Building Materials Prices Expected to Rise, But Not Hamper Construction

Construction material prices are on the rise as residential and commercial building activity escalates during the spring season.

Local building products suppliers say annual materials price increases of about five percent have been typical for the past few years. They’re expecting similar increases this year and say the price hikes shouldn’t hamper what they think will be a robust construction season.

While demand for new homes is rising in the Traverse City area, much of it is a result of retirees moving into the region, housing starts are still below pre-Great Recession levels. And there’s generally a good supply of building materials, which keeps material prices in check.

Material suppliers also say they’re seeing a pickup in demand for multifamily housing, particularly near downtown Traverse City. And a number of commercial projects, some of which have been delayed for years, are starting to rise from the ground.

But suppliers generally say any cost increases due to a greater demand for construction materials will likely be moderate as the year progresses.

One wild card is the political agenda of the Trump administration. In its February forecast, the Associated General Contractors of America said the president’s proposed policies that would limit immigration, increase infrastructure spending, restrict global trade, reduce taxes and cut regulations all could impact construction for better or worse.

Recent interest rate hikes by the Federal Reserve and the expectation for more increases could raise the price of materials and trim construction spending, according to AGC of America.

Here’s what local suppliers are experiencing in the prices of some popular building materials —lumber, structural steel, concrete and drywall.

Lumber

“This is poised to be a very good year for construction in northwest Michigan, which helps push material costs up,” said Beau A. Vore, owner of Kingsley Lumber & Hardware in Kingsley. “But I don’t see anything dramatic happening.”

Lumber prices vary by the type of wood, ranging from soft wood for home framing to exotic hardwoods. Price increases depend on a variety of factors, including oil prices, labor costs and environmental regulations.

“There are so many factors,” Vore said. “Hundreds of things come into play.”

Kingsley Lumber sells primarily to building contractors and the price of lumber is just one component of the company’s business relationship with builders.

“We’re more services based,” Vore said. “We’re the logistics arm of our customers.”

The national Producer Price Index for lumber and plywood fell 0.7 percent in 2011, according to the AGC of America. The PPI rose 11.1 percent in 2012, 10 percent in 2013, and 3.3 percent in 2014. It fell 7.9 percent in 2015 and rose 4.5 percent in 2016.

The Produce Price Index is a weighted index of prices measured at the wholesale, or producer level.

Vore said Traverse City’s tourism and service-related economy has helped it avoid wild lumber price swings in other parts of the country that are heavily dependent on the highly cyclical and manufacturing industries.

“The Traverse City region doesn’t follow the national trend,” he said.

Structural steel

Steel prices have been rising at a fairly steady rate over the past several years, said Joe Loney, who heads sales and purchasing at Actron Steel in Traverse City. Actron fabricates steel for residential, commercial and agricultural buildings.

But increases have been constrained by fundamental changes in the steel production industry, he said. Large, coal-fired steel mills in the United States have largely been replaced by “mini-mills” that use natural gas as their fuel source. Not only is natural gas cheaper than coal, Loney said, several major coal mines have been shut down because of underground fires that have been burning for years.

Plus, the domestic steel industry has come under intense pressure in recent years for lower-cost suppliers in China.

Steel prices tend to fluctuate throughout the year, Loney said. Steel mills are difficult to shut down in the winter when demand is low and restart in the spring. Therefore, the mills produce steel throughout the year and prices fluctuate depending on demand.

“If the economy takes off this year, I expect we’ll see some price increases,” Loney said. “But I don’t think anybody knows the market. It’s been a roller coaster.”

The PPI for steel mill products rose 12.2 percent in 2011. It fell 8 percent in 2012 and 0.6 percent in 2013. The PPI rose 0.7 percent in 2014 and fell 19.4 percent in 2015. It rose 8.7 percent last year.

Drywall

Steve Fouch, president of Chess Construction in Traverse City, said drywall prices have risen five to eight percent annually in recent years and he expects that rate to continue this year.

“I’ve had one (announced) price increase this year of seven percent, but that might get pulled back,” Fouch said.
Drywall producers often announce double-digit price increases but then rescind them when it appears the market won’t sustain them.

Fouch said it’s hard to determine the factors behind price increases, and he just accepts them as a cost of doing business.

The PPI for gypsum products, the main component in drywall, fell 1.6 percent in 2011, but rose 14.1 percent in 2012. It rose 16.2 percent in 2013, 5.1 percent in 2014, 0.1 percent in 2015 and 5 percent in 2016.

Concrete

The price of ready-mix concrete, used in poured basement walls, driveways and other types of construction, has been rising locally at about three percent a year, said Andy Chadwick, owner of A & R Flatwork & Poured Walls in Traverse City. He expects a similar increase this year.

“Nothing goes down,” he said.

Chadwick said he’s looking forward to a strong year for building construction in a continued healthy economy.

“It looks excellent,” he said.

Labor 

Finding carpenters, electricians, plumbers and other skilled construction workers continues to be a challenge for local contractors, as well as those across the nation.

A February survey by AGC of America found that 69 percent of its members who responded to the survey said they were having a hard time filling craft positions.

Forty-eight percent of those having trouble finding skilled workers said they are boosting wages to attract talent. Contractors also are using a variety of other tactics, including doing more in-house training, increasing overtime and relying more on subcontractors.

 

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