Producer Price Index Construction /Economist Quotes

First American Senior Commercial Real Estate Economist Xander Snyder’s reaction to the latest Producer Price Index (PPI) for Inputs to Construction release.

What is the PPI?  The Producer Price Index (PPI) for Inputs to Construction measures the change in price of goods and services purchased by building construction companies. As with the more familiar CPI – which tracks changes in prices paid by consumers – the PPI for inputs to construction surged throughout the pandemic as supply chain disruptions made it more difficult to acquire building supplies and warehouse shortages made it more costly to store those supplies near construction sites.

In March 2022, prices for inputs to construction jumped 21.5% year over year for all non-residential buildings and 20.1% for multifamily buildings. While the price growth in March represents a deceleration from the June 2021 peak, builders continue to face inflationary and supply chain headwinds. Inflation of building materials costs remains high, forcing builders to pass on rising costs in the form of higher prices. At the same time, builders are trying to accelerate construction to meet unrelenting demand for certain commercial real estate (CRE) asset classes, but supply chain disruptions have hindered the pace of construction, contributing to an ongoing supply-demand imbalance.

  • Over 90 percent of builders surveyed by the National Multifamily Housing Council (NMHC) in March 2022 reported that they had to reprice projects upwards within the last three months to offset rising costs of materials. Among builders who have increased the prices of their projects, the median and average price increases were 11% and 25%, respectively, in the first quarter. Additionally, 85% of builders surveyed said they have experienced delays in project starts, and 64% of builders at least partially attributed delays to materials sourcing and delivery.

  • Additionally, the March PPI is the first that accounts for a full month of energy market dislocation caused by the Russia/Ukraine conflict. Diesel provides the vast majority of energy used in construction, and the average retail price of diesel increased 25% from late February to early April, according to the  U.S. Energy Information Administration.

  • Port congestion, which has extended lead times for builders to acquire construction materials and contributed to price increases, is improving but remains a source of delays. Many builders have responded by storing construction material in nearby warehouses before beginning a project, and prices for warehousing services continued to rise in March, driven by a national shortage of warehousing space.

  • Despite the strong demand to own certain CRE asset classes, like multifamily and industrial, construction material cost inflation remains an ongoing headwind to delivering more supply to meet demand.

 

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