyone.

Jeter explained one thing landowners don’t understand is land prices hit a peak about a year ago, and he said those with a large amount of land who are waiting to sell should do it now, because it might be worth less later. And as interest rates are expected to continue to rise, it would impact the amount buyers have to spend.