Home » Behind the Headlines » Construction Inflation May 2021

Construction Inflation May 2021

update 6-15-21 PPI for May

Post Great Recession, 2011-2020, average nonresidential buildings CONSTRUCTION INFLATION is 3.7%. Residential cost inflation averaged over 5% for the last 8 years.

The 30-year avg inflation rate (including recession) for Nonres Bldgs is 3.5% and for Residential it’s 3.4%.

The 30-year avg inflation rate (EXCLUDING recession years) for Nonres Bldgs is 4% and for Residential it’s 4.75%.

I expect non-residential buildings construction inflation in 2021 to range between 3.2% to 3.5%, with potential to be held lower. Expect residential inflation of 7% to 8% with potential to push slightly higher.

As of March 2021, PPI for materials inputs to construction is up 12% to 14% yoy, measured to last March before the bottom dropped out. The PPI Buildings Cost Index for final cost to owner is up only 2%.

Almost every construction market has a weaker spending outlook in 2021 than in 2020. Approx. 50% of nonres spending in 2021 is generated from 2020 starts.

  • Nonres Bldgs starts fell 22% in 2020.
  • Nonbuilding starts were down 15%.
  • Residential starts were up 6%.

While there are several reasons that construction inflation will increase, downward pressure on spending will temper construction inflation.

as of 6-15-21, May PPI report > Inputs to Nonres Constr YTD21 +13.3%. Final Demand Nonres Constr YTD21 +2.7%. Five solid months of 2021 data shows the Input costs of materials IS NOT being passed along to final cost to owner. This could change, but for now final costs of construction are holding well below input costs.

A look back at Res, Nonres and Nonbldg construction inflation over the last 30 years shows rarely has there been any substantial increase in inflation when construction spending is headed down.

  • Nonres Bldgs spending 2020 -2.0%, 2021 -7.7%, 2022 -4.5%
  • Nonbuilding spending 2020 +2.8%, 2021 -1.3%, 2022 -3.2%
  • Residential spending 2020 +12.2%, 2021 +17%, 2022 +4.8%

Over 30 years, looking at the 3 major sectors, Res, Nonres Bldgs and Nonbldg = 90 pcs of data. 27 out of 90 times spending decreased or stayed flat for the year. Only 3 out of those 27 times when spending was down/flat did inflation come in over 3%. Avg inflation for the 27 down/flat yrs is less than 1%. For those 27 times, only 3 times were PPI Inputs less than 2%.

An estimator must differentiate between “added quality” and inflation. Added components or increased level of finish are not inflation, but are picked up in the estimators increased unit costs. Inflation captures higher labor, mtrl, margin costs for same level of build out.

Granite counters and Italian tile floors vs PLam counters and vinyl floor coverings is an increase in quality, not inflation. Increased SqFt is an increase in quantity, not inflation.

7-21-21 June PPI data will probably drive up inflation cost in this report. SEE PPI as of June 2021

Download the full Inflation Report here

Follow this link for Construction Spending 2021 update 5-3-21

Follow this link for 2021 Construction Economic Forecast 2-2-21


3 Comments

  1. John says:

    Ed,

    Do you have data related to just Florida? I believe our market is somewhat unique with lot’s of people moving in. When I read your comments related to what the data’s indicating it’s hard to apply it or use it to justify what I see in Florida. For reference I’m a commercial senior estimator at a roughly 700M a year company. Thanks!

    Like

    • edzarenski says:

      John, Data specific to individual metropolitan statistical areas (MSAs) are consulting efforts. To combine all MSAs to get statewide results would take a team of analysts full time.

      Like

      • John says:

        Thanks! I’ll see if there’s any interest in drilling into this more than we can do our selves.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Follow Construction Analytics on WordPress.com

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 420 other followers

CONTACT ME by EMAIL

%d bloggers like this: