RISING CONSTRUCTION CHARGES

Developers, distributors, contractors and subcontractors have suffered from horrendous increases in the cost of materials during the past few years.


from Sacramento Business Journal, August 25, 2006


"Although contractors absorbed the rising charges, driven mostly by global demand, when the trend began, they increasingly must pass the cost to the consumer or risk going down the tubes. That means tenants in office, industrial and retail space will often pay considerably more for the privilege of moving into new buildings.


One example of rents spiked by such costs is the four-story office building under construction by developer John Mourier in Highland Pointe business park, overlooking Highway 65 in Roseville. The new structure is the twin of a building finished at the beginning of this year. But it's not a twin in rents.
Almost entirely because of materials costs, rent in the new building will range from $2.50 to $2.60 per square foot, compared to $2.35 for the first building.


Another example is a 76,000-square-foot office building just completed in Vineyard Pointe Business Park in Roseville that has rents ranging 12 cents to 15 cents per square foot higher than its twin, which was finished in 2003. About 35% of the difference is the result of materials costs, and also rising municipal fees.




Sticker shock strikes twice


Material prices also are driving up tenant improvement costs for cubicles and the like. Builders have changed the way they negotiate those costs. In the past, landlords gave an allowance which was settled before the lease was signed. But the tenants didn't get cost estimates for the work from contractors until later. Because of rising materials costs, the sticker shock during the past 3 years could leave the tenants, stuck with the lease, to make up the difference between the allowance and the real costs.


Now some landlords are making sure the tenant improvement cost is known before the allowance is set and the lease signed.


Industrial building rent has also gone up, probably by at least 20% for new buildings, largely because of materials costs.


Some builders have decided to postpone construction until the market allows them to charge rents that warrant the increased construction cost. 9 out of 10 developers are saying lease rates have to go up.


The China Syndrome, Hollywood's 1979 nuclear-meltdown thriller, provides a handy label for one of the big reasons that materials costs have jumped. Builders in China, and similarly fast-growing economies elsewhere around the world, are voracious for ready-mix cement, steel, copper and other materials. We're in a global economy, competing with the whole world for materials.


From June 1999 through June 2003 materials rose 80%, to levels 613% higher than 1967 costs. In the 3 years from 2003 through this year, the rise was 131 points – 744% over 1967's costs. The combined cost of materials, labor and ancillary expenses charged by contractors to clients has increased very sharply during the past 3 years, reflecting a rise in demand for contractor services as well as hikes in materials costs. We had 20 years of annual 3-to-3.5% escalations in costs, and 2 years of about 20%, and now we're staring at 8-10% this year.


Among the materials typically thought of as construction related, the rising price of oil has dramatically increased the cost of plastics and asphalt, and has driven up the cost of transporting materials. Prices might slow their rise next year, and some items might even decline in cost. That's partly because China is increasing its own steel production. Also, some analysts say China probably can't maintain its current growth rate into next year.


Analysts also say the ebbing pace in U.S. home construction is easing materials prices. Also, more Mexican cement is expected in the U.S.
market, which should increase competition and lead to lower prices.


The hikes of the past few years have been so great that building will still be more expensive than in past years. And gas will still be $3 a gallon."