Commercial Construction Should Increase in ?06

Commercial construction will continue to increase during 2006 despite higher costs for major components such as diesel fuel, said Kenneth Simonson, chief economist for the Associated General Contractors of America.

“Economists are pretty much unanimous that residential is going to slow down,” he said, adding that he expects the first few months of 2006 to be the best months of the year for residential construction.

“From a commercial standpoint, everything is still going strong, and I see it that way for the foreseeable future,” Patrick Tenney, vice president of Baldwin & Shell Construction Co.’s Rogers office, said of the Northwest Arkansas market.

Simonson said construction in general took a hit last year after hurricanes Katrina and Rita. For all of 2005, highway construction jumped 14 percent and building construction was up 7 percent. Meanwhile, the consumer inflation rate rose just 3.4 percent.

Materials costs have dropped somewhat since the hurricanes, but products related to oil and natural gas are at elevated levels, Simonson said.

Diesel fuel, for example, was selling for $1.99 per gallon a year ago. After the hurricanes, it spiked at $3.16 per gallon, but has since dropped back down to $2.49.

Diesel has a huge impact on construction sites, Simonson said. Besides fueling bulldozers, cranes and dump trucks, “for every construction site, there are hundreds if not thousands of deliveries,” he said.

And those extra costs are ultimately being passed on to the building owners.

Some companies are adding extra delivery charges to cover the cost increase for diesel fuel.

Since the hurricanes, 25 percent of oil production in the Gulf Coast is still off-line, and natural gas production is down by 18 percent.

That affects the cost of asphalt, which has a large amount of oil, as well as several materials that are made with natural gas, such as PVC pipe, insulation and roofing materials.

The price of natural gas doubled after Hurricane Rita but is now down to about $9 per thousand cubic feet. That’s still an increase of more than 33 percent over a price of $6 per thousand cubic feet a year ago.

The hurricanes can’t be blamed for all of the increases, though.

Simonson said the price of gypsum, which is used to make drywall, went up 20 percent in 2004 and 18 percent in 2005. The cost of concrete jumped 10 percent last year, due largely to a 12 percent increase in the cost of cement.

Lewis May, CEO of May Construction Co. in Little Rock, said construction is proceeding slowly in New Orleans as builders wait to see if levees will be reinforced and whether insurance companies will insure new construction.

“Until they make a decision on the levees, the insurance companies aren’t going to get on board,” May said. “You’re not going to see a big building boom there until those things get decided. We are seeing a boom in the Ft. Lauderdale area in southern Florida. They’re rebuilding because they have codes in place.”

New Orleans may have to implement new zoning and construction regulations, he said. When the city’s construction activity resumes, it may result in a temporary shortage of construction materials in Arkansas.

May said price increases in electrical wire, switch gear and similar components are more tied to the global market than to hurricane damage.

People who saw the hurricane destruction on television or in news print might think timber costs would go up because of the number of downed trees. But Simonson said the impact was minimal because of the vast forests in the South.

Tenney said lumber prices in Arkansas did increase temporarily after the hurricanes, but that’s because some lumber mills in the Deep South were off-line, not because of a shortage of timber. The price increase had affected plywood, in particular, he said.

Simonson said Arkansas was impacted pretty much like the rest of the country but might have a slight increase in construction due to Hurricane Katrina evacuees moving to the area.

The Associated General Contractors of America is based in the Washington, D.C., area.