By Roland Murphy for AZBEX
The construction market has been promised cost stabilization so many times in the past several years, “It’s just around the corner. Honest,” those optimistic outlooks now reflexively generate skepticism in the minds of many long-time observers.
It looks, however, like there might be a genuine reason to start expecting better things soon.
Mortenson’s Phoenix Construction Cost Index for Q2 2024 says its outlook for nonresidential construction is “cautiously optimistic” and that there are “signs of more robust market conditions for starts ahead.”
The report shows a national nonresidential construction cost increase of +1.24% for Q2. This reflects a +1.85% increase over the preceding 12 months. Q1 costs increased +0.34%.
Costs increased at all of Mortenson’s regional offices around the country. Minneapolis saw the largest increase at +2.46%. The smallest was reported in Portland at +0.72. Phoenix was next smallest at +0.76%.
The greatest volatility continues to come from Mechanical, Electrical and Plumbing. Plumbing contractors reported increases of +6.1% in material costs for the quarter.
Mortenson reports trade partner work increased by 1.8% in Q2. Materials cost increases were slight at 0.2%, and labor costs rose by 4.2%.
Over the last year, labor costs have risen an average of 5.3%, marking a significant contribution to trade partner work cost increases of 3.7% year-over-year.
Key takeaways from the report include:
- Construction Cost Index increases of 1.2% nationally in Q2 and 1.9% over the previous 12 months. In Phoenix, the Q2 increase was 0.8% and 1.8% over the year.
- Phoenix Building construction employment was up 3% in June for a total of 37,400, marking the addition of 1,000 workers since June 2023.
- Commodity-based materials prices were generally stable, with the exception of MEP scopes, which continue to report pricing volatility in both material and equipment pricing.
Mortenson cites both international and domestic freight rates as a possible complicating factor for price stabilization in the second half. After bottoming out in January 2022, diesel prices have been trending upward, and domestic trucking has been encountering problems with both availability and shipping rates. In addition, a potential strike situation is in play for dockworkers on the Gulf and East coasts if a new labor agreement is not in place by next month.
Still, Mortenson cites information from Associated Builders and Contractors in expressing optimism for the remainder of the year, particularly due to the likelihood of an announcement by the Federal Reserve that it will begin lowering interest rates.
“Our construction cost index shows a modest increase in costs for the 2nd Quarter 2024 after a period of either negligible or slower cost increases experienced across the prior 12 months,” Mortenson says. “As decreases to inflation trigger interest rate cuts and material costs remain steady, we expect overall spending on non-residential construction to remain steady as conditions continue to improve. We recommend customers gauge their market-specific challenge of labor procurement while considering project starts on an opportunistic basis across the second half of 2024.”