Non-Residential Construction Inflation
% Change Year/Year
After several years of sharp increases, construction costs for commercial real estate are plunging, down by 4.3 percent in April compared with April 2008. Speculative construction starts have dried up along with the availability of credit, and demand for construction materials has plunged across the globe. Nevertheless, core inflation as measured by the Consumer Price Index, which excludes food and energy, increased by a comfortable 1.9 percent in the 12 months ending in April, which means that broad, economy-wide deflation is not in evidence. Some economists think that inflation, not deflation, poses a greater risk to the economy, spurred by growing federal debt and massive injections of liquidity by the Federal Reserve. While the conditions are present for inflation to catch fire, there is no match to light the fuse; wages are deflating, not inflating, as employers eliminate jobs, a trend that is likely to persist into 2010. Most analysts expect the recovery, when it comes, will be gradual at first, which should provide a window for the Fed to remove excess liquidity by selling off the Treasuries, mortgage-backed securities and other bond instruments it has been buying recently. The decline in construction costs is good news for landlords and tenants who need to refit their spaces. A moderate increase in inflation might be considered good news for commercial real estate owners and investors; in the 1970s and early 1980s, when inflation was high, real estate was viewed as an inflation hedge along with gold and commodities.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis