CONSTRUCTION COSTS HOW MUCH LOWER WILL COSTS GO BEFORE IT MAKES SENSE TO BUILD AGAIN? April 15, 2009

Transcription

1 CONSTRUCTION COSTS HOW MUCH LOWER WILL COSTS GO BEFORE IT MAKES SENSE TO BUILD AGAIN? April 15, 2009 David Schoonjans, MBA, MRICS, PQS Director, Altus Group Cost Consulting

2 TWO COMPONENT PARTS COST VALUE

3 REFRAMED QUESTION ORIGINAL QUESTION CONSTRUCTION COSTS HOW MUCH LOWER WILL COSTS GO BEFORE IT MAKES SENSE TO BUILD AGAIN? REFRAMED QUESTION AT WHAT POINT WILL CONSTRUCTION COSTS FALL BELOW VALUE AGAIN? OR FLIP SIDE OF THE COIN AT WHAT POINT WILL VALUE RISE ABOVE CONSTRUCTION COSTS AGAIN?

4 MOST LIKELY QUESTION WHAT COMBINATION OF DECREASED COSTS AND INCREASED VALUE WILL RESULT IN NEW CONSTRUCTION STARTS?

5 COST DRIVERS & TRENDS COST

6 COST MAJOR DIRVERS Labour Wage Rate Productivity Mark-ups Relative Demand Materials Commodity Prices Allocation of Risks Relative Demand Above noted factors assume a given building design & use in a given location (i.e. excluding factors for design, use and location).

7 COST DRIVER TRENDS LABOUR

8 CONSTRUCTION WAGE RATES EDMONTON, ALBERTA $48.00 $46.00 $44.00 CDN Dollars / Hour $42.00 $40.00 $38.00 $36.00 $34.00 $32.00 $ Carpenter (20% Change ) Electrician (0% Change ) Labourer (21% Change ) Sheet metal worker (6% Change ) Bricklayer (8% Change ) Period % Change Crane operator (Calgary and Edmonton only), group 1A, up to 50 tonnes (20 % Change ) Heavy equipment operator (Calgary and Edmonton only), group 1C, up to 6 tonnes (9% Change ) Source: Statistics Canada. Construction union wage rates, computed annual average (dollars) Including Selected Supplements

9 CONSTRUCTION EMPLOYMENT, ALBERTA, Percentage of Total Employment 15.0 Construction Employment in Thousands * 0 Source: Altus Group Economic Consulting based on data from Statistics Canada

10 NET INTERPROVINCIAL MIGRATION, ALBERTA, Persons 18,000 15,000 12,000 9,000 6,000 3,000 0 (3,000) 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 Source: Altus Group Economic Consulting based on data from Statistics Canada

11 COST DRIVER TREND LABOUR SUMMARY Labour rate increases over the past several years have been roughly in line with inflation on average; Increase in rates should slow along with inflation, but rates are unlikely to decrease by any significant amount; Decreases in construction employment should result in productivity improvements as less skilled workers leave the market. This should result in improvements in overall labour costs. Productivity improvements may be mitigated by decrease in net migration.

12 COST DRIVER TRENDS MATERIAL

13 WORLD CARBON STEEL PRODUCTS PRICES - $US/TONNE $US/Tonne $1,350 $1,300 $1,250 $1,200 $1,150 $1,100 $1,050 $1,000 $950 $900 $850 $800 $750 $700 $650 $600 $550 $500 $450 $400 Emerging markets - Growth far exceeding that of developed economies, resulting in greater global demand for resources September 2008: Beginning of Global Financial Crisis August 8, 2008: Beginning of Summer Olympics in China Feb 2006 Apr 2006 June 2006 Aug 2006 Oct 2006 Dec 2006 Feb 2007 Apr 2007 Jun 2007 Aug 2007 Oct 2007 Dec 2007 Feb 2008 Apr 2008 Jun 2008 Aug 2008 Oct 2008 Dec 2008 Feb 2009 Change in Total Value of selected commodities (Jul 08 - Feb 09) -44% Rebound and/or some Stability in Cost of Commodities January 2009 Hot Rolled Coil (Jul 08 Feb 09) 49% Hot Rolled Plate (Jul 08 Feb 09) 45% Cold Rolled Coil (Jul 08 Feb 09) 46% HD Galv. Coil (Jul 08 Feb 09) 43% Electro Zinc Coil (Jul 08 Feb 09) 40% Wire Rod (mesh) (Jul 08 Feb 09) 46% Structural Sections & Beams (Jul 08 Feb 09) 39% Rebar (Jul 08 Feb 09) 50% Merchant Bar (Jul 08 Feb 09) 36%

14 RAW MATERIAL PRICE INDEX - CRUDE OIL JANUARY 1981 PRESENT Crude Oil Refinery Problems - Ethanol Switch. Recovery from Hurricanes 2008 Beginning of Global Financial Crisis. End of July Price at over $148 U.S. / B. Asian Demand Soars 05 - Present Index, 1997 = Iraq Invades Iran U.S. Price Controls Gulf War Iraq Invades Kuwait Aug OPEC 10% Quota Increase. Asian Economic Crisis Series of OPEC Cuts 4.2 Million Barrels PDVSA Strike, Iraq War, Asian Growth 9/11 (75%) 100 Kyoto Protocol Minimal Y2K Problems Some Stability Feb/Mar 2009 $38-$ Period Source: AGCC Based on Statistics Canada Data

15 COST DRIVER TREND MATERIALS SUMMARY Priced in US$. High commodity prices corresponded with high CAN$ & fall in commodity prices have corresponded with fall in CAN$. Hence swings in prices have be dampened to some extent; Experienced steep declines in the price of many materials over the past several months, but prices appear to be stabilizing recently.

16 COST DRIVER TRENDS RELATIVE DEMAND

17 REAL GDP GROWTH, ALBERTA, Percentage * * Estimate Source: Altus Group Economic Consulting based on data from Statistics Canada

18 BUILDING PERMIT VALUES - ANNUAL EDMONTON, ALBERTA Present 4,500,000 4,000,000 3,500,000 3,000,000 Total residential and non-residential Residential and Non-Residential 2,904,492 3,541,076 3,925,314 3,656,672 Dollars ($) 1,000 2,500,000 2,000,000 1,500,000 1,461,694 1,797,317 1,766,707 2,027,807 1,000, , Edmonton, Alberta Total Residentail and Non Residential Source: AGCC Based on Statistics Canada Data

19 BUILDING PERMIT VALUES EDMONTON MONTH OF JANUARY & FEBRUARY 400,000 Residential and Non-Residential Dollars ($) (1,000) 350, , , , ,000 Jan 152,551 Feb 132, , , , , , , , , , , , ,000 78,050 78,380 94,893 93,745 91,167 50, Edmonton, Alberta Total Residentail and Non Residential Source: AGCC Based on Statistics Canada Data

20 COST DRIVER TREND RELATIVE DEMAND SUMMARY Provincial GDP growth rate has decreased over the past couple of years and is expected to continue to decrease in 2009; Value of building permits issued fell in 2008 and early indications are that the downward trend will continue in 2009; Net effect is decreasing demand for construction services.

21 VALUE DRIVERS & TRENDS VALUE

22 VALUE MAJOR DRIVERS Supply Factors Rental Vacancy Rates Resale Properties New Properties Coming Onto Market Demand Factors Economic Trends Employment Trends Migration Trends Interest Rates Credit Availability Energy Prices Energy Sector Capital Expenditure Plans Investor and Buyer Confidence Above noted factors assume a given building design & use in a given location (i.e. excluding factors for design, use and location).

23 VALUE DRIVER TRENDS SUPPLY FACTORS

24 Office Vacancy Rates as % of Total Area (Greater Edmonton Area) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Period Source: Altus InSite Percentage

25 RESIDENTIAL LISTINGS EDMONTON, ALBERTA, PROPERTIES LISTED & SOLD 6,000 Listed & Sold (March 2005 March 2009) LISTED SOLD 5,000 4,000 3,000 2,000 1, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Source: AGCC Based on Realtors Association of Edmonton

26 VALUE DRIVER TREND SUPPLY FACTORS SUMMARY Trends indicate rising rental vacancy rates; Residential listings have been significantly greater then sales over the past 24 months. Generally there is an oversupply of residential properties; Land is readily available at off peak pricing; Net effect is generally increasing supply for most asset classes.

27 VALUE DRIVER TRENDS DEMAND FACTORS

28 RAW MATERIAL PRICE INDEX - CRUDE OIL JANUARY 1981 PRESENT Crude Oil Refinery Problems - Ethanol Switch. Recovery from Hurricanes 2008 Beginning of Global Financial Crisis. End of July Price at over $148 U.S. / B. Asian Demand Soars 05 - Present Index, 1997 = Iraq Invades Iran U.S. Price Controls Gulf War Iraq Invades Kuwait Aug OPEC 10% Quota Increase. Asian Economic Crisis Series of OPEC Cuts 4.2 Million Barrels PDVSA Strike, Iraq War, Asian Growth 9/11 (75%) 100 Kyoto Protocol Minimal Y2K Problems Some Stability Feb/Mar 2009 $38-$ Period Source: AGCC Based on Statistics Canada Data

29 PRIME LENDING RATES & FORECAST BY CHARTERED BANKS (AS OF MAR. 11, 09) 6 5 Forecast 2009 Forecast 2010 percent (%) Q Q Q Q Q1F 2009 Q2F period CIBC SCOTIABANK TD RBC BMO Average 2009 Q3F 2009 Q4F Calculated based o n the fo recasted Overnight Target Rate (%) % 2010 Q1F 2010 Q2F 2010 Q3F 2010 Q4F Source: AGCC Based on CIBC, RBC, BMO, TD, SCOTIACAPITAL

30 VALUE DRIVER TREND DEMAND FACTORS SUMMARY Falling provincial GDP growth rate; Falling oil & gas prices have led to cut backs in energy sector capital expenditure plans; Increasing unemployment and decreasing investor and buyer confidence; Interest rates remain low, but credit availability continues to be an issue; Net effect is decreased demand for most asset classes.

31 PANEL DISCUSSION