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VOL. 122 | NO. 46 | Tuesday, March 13, 2007

Building Material Costs Appear To Be Leveling Off Post-Katrina, Rita

By Eric Smith

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A MATERIAL WORLD: Supplies such as the steel, concrete and lumber being used to build Hope Presbyterian Church's new sanctuary in Cordova aren't expected to rise as sharply in 2007 as they did in 2006. But construction costs can change quickly, as evidenced by the rising price of lumber after Hurricane Katrina. -- Photo By Eric Smith

It's easy to see how nearby natural disasters affect the cost and availability of construction materials. When Hurricane Katrina ravaged the Gulf Coast in 2005, it created a clear demand for supplies such as lumber and forced builders to pay a higher premium for them.

What's less apparent is how faraway factors play a role.

For example, the rampant construction of airports in China has required massive amounts of steel and even has been affecting local builders such as Chamberlain & McCreery Inc.

"That's creating a supply and demand issue for everybody, which has run the price up on steel," said company president Jon McCreery. "It drives commercial pricing because of our use of red-iron steel in the steel bones of a structure, as well as the light-gauge steel that is used in metal studwork.

"I built two buildings exactly the same way three years apart and my red-iron steel tripled on the second building," he said.

Steel magnolias

China's appetite for steel was one of many reasons construction costs jumped 10.6 percent from 2005 to 2006, according to the Turner Building Cost Index. Fortunately, another big increase doesn't appear to be in the forecast, and that's good news for McCreery, who handles the company's commercial construction projects and recognizes a grave need for prices to settle.

"While I'm willing to assume some of that rising cost, there is a point in time where I'm going to say, 'Uncle,'" he said. "Things have to stabilize to allow us to keep building."

The Turner Building Cost Index, compiled by New York-based Turner Construction Co., has projected just a 1.59 increase in construction costs from fourth quarter 2006 to first quarter 2007. That marks the lowest quarter-to-quarter increase nationwide since 2004.

The projection is aided by the lack of a devastating hurricane in the past year, which should keep lumber costs from skyrocketing in 2007 as they did in 2006 following Katrina.

Tim Wilson, president of residential construction at Chamberlain & McCreery, said one of the biggest effects of Katrina - indeed, any natural disaster - came when the federal government grabbed plywood by the truckload and sent prices soaring.

"When the government steps in and makes a huge buy, which they have the power to do, it does screw the market up temporarily, and it did for about three or four months," Wilson said. "But it's back to normalcy now."

Lumbering along

Back to normalcy means the usual factors for lumber are in play once again.

For instance, costs usually increase in the spring as snow melts up North and construction ramps up in that region, creating more demand for lumber.

"Basically in the wintertime, lumber goes down because really the South and the West are the only people who buy lumber because there's snow everywhere else," Wilson said.

Steel and lumber aren't the only materials whose costs are subject to the rise-and-fall phenomenon.

John Worley of John Worley Builders Inc. has been building homes since 1976, and he's noticed a roller coaster in the price of copper, which is used for plumbing, wiring and air conditioning.

"Copper has been a big increase," Worley said. "A year ago, copper was about $2.40 a pound, and then it went all the way up to $4 a pound. Now it's a little less than $3 a pound."

H. Montgomery Martin, owner of Montgomery Martin Contractors LLC, said the price of metals for ductwork, conduits and piping tends to rise sharply and then plateau without falling to its original cost.

"There's a cyclical inflation in our business, where things will be pretty flat and then they'll have a spike and then they'll level out - but they never get back to where they once were," Martin said. "We're in that 'flat spike.'"

The components of capitalism

Beyond materials, other factors play integral roles in the price of building. Seismic codes that require homes to be more stable in case of earthquakes have affected construction costs, especially on the residential side.

Prefabricated panels to reinforce walls and additional concrete to strengthen building foundations can escalate quickly and ultimately end up being passed on to homebuyers.

"You're probably adding anywhere from $2,000 to $5,000 per house," Wilson said. "It's dramatic."

Also, fuel prices continue to be a dramatic factor, whether it's gasoline used in the delivery of materials or petroleum used in the manufacturing of materials.

Last, there's labor. For Martin, reliable labor to construct buildings is essential, but it does add significant costs to any budget.

"We're always looking for good, qualified, educated, willing individuals to perform the work," he said, "and that comes with a higher labor price tag."

Macroeconomics & co.

All told, most builders keep an eye on the commodities used in construction and don't expect a sharp increase in costs this year, especially after the record increase they endured in 2006.

"I don't see any economic influences that are going to create a spike in prices," Martin said. "I think that, short of any natural calamities, prices will be stable."

Builders also said they believe the demand for new commercial and residential construction will continue to rise as it always has in Memphis - steadily.

"The developers and the architects are all very busy," Martin said. "There's a lot going on."

But should another substantial price increase occur, no matter the reason, look for some building plans to be scrapped.

"I could see where somebody who owns a site, has to hire a contractor and is trying to squeeze all those numbers into a deal would have a problem," McCreery said. "It could very well derail a project."

PROPERTY SALES 103 137 4,008
MORTGAGES 84 131 4,521
BUILDING PERMITS 178 368 9,636
BANKRUPTCIES 50 110 2,995