California s Construction Cost Outlook

Transcription

1 California s Construction Cost Outlook Economic Forecast Q Questions and/or Comments, Please Call: Bill Rodgers Managing Principal P (916) CUMMING CORPORATION. All rights reserved. The contents of this report are protected by copyright. Any unauthorized reproduction, distribution, or transmission of this material by any means without the express written consent of CUMMING CORPORATION is prohibited. Use of these materials is subjected to the terms and conditions outlined below. User may not modify, publish, distribute, perform, display, reference, transmit, or participate in the transfer sale of, reproduce, create derivative works from, or in any way exploit any of the content, in whole or in part, without obtaining prior written authorization. Construction Volatility Price Pressure Score Sheet Economic Conditions Credit Markets U.S. Dollar International Demand Commodities Trends Energy Construction Activity (S/L) Prepared by: Cumming Corporation 1

2 Economic Conditions The US Economy A Closer Look Unemployment 7.4% by December 2013 Wall Street Journal January 2013 Prepared by: Cumming Corporation 2

3 The US Economy A Closer Look In Summary: GDP trending well below 2.3% for 2013, and 2.9% through 2014 Unemployment 7.4% by December 2013, 7.0% by December 2014 CPI kept in check, reaching 2.0% by end of Oil remains below $95/barrel through Year Treasury Note reaches 2.34% yield by end of 2013 A U Shaped Recovery Wall Street Journal January 2013 The US Economy A Closer Look Construction Unemployment Jan 2006 to Dec 2012 Construction Unemployment decreased to 13.5% in December (a full 2.5% lower than last year), but 82% higher than the 7.4% national rate for all industries Prepared by: Cumming Corporation 3

4 The US Economy A Closer Look ABI is signaling a recovery The US Economy A Closer Look ABI the Northeast is strongest, West is lagging Prepared by: Cumming Corporation 4

5 The US Economy In Summary The recovery is very weak Unemployment will remain high Many asterisks next to forecasts Construction volume forecasts vary greatly: AGC 6%to 10% increase McGraw Hill 6% increase FMI 8% increase Global Insight 1.2% increase PCA 1.3% increase Good News all forecasts say Increase The US Economy A Closer Look A Balancing Act between commodities, energy, emerging market growth, and US debt California Statistics: CA 9.8% Unemployment (Down from 12.5%) CA Construction volume down 50% since 2005 Prepared by: Cumming Corporation 5

6 The US Economy Markets for Job Growth Source: Moody s California has 5 of the top job growth markets Credit Markets Prepared by: Cumming Corporation 6

7 The Credit Crunch Lending Activity FDIC Quarterly Report December 2012 Real estate lending has bottom out, construction lending has been in a free fall Credit Markets Construction Lending: 9.5% Delinquency Rate!!!! Lenders couldn t securitize loans like residential Construction lending has dropped from $632b to $210b annually (70% below peak in 2008) Lenders holding large construction loan portfolios are considered distressed Prepared by: Cumming Corporation 7

8 International Demand China Continues to Dominate Global Material Demands China Consumes: 50% of the world s cement 36% of the world s steel 30% of the world s coal (and increasing!) 9% of the world s oil (and increasing!) Prepared by: Cumming Corporation 8

9 China s Economy GDP Growth should remain in the 7.5% to 8.5% range Source: IMF China s Economy Recovering economy, officially bottomed out GDP rebounded, exceeding 7.8% in 2012 Real estate bubble deflated after sharp declines in Q4 11 and Q1 12, prices are rebounding in major cities CPI currently is 2.2% Government has eased lending policies Chinese reversed currency policy to drive growth Prepared by: Cumming Corporation 9

10 India s Economy GDP Growth should remain in the 6.0% to 6.5% range Tends to trend 1.0% below China Source: IMF India s Economy GDP growth slowed to 5.1% in 2012 (9 year low) Hampered by black swan events (drought, power grid failure, etc) CPI currently in excess of 8.0%, but dropping Government holding elevated lending rates The return of the FM Chidambaram last month has restored some confidence in int l markets. Has vowed to reign in gov t spending Prepared by: Cumming Corporation 10

11 Why Europe Matters LIBOR Rates vs 3-Month Treasury - Jan to Nov % 7.00% Overnight LIBOR 3-Month LIBOR > Banking Crisis 6.00% 3-Month Treasury 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% US Dollar Prepared by: Cumming Corporation 11

12 The US Dollar Trending Better for Imports Commodities/Mat l Trends Energy Prices Prepared by: Cumming Corporation 12

13 Commodities & Energy Prices are Leveling Off Global Insight January 2013 Material Price Forecasts through 2014 Look for products involved in homebuilding (concrete, gypsum & lumber products) to increase in excess of the CPI Prepared by: Cumming Corporation 13

14 Construction Volume/Activity California Conflicting Regional Factors Have Set the Stage for Cost Volatility Public non-residential construction is slowing Residential construction is showing signs of recovery Passed Props 30 & 39 will raise $7b in revenue Passed 88 School Bonds totaling $13.3b State Budget Deficit - expected to drop to <$2b next year San Francisco/San Jose best growth market in the country Los Angeles largest market in the state Sacramento continues to struggle, is seat of government San Diego smaller market with strong job growth Attrition is occurring among subs, smaller GC s and architects Prepared by: Cumming Corporation 14

15 California Volume Forecast Trends (05$) California Volume Forecast Trends Total Volume Forecast Change: % % Strongest Sectors: Residential Commercial Lodging Office Weakest Sectors: Manufacturing Gov t Buildings Prepared by: Cumming Corporation 15

16 California Volume Forecast Key Cities (x$1m, 05$) California Construction Labor Jan 02 to Oct 12 +/- 380,000 construction workers California has lost 40% of it s construction workforce since the peak in 2006 Prepared by: Cumming Corporation 16

17 California Construction Labor % Change Over Same Period From Previous Year April 03 to Oct 12 Inflection Pt Inflection Point = Return to Escalation California Monthly Construction Volume Total April 03 to Oct 12 +/- $3.8 Billion in Volume Prepared by: Cumming Corporation 17

18 California Construction Vol % Change over Same Period From Previous Year April 03 to Oct 12 Direct Comparison California Annual Construction Volume % Change vs. Labor Force Change April 03 to Oct 12 (3 Month Rolling Average) Prepared by: Cumming Corporation 18

19 Trend Forecast 2013 & 2014: Forecast Highlights US National volume forecasted to increase 1.2% in 2013, increase 9.1% in California State volume forecasted to increase 5.8% in 2014, and increase 14.2% in Strongest Growth Markets San Francisco & San Jose Weakest Market Sacramento California Escalation Forecast Prepared by: Cumming Corporation 19

20 California Escalation Forecast Total Escalation = Commodity/Labor Trends + Captured Volatility = + California Commodity/Labor Escalation Projections Year Escalation Rate % % % % % % % % % 2013 (Projected) +3.5% to +4.2% 2014 (Projected) +3.5% to +4.5% Prepared by: Cumming Corporation 20

21 Commodity/Labor Escalation Projection Comments Commodity, labor, and subcontractor/gc mark up trends based on a stable bidding market and a minimum of 3 bidders per trade. Complexity, size, contracting method, and the number of bidders can impact these rates Market Volatility Number of Bidders and Deviation from Estimate Low Bid Deviation Number of bidders from Estimate Source: Carr, Paul G., P.E., M.ASCE, Investigation of Bid Price Competition Measured through Prebid Project Estimates, Actual Bid Prices, and Number of Bidders, Journal of Construction Engineering and Management, 2005 Prepared by: Cumming Corporation 21

22 Number of Bidders Impact Compared to Estimate (Fair Market Value) Cumming Corporation Experience Number of Bidders Variance from Estimate 1 +15% to +40% % to +12% % to +4% % to -7% % to -25% Escalation History/Forecast Looks Volatile Prepared by: Cumming Corporation 22

23 Until You Index It In Summary The recovery is under way Prices are increasing as a result of: Energy and commodity pressure Attrition of labor capacity and competitors Inflection point of volume Bonding capacity Owners can successfully mitigate and manage these increases with proper planning and appropriate delivery method selection Prepared by: Cumming Corporation 23

24 Conclusion Thank you for your time? Questions Questions Questions Questions Questions Prepared by: Cumming Corporation 24