When people discuss the cost of real estate, they might point to lack of inventory, high financing rates, and the desire for owners and investors to make their projects pan out fiscally. But most people from the outside don’t see how big one component, the cost of building, has become.
The Producer Price Index for October was up 0.2%, seasonally adjusted, and final demand prices were up 0.2% in September. “On an unadjusted basis, the index for final demand advanced 8.0 percent for the 12 months ended in October,” the Bureau for Labor Statistics wrote.
That would seem like good news at first blush. “Producer prices rose a slower-than-expected 0.2% in October, and September’s increase was revised lower,” Oxford Economics wrote in a note. “Core producer prices also rose 0.2% last month, slightly slower than the downwardly revised 0.3% increase from September. The more moderate pace of gains cooled the inflation rate for the fourth straight month; headline inflation fell a significant 0.5ppts to 8.0% y/y, while core PPI declined a more modest 0.2ppts to 5.4% y/y.”
But then there was this from the BLS: “In October, the rise in the index for final demand can be attributed to a 0.6-percent advance in prices for final demand goods. In contrast, the index for final demand services decreased 0.1 percent.”
As Oxford noted, “The goods advance was attributed to the volatile final demand energy category, which increased 2.7% on the month. Core final demand goods, meanwhile, decreased 0.1%.” Although a drop in vinal demand trade services prices helped a broad-based services decline.
But move beyond the headlines and the specific data for construction is hardly comforting. From October 2021 to October 2022, materials for construction were up 11.3% and components for construction rose by 12.8%. It is an improvement over the picture in September, when the numbers were respectively 13.1% and 15.2%.
The results for final demand construction—new buildings and maintenance and repair sold to those that want it—are worse. Overall, the category was up 19.6% year over year. Construction for government saw a jump of 17.4%, while for private capital investment it was 20.7%. Drilling down a bit more, new warehouse building was 20.5%; office building, 21.2%; industrial, 22.1%; and healthcare, 19.4%
These are increases on top of all the others. Materials and components are significantly higher than they were pre-pandemic and don’t seem on a path to level off in the near future.
Source: “PPI Shows Some Relief but Reality Is Still Hard for CRE Construction“