More on Construction Cost

CoStar.com has an informative interview with Kenneth Simonson, Chief Economist for Associated General Contractors of America. He was not optimistic about construction cost coming down particularly because of the sustained growth in developing countries like China and India. He stated steel and asphalt are the two main materials busting commercial budgets.

Source: CoStar.com

Coping with Higher Construction Cost

A recent CoStar article titled “Building Smarter: Strategies for Brokers and Developers on Managing Spiraling Construction Cost” discussed the potential that the dip in oil and commodity prices and the stronger dollar might lower construction cost in the short term. The article concluded that we should not expect this trend to continue and will likely foresee continued volatility in the markets. The article also addressed strategies for coping with higher construction cost. They included the following:

1. Avoid project 'scope creep,' and build lighter
2. Purchase materials smarter and in bulk
3. Know where the dollars are spent
4. Change the palette of materials
5. Build green and reap the benefits
6. Integrate more revenue-generating space and features
7. Leverage the contractor as a development partner
8. Bring the builder onboard early and consider design-build as an option
9. Fast track it
10. Build smart, energy producing or self-powered projects

What surprised me was that the rise in construction cost still catches projects off guard. Pierre Cowart, Vice President Leopardo Construction, was quoted saying

Despite ample publicity about the rising price of materials and cost overruns, "these issues still fly under the radar until too late in the project on at least 30% to 40% of the projects we’re working on," Cowart said. "When we get involved later in the process, it costs more to make adjustments to the project scope."

Here is a link to Leopardo Construction's white paper titled "Smart Construction:
Economical Building Solutions to Offset Soaring Material Prices". Great Resource!

Source: CoStar.com

Construction Spending Up In July in Some Categories

Overall construction spending last month inch down 0.6%. However, while construction spending was down in residential and commercial categories, there were a few bright spots in their report . Particularly in Public and Transportation related construction. Any growth in good news. I was surprised but happy to see it. Investment News had a great summary article reporting on the news. See the following list below. See the following list below.

Construction Spending
Source: Investment News

Residential..................... -2.1% from June 2008
.......................................-27.1% from July 2007
Office..............................+2.1% from June 2008
.......................................+16.8% from July 2007
Health Care....................+0.1% from June 2008
.......................................+6.3% from July 2007
Education.......................+1.7% from June 2008
.......................................+6.3% from July 2007
Transportation...............+3.8% from June 2008
.......................................+11.5% from July 2007
Public Construction.......+1.4% from June 2008
.......................................+8.1% from July 2007

Real Estate to Recover in 2011?

The bad economic news continues to pile on. Layoffs have been hitting architecture and landscape architecture firms all over the country for the past few months, particularly those that work on residential development. ASLA reports that firms have been staying busy, but over 70% of landscape architecture firms are not considering hiring this quarter. AIA predicts a downturn in non-residential construction toward the end of this year. While I remain optimistic that we will make it through these tough times, there is no denying that they are tough. I continue to hear many predications as to when real estate markets will recover. Unfortunately, most seem to be hopeful predictions versus realistic ones. I came across this article over the weekend reporting on recent economic predictions by Dr. Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University and Dr. Rajeev Dhawan, director of the Business Economic Forecasting Center at Georgia State University, two highly respected national economist. They predict that real estate will begin to recover in late 2010 and rise markedly by 2011. This seemed to be more realistic. However, Dr. Dotzour was kind enough to offer a ray of hope for an earlier recovery saying:

Dotzour points out a source of hope for commercial real estate investors, who would certainly welcome an unexpectedly stronger economy next year. Due to the credit crunch and economic uncertainty associated with the presidential election, Dotzour believes a number of U.S. companies and consumers have put off major decisions to spend or commit to space this year.

By March 2009, he says, businesses will have a better understanding of their financial standing and tax burdens under the new president, and may cut loose with a swath of business deals, leases and real estate purchases. “It’s possible we could have a very pleasant surprise around April.”

Economic Outlook for Non-Residential Construction

AIA released their Architectural Billing Index (ABI) from February last week. It did not paint an optimistic view of the months to come. The release came as I was writing about AIA’s Construction Forecast for 2008 and ASLA’s Market Survey. AIA’s CF projects a relatively flat year in non-residential construction while ASLA’s MS is more optimistic. At the time they were done, they obviously did not have the benefit of knowing the future. Each provides a differing outlook, with AIA’s being more on target. The release of the AIA’s ABI was a surprise to many as it was significantly lower than most expected. AIA’s press release indicates studies that say it is a good predictor of construction activity over a 9 to 12 month period. It is down nearly 25% from December’s numbers.

I always hate to be pessimistic, but the fundamentals of the economy have been out of whack for some time and are beginning to correct themselves. With the continued credit crunch and the problems in the financing sector, money is not as easy to come by. In addition, inflation, higher energy cost, devalued dollar, and the loss of value in people’s largest asset, their home, one is to expect to see a downturn in consumer spending. With that will come a continued cutback in retail, office, and industrial expansion. The refunds coming this year from Washington won’t offer much relief from these issues. This cycle will take time and I wouldn’t be surprised if this last beyond 2010.

AIA’s Construction Forecast predicts the state of non-residential construction will only get worse in 2009 and predicts a drop of growth (-0.9%). AIA’s Construction Forecast is comprised of various organizations that make their own forecast and on AIA’s website, you can isolate each member’s projection. The most optimistic is Reed Construction Data who sees an increase of 8% in 2008 and 4.9% in 2009. McGraw-Hill Construction is most pessimistic projecting -4.6% in 2008 and -2% in 2009, though Global Insight suggests a worse 2009 at -5.4%. These are the averages combining each industry followed. The bright spots include institutional, education, and health care. As would be expected retail is projected to fair the worst.

Despite the bad news, it is important to keep in mind the population will continue to grow and while the demand for future facilities may not be at its incredible pace of the last few years, there will still be demand. Investment will still continue. There just may be less of it.

Trying to make sense of ASLA’s optimism when it comes to landscape architecture, maybe the discrepancy in the outlooks has more to do with the fact that there are fewer landscape architects than architects and the increased move in the marketplace toward sustainable building practices may favor landscape architects. This trend has resulted in greater collaboration between architects and landscape architects. Architectural Record recently wrote a piece on discussing this trend with an example illustrating the collaboration between SWA and Renzo Piano on the California Academy of Sciences.

"As the environmental details of sites become more integrated into architectural design, be it to store water or to absorb the impact of a large building, landscape design is becoming a major part of the architecture. And as green roofs are growing up in our own backyards, the relationship between architect and landscape architect is sure to blossom."

While I whole heartily believe in the benefits landscape architects bring to a design team, I caution this optimism as architects seek to protect their practices from the economic downturn. You could see more architects keeping their services in-house as opposed to bringing a landscape architect onto the team. I hope this does not happen because our built environment would suffer, but it is not out of the realm of possibilities.

More Good Economic News for Landscape Architects

Piggy backing on my last post about the increasing demand for landscape architects, Landscape Architecture and Specifier News published another industry survey. In fact it was hard to tell if they were not the same survey. I could not find any indication if it was. Regardless, it had a lot more information than the ASLA press release. LASN reported forty three percent of firms surveyed a ten percent or more increase in 2007 revenues as of the third quarter. Fifty-two percent of the firms anticipated a better year next year. This is good news. I hope they are right. LASN predicted growth in all listed non-residential sectors. This included an increase of 12.5% for Hotels in the Commercial/Industrial Sector and 9.8% increase in Public Safety within the Institutional Sector. (link to entire list). I found it surprising that LASN was much more optimistic than the consensus figures between McGraw-Hill Construction, Global Insight, Portland Cement Association, Moody's, FMI, and Reed Business. Collectively, they predicted a 5.2% increase in Industrial facilities and a 5% increase in healthcare facilities as their top 2 sectors. They predicted a net decrease in retail by -0.9%. I would lean toward these more conservative figures. I may be pessimistic but the current credit crunch has to be a big factor. On the flip side, I was talking to an architect recently and they said many of their clients had thought they could wait out the construction price increases before making commitments, but are now realizing the high prices are here to stay, so they are now moving forward on projects. A recent report from Reed Construction Data confirms that construction cost have slowed, but rose 1.4% in November. Of course, all of this talk about the economic outlook is about the US market. For those working abroad, particularly in red hot China, things may look much different.

Landscape Architects Are In Demand.

I recently wrote about landscape architecture economic anxiety caused by the credit crunch, sub-prime melt down, and the resulting downturn in the construction industry. This week more bad news was released by the Commerce Department that showed housing construction had dropped to the lowest level in more than sixteen years. But it looks like the immediate economic outlook isn't so bad for landscape architects. In November, the American Society of Landscape Architects (ASLA) released the results of their business survey showing landscape architectural services were in demand. More than three fourths of the 251 firms who responded reported steady or increased billable hours. There was no indication as to how much they had increased. Forty percent of the respondents said they were planning on hiring in the fourth quarter, which good news for landscape architects looking for work. If you are wondering, as of this writing there were 82 job postings on ASLA's joblink in the last 60 days. Unfortunately, there is no data for comparing with other time periods. ASLA's survey was conducted during the third quarter of this year, so it may have been before the big credit fiasco in August and September. I wish the data released was more comprehensive. Breaking it down by region, office type, specialty, and other factors would have been helpful. ASLA should consider using the format of AIA's Component Survey of Business Conditions. It is much more informative. ASLA is expected to conduct another survey in Mid-January and release it the following month. So we will wait and see if all the doom and gloom about the economy will settle in on landscape architecture. Hopefully not, but we are all in this together, so we are effected by the global picture. With only 30,000 landscape architects in the US according to the press release, the law of supply and demand should be in the LA's favor.

Landscape Architect's Economic Anxiety

From the fall of the sub-prime debacle to the tightening of credit, I would imagine many landscape architects and other designers of the built environment are reflecting on the foreseeable economic outlook with some anxiety. According to the AIA’s 2007 Component Survey of Business Conditions, the outlook in their words is “relatively strong”. Though the survey acknowledges that the conditions are weaker nationwide than they were a year ago. The best areas of the country were the Southwest and Texas. Michigan, Ohio, and Southern Florida were the worst regions that responded.

Based on the current outlook, I anticipate a sharp weakening in the 2008 business conditions. There are a number of serious issues that we will need to overcome if the economic picture is to improve. These issues include the highly probable continuing of defaults on home mortgage loans, deepening slide of the dollar against the Euro and other currencies, annual rise in health care and energy cost, and our nation’s dismal negative savings rate. Fundamentally, the economic system is out of balance. As always the economics has no compassion for anyone. Home builders, Home Depot, Lowes, and other related businesses have rightfully cut their outlook in 2008. Yesterday the Wall Street Journal reported a small drop in retail property values from September. Commercial, Office, and retail was suppose to balance out the losses in the housing sector, but it looks like they are weakening as well.

As a landscape architect, I feel powerless in affecting change within the economic system. Like most landscape architects, I will succumb to market forces. Reflecting on this, it made me wonder who will fair better than others. Three aspects of a firm will likely shape how they fair within an uncertain environment. These include financial planning, type, and market.

A firm’s financial planning and business practices are a critical characteristic that will determine the company’s success in trying times. Those that hire and fire based on their short term workload will quickly reduce their payrolls at the expense of their employees and future loyalty. Then there are the poor financial planners that assume all will be fine because it always has been. While they may want to hold the company together, their hands will be forced to lay off their staff as it becomes more difficult to keep them. Firms that have been through trying economic times (at least 15 years old) and learned from them have prepared for times like these. They are the ones that will benefit from an experienced loyal staff . When interviewing who ever ask about the financial characteristics of the firm? Besides rumors or interviewing other who have worked for the firm, you really can not learn a lot.

What you do know is the type of firm you work for and its market. It would seem those that specialize in aspects of the profession that are experiencing more of a downturn will have a tougher time and may be forced to adapt. While those that are more generalist are adaptable to a changing market. In addition, public work is probably more stable than private work which is more volatile because of a reliance on credit and consumer spending. The best situation is likely a general multi-disciplinary firm. The firm’s market base is important as well. Those that have an international base are likely to fair better than those that are more localized, particularly those who practice in emerging markets.

While it may seem that the economic outlook will dim for a time, it is important to remember that the industry is cyclical and that everyone needs a place to live, so development will continue. Maybe not at the breakneck pace of the last few years, but it will continue. Though with fewer jobs, competition will be more fierce. Firms will need to get more savvy.