C O S T T R E N D S • Y E A R E N D 2 0 1 6

CannonDesign’s Cost Estimating team offers clients an in-depth understanding of initial construction cost, life cycle cost, schedule and construction delivery strategies to complement the firm’s design talent.

Our team includes multidisciplinary, professionally licensed and LEED® accredited cost estimators with a track record of success across every market and discipline CannonDesign serves. With extensive experience in state-of-the-art technologies and processes, our cost estimating team has the knowledge, tools and relationships to ensure we develop fully-optimized solutions that respond to the complex scopes, schedule and cost balance our clients face.

This Cost Trends Newsletter details recent construction trends and provides information relative to future costs for labor, materials and profit margins.

Changes are Certain.Construction Impact is Not.

Source: Bureau of Labor Statistics

20

10

15

5

0

25%

Total Private

2010 2011 2012 2013 2014 2015 2016 (as of 8/16)YEAR END 2008 2009

Construction-Related

Unemployment RateGeneral Unemployment vs. Construction Unemployment

In 2016, both the general and the construction unemployment rates fell to their lowest level in eight years to 4.9%, and 6.4% respectively. While the construction unemployment rate is higher than general unemployment, this is not a sign of good construction workforce availability. Rather, the lack of trade worker availability is at an all-time low as compared to previous yearly construction unemployment rates.

At the height of the construction recession in 2010, construction unemployment was running over 20%. This 75% percent drop to current levels in construction unemployment may be attributed to two phenomena. One is because the recession was so deep that a number of people in the skilled trades moved to other professions and never returned. The other is the disparity of the construction trades unemployment rate is highly dependent upon geography and skill level availability versus needs. The very highly skilled trades, such as mechanical and electrical, are experiencing the greatest shortages. Also, geographical construction labor rate differences are very prevalent. Major metropolitan areas are experiencing the greatest shortages. These

areas not only have a high cost of living, but also have a number of other industries, making it difficult to retain skilled trades people.

While marginal increases due to labor shortages are more prevalent in major metropolitan areas, rural areas are also experiencing upward price pressures, especially when an unusually large construction project hits a rural area.

Having construction unemployment at its lowest rate in ten years while the economy is steady and strong, but not booming, may point to a new normal construction trend that is very regionally sensitive to local building activity.

U.S. Construction in millions

2011 2012 2013 2014 2015 2016 (as of 10/16)

Commercial Manufacturing& Transportation

Healthcare Education Residential0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

$500,000

Source: U.S. Census Bureau

Will commercial and entertainment spending continue its impressive double digit percentage growth rate in 2017, as it has for the past three years? If the new administration can enact the pro-corporate legislation that it has touted it would, then this continued growth in construction is possible. Counter to this push of pro-corporate executive action is the threat of a rise in the interest rate. There is little doubt the federal reserve will increase the prime lending rate. The increase in the prime rate may have even occurred as this letter is being published. What remains to be seen is: will the inevitable interest rate increase slow the corporate market construction growth that has occurred in recent years?

Due to the sheer size of residential construction and its 80% growth since the recession, the residential market segment has driven the bulk of the construction growth. Currently, the majority of the residential markets are booming due to concerns over the pending interest rate hikes, although there are signs that the growth for this market segment could slow. Much growth has been fueled by foreign investment in the United States’ multi-unit residential projects, which can be seen in the southern Florida/Miami market. What appears to be happening is that the continued strength of the American dollar has created a profit taking trend by foreign investment, which may mean upcoming sell-offs by foreign investors to achieve profits while the U.S. currency remains strong.

Construction by Market Segment

General construction continues to increase, with last year growing at a rate of 4.4% to $893 billion of total construction spending. The market segments that have been pushing the growth of construction out of the recession have been commercial and residential projects.

In comparison, the healthcare and educational market segments have nearly stalled over the past five years, with educational construction growing just 1.8%. Education has stagnated due to states’ managing budgets to avoid deficit spending, general population aging, and the hangover effect of the previous year’s increasing student debt. There is no clear indication that this trend in educational spending shall reverse any time soon. Healthcare construction has showed little change, at 2% growth over the past five years. This too is not showing any clear tendencies for growth or decline. With an aging population consisting of a higher socioeconomic make-up, the trend should point to an increase in construction spending for the healthcare market segment. This is offset by the uncertainty of what is to become of the Affordable Care Act with the new administration. If bilateral decisions can be made quickly and decisively, then this may cause a long overdue growth spurt for the healthcare market.

As for the manufacturing and transportation construction spending, 2015 saw robust growth of 20% only to drop down to -2% in 2016. If the new administration does as it says it will and increase spending on infrastructure, then expect to see an uptick in manufacturing and transportation construction spending in 2017.

Material Costs

With the continued gradual U.S. economic recovery, construction materials have seen steady price increases in 2016. There have been a few anomalies, as there always seem to be. The biggest is the run up of concrete at a 4% increase in 2016 and lumber increasing 11.5% from its low. While petroleum based product pricings, such as PVC, have taken a price ride down as oil prices continue to stagnate. The pricing increases in concrete and wood could be attributed to the busy housing market. Concrete pricing, with its labor intensive installation, means double escalation on both the material and labor side.

PVC Water Pipe 1992=100

Lumber 1992=100

Source: McGraw-Hill Construction Research & Analytics: ENR Material

Graphs, ENR Material Indexes

Ready-Mix Concrete 1992=100

Wide Flange 1992=100

J F M A M J J SA

219

216

213

210

222

225

2016J F M A M J J S O N DA

219

216

213

210

222

225

2015J F M A M J A S O N DJ

198

192

186

180

204

210

2015

J F M A M J A SJ

198

192

186

180

204

210

2016

J F M A M J J S O N DA

240

230

210

220

250

2015J F M A M J J SA

230

240

210

220

250

2016J F M A M J J S O N DA

140

136

128

132

124

144

148

2015J F M A M J J SA

140

136

128

132

124

144

148

2016

While energy prices have increased by 20% from their lows last year, they are not close to the triple digit pricing experienced just six years ago. Recently, OPEC appears to have successfully negotiated drilling production limits amongst its members, causing prices to increase to over $50/barrel. If they can maintain production limits and force prices to $70/barrel, this will cause upward pressure on construction material pricing.

Source: www.eia.gov

NYMEX Crude Oil 2016 $/Barrel

$/Ba

rrel

01/0

4/16

20

30

40

50

60

$70

10/0

4/16

09/0

4/16

08/0

4/16

07/0

4/16

06/0

4/16

05/0

4/16

04/0

4/16

03/0

4/16

02/0

4/16

$44.65

NYMEX Crude Oil 2015 $/Barrel

$/Ba

rrel

01/0

2/15

20

30

40

50

60

$70

12/0

2/15

11/0

2/15

10/0

2/15

09/0

2/15

08/0

2/15

07/0

2/15

06/0

2/15

05/0

2/15

04/0

2/15

03/0

2/15

02/0

2/15

$37.13

0

4

6

8

10

-6

-4

-2

2

% G

DP

Gro

wth

2011 2012 2013 2014 2015 2016

U.S. CANADA CHINA INDIA EURO AREA U.K. GERMANY JAPAN BRAZIL

Source: TradingEconomics.com

GDP Growth 2011-2016

GDP Growth across countries

Gross domestic product (GDP measures goods and services produced by a country) is a good indicator of a country’s economic health. The change in GDP year over year is a good indication of whether a country’s economy is growing or contracting. Typically, a strong growing economy will be heavily investing in construction activity, pushing escalation. The United States had a modest GDP in 2016, while the dollar has been strong due to foreign investment. This has caused an effect that has helped keep the inflation in check and has slowed escalation rates in the U.S. The chronic U.S. construction labor shortages is forcing escalation rates to be higher than the general inflation rate.

China’s economy, while expanding, is experiencing a growth rate well below the historical double digit growth experienced from 2005 through 2011. Canada’s GDP growth rate has also slowed in both 2015 and 2016. The slowing in Canada

is most likely due to the depressed energy industry that makes up a significant portion of Canada’s economy. However, the energy sector may pick up for Canada with the before mentioned energy price increases and pending approval of the Keystone pipeline project.

England is showing to be a very resilient economy. Its growth rate equals that of Germany’s, which has been continually outperforming the European Union economy. What remains to be seen for the European Union is the effect of the vote to defeat the Italian Constitutional reform, and if this will lead to Italian bank default, which would further slow the Euro economy.

Brazil’s negative GDP contraction is due to the economy collapsing from energy price reductions. These price reductions have had a disastrous effect on Brazil’s economy given their high dependence on energy to drive the economy.

Construction Escalation in North America

Source: enr.com

Escalation Across North America

Construction activity has gradually improved since the end of the recession, similarly to how the U.S. general economy has gradually improved. The measure of general inflation, the consumer price index (CPI), has stayed at a very healthy level, in the 1% to 2% range, providing for economic growth. A much higher rate starts inflation concerns and a rising interest rate. A lower rate, or even a negative rate, may cause deflation, which would slow the economy.

The CPI and the construction escalation rate typically move in a similar fashion, although they are not the same. The biggest difference between the two is that the CPI is based upon a hypothetical basket of consumer goods. It does not measure wages. The Construction Escalation Index is based upon a collection of construction materials and services and takes trade wages into account. Profit of margin should also be factored into typical construction escalation indexes (such as ENR, BCI, CCI, Means, Turner, and Beck).

Labor rates or labor availability for construction is dependent on the local construction activity, as are profit margins. A strong bidding market, or a buyer’s market, is very much dependent on the local activity. Strong construction demand may result in labor shortages, translating into a lack of qualified bidders with qualified labor. Typically, this results in additional costs to attract labor in both hourly wages and per diem reimbursements, while also resulting in higher profit taking opportunities.

This all translates into construction escalation being very dependent on local construction activity and demand. Almost all major urban centers in the U.S. are currently seeing strong construction activity. Residential construction in big west coast cities, such as Los Angeles, San Francisco, and Seattle are currently very stressed. There is not only is concern over possible interest rate hikes driving the market, but also the strong technology sector. Financial markets are driving the strong growth in big cities moving east, such as Chicago, New York City, and Boston.

There are some major cities which have slowed from their previously strong construction activity, such as

Miami, which is seeing a slowdown from their recent residential boom as a result of foreign investment profit taking.

As long as interest rates can maintain their historically low levels, construction activity should remain strong. This is a very big “if,” as there does not appear to be any increase in the construction labor pool. If anything, talk of infrastructure spending increases and tighter border control should maintain or increase current construction labor demands. All of these factors ensure that construction escalation volatility will remain high.

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

12%

10

8

6

2

4

0

-2

Actual Escalation %Predicted Escalation

VancouverVICTORIA

St. Louis

Phoenix

Buffalo

PittsburghChicago

DETROIT

INDIANAPOLIS

DALLAS

CALGARY

MIAMI

DENVER

NEW ORLEANS

SEATTLE

MINNEAPOLIS

San Francisco

Los Angeles

Baltimore

Washington DC

New York

Boston

Montreal

Toronto

CannonDesign North AmericaLow and high construction cost values per square foot

University Biomedical Laboratory Facilities

Healthcare Patient Beds

Residence Halls

Recreational Complexes

City Low High Low High Low High Low High

Boston $610 $850 $595 $830 $320 $500 $390 $570

New York 770 1,080 751 1,050 390 600 470 680

Buffalo 450 630 439 610 210 330 250 360

Baltimore 460 640 449 630 220 340 260 380

Washington 470 660 458 640 240 370 290 420

*Toronto 590 830 575 810 230 370 290 420

*Montreal 590 830 575 810 230 370 290 420

Chicago 600 840 585 820 290 450 350 510

St. Louis 490 690 478 670 220 340 260 380

Dallas 450 630 439 610 210 330 250 360

Phoenix 420 590 410 570 190 290 230 330

Los Angeles 630 880 693 970 330 510 390 570

San Francisco 680 950 748 1,050 370 570 440 640

*Calgary 600 840 585 820 240 380 300 440

*Vancouver 590 830 575 810 230 370 290 420

Average $560 $785 $557 $780 $261 $408 $317 $460

General Clarifications:

• Hard building construction costs exclude any work outside a 5’0” perimeter around the building. Additional exclusions include all FFE; Group II and III (headwalls, computers, IT cabling, monitors, etc.), construction contingency, design fees, legal fees, permits, land acquisition, financing, owner’s administrative fees, and escalation (costs are in current dollars), phasing, and relocation costs.

• Wage rates based upon local prevailing wages.

• All market segments are institutionally based buildings.

• All CannonDesign buildings are LEED® certifiable minimum.

• HVAC central plant equipment and piping is excluded.

• The exterior enclosure is a 50-year institutional grade.

University Biomedical Laboratory Facilities are mixed use for biology and chemistry. At least 30% of the space is office and administrative. Laboratory space receives almost equal amounts of lab support space. Costs include CSI Division

#11 casework and fume hoods but exclude all centrifuges, sterilizers, environmental rooms, and freezers.

Healthcare Patient Beds: On average 2,250 sf of building per bed, ACT, VCT with some GWB sof-fitting, painted GWB walls, minor millwork (chair rail, wardrobe unit, windowsill, not “VIP-level”), allowances for central-plant-fed mechanical and electrical systems. The costs provide medical gases to outlets with bed bumpers and locators. The sf cost range includes a high-quality urban-setting shell and redundant MEP systems.

Residence Halls are four- or five-story buildings. Suite-style configurations range from 350 to 450 square feet of building per bed.

- Structural framing is steel or concrete, not wood framing.

Recreational Complexes are mixed-use, with a gymnasium, fitness center, climbing wall, locker rooms, and public lobby with concessions.

- Pre-engineered structure and enclosure will dramatically reduce the pricing.

* Pr

icin

g in

Can

adia

n D

olla

rs

Indicates CannonDesign office locations.

California costs include building premium to accommodate seismic conditions and OSHPD review. 3% to 4%

2% to 3%

1% to 2%

Predicted Escalation Ratesfor the year ending December 2016

Percentages are annualized.

CannonDesign is an integrated global design firm that unites a dynamic team of strategists, futurists, researchers, architects, engineers, and industry specialists driven by a singular goal—to help solve our clients’ and society’s greatest challenges.

cannondesign.com

CJ Blossom Park, South Korea

For further information:

Joseph L. Cohen, AIA, LEED AP

Senior Vice President

716.773.6800

jcohen@cannondesign.com

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