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Thread: Construction Material Costs On The Rise

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    Forum Veteran krulltime's Avatar
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    Default Construction Material Costs On The Rise

    Costs blindside builders, subs
    Steel increases slash profits; owners, contractors squabble over who pays


    By Christine Haughney, May 31, 2004

    It was the kind of project that most small glazing contractors could only dream of landing. But in February, Trainor Glass Co. decided to try to defy the odds. It went ahead and bid on a $4 million contract to provide the interior glasswork on all 30 floors of PricewaterhouseCoopers' new offices at 300 Madison Ave.

    By the time Trainor won the contract six weeks later, though, the cost of the project's stainless steel parts had jumped by nearly 15%, taking a significant bite out of Trainor's slim profit.

    "This is our biggest contract to date in the New York market," says Glen Burger, an account executive at the Chicago-based firm, which entered the local market only five years ago. "Costs are ballooning on a daily basis."

    As prices for key raw materials soar nationwide, New York City's contractors, construction companies and developers are battling over who will have to foot the bill. In a few cases, developers are even delaying their projects.

    "Escalating material prices are really shaking up the market," says Bob Barone, a senior vice president at Inspection & Valuation International, a consulting firm to investors on a dozen New York City development projects.

    The biggest problem is steel. In the past year, raw steel prices have jumped by 75%, hitting $700 a ton recently. Subcontractors say that the soaring cost of raw steel is now showing up in products like dry-wall studs, air conditioning ducts, office partitions and even light fixtures.

    "In my 25 years in this business, I haven't seen inflation so quick on a single kind of product," says Ken Levien, president of Levien & Co., a construction project management company. It has recently added a new sideline: advising owners on how they should respond to increasing calls for help from contractors.

    Experts say that the surge in steel prices was touched off by the enormous building boom in China, which has sucked in supplies of the metal from all over the world. That situation was exacerbated by stronger growth in India and, more recently, in the United States, all at a time when mills were unprepared to deal with it.

    "All of this growth has occurred in a world where the supply chain has learned to keep much smaller inventories," says Kenneth Simonson, chief economist with the Associated General Contractors of America.

    Some developers immune

    Some leading developers have escaped rising steel costs during a fairly quiet period for commercial construction in New York. The few developers currently involved with major commercial projects say that they are unscathed by the high prices.

    Developer Larry Silverstein, for example, ordered steel for 7 World Trade Center before prices started to rise. He won't need to order steel for the Freedom Tower for several more months. The Durst Organization may miss what it hopes will be a short-term blip in prices because it won't order steel for its 2.1 million-square-foot Bank of America Tower at 1 Bryant Park until the fall.

    "Things seem to be leveling off," says developer Douglas Durst. "So we're keeping our fingers crossed."

    But for developers and contractors locked into ongoing projects, these are tough times. The New York City Department of Environmental Protection, which has had plans to build a waste-water treatment facility in Jamaica, Queens, put them on hold in March because of increased steel prices. The decision came after most construction companies submitted bids that exceeded the $100 million estimated cost of the project by $40 million.

    DEP finally moved forward with the project last week by awarding it to a company that bid $124 million.

    "When the original estimates were done, we didn't factor in the dramatically escalating steel costs," says Marcello DiGeronimo, whose architecture firm has worked as a consultant on the project for the past four years.

    Elsewhere in the city, battles are breaking out over who eats the increased costs. A steel subcontractor for a $2.5 million privately built youth center on West 171st Street in Manhattan recently appealed to the owner for help. He was facing a 25% jump in steel prices, which had tacked on more than $10,000 to the cost of the project.

    "It's a very tightly budgeted, private nonprofit, which has very limited resources," says Mr. Levien, who is advising that owner. "It's the subcontractor's responsibility."

    Helping their subs

    In some cases, the general contractors are voluntarily paying up. One of the city's biggest builders, Bovis Lend Lease, has helped out key subcontractors that it felt could be driven out of business otherwise.

    "This is such an unusual event," says Ken Hiller, senior vice president and chief engineer for Bovis. "It's like an act of God."

    Rather than pay up, other developers are exploring alternatives. In the past two months, Thornton-Thomasetti Engineers did studies for two hospitals exploring the savings of switching to concrete from steel. Based partly on cost considerations, Kings County Psychiatric Hospital opted for concrete for a new 11-story building.

    "There are more studies going on for buildings that normally would have automatically considered steel," says Aine Brazil, a Thornton-Thomasetti managing principal.

    Fearing that the worst is yet to come, some subcontractors are stockpiling. Trainor is storing 200 sheets of stainless steel in a 5,000-square-foot warehouse space in South Kearny, N.J., to finish out the PricewaterhouseCoopers project.

    In some cases, subcontractors are also taking a more cautious approach toward new contracts. For a bid to install vanity tops and mirrors at the proposed New York Times Co. headquarters, Trainor offered to strike a deal with the supplier to set aside raw sheet glass for the next eight quarters if the developers paid for the glass ahead of time.

    Copyright 2004, Crain Communications, Inc

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    Forum Veteran krulltime's Avatar
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    Some leading developers have escaped rising steel costs during a fairly quiet period for commercial construction in New York. The few developers currently involved with major commercial projects say that they are unscathed by the high prices.
    Well...that's the spirit... :|

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    The raw product increasing in price still holds a distant second to actual erection and construction costs.

    YEARS ago the price for steel was blindly estimated in all rough cost estimates at about $1 per pound. If raw steel is at $700, that still leaves a lot to the plants for their own cost of manufacture.

    If steel gets too expensive, you will see concrete start to gain popularity. Concrete having a few disadvantages being, obviously, bulk, construction time (7 and 28 day curing strengths) and labor.

    I hope steel does not get too much out of control...


    What's the deal on the Tariffs?

    Ah, just talked to a co-worker. Seems like the steel prices are starting to wane now. The companies had a low production schedule and were hit by the US and China at the same time, but things seem to be leveling out now.

    And TT was quoted in this? heh. they get quoted on a lot sometimes......

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    July 2006

    Steel out, concrete in: construction costs force changes

    By Vanessa Londono

    In 2003, Richard Bassuk, president of Singer and Bassuk Organization, penciled out the costs for a residential project on Fifth Avenue and 26th Street. Construction costs were between $175 and $180 a foot.

    Three years later, when he arranged the financing for a project across the street, construction costs had doubled to at least $400 a foot.

    Market watchers say construction costs have gone up 30 percent in the past year alone -- and if the prices continue to rise, it may bring the condo industry to a stall.

    Certainly, lenders and developers are losing enthusiasm to take on new projects. More desirable now are conversions, which require less materials and labor than new construction. Some developers are also changing the materials they use -- goodbye, steel, and hello, reinforced concrete.

    A few developers caught by added construction expenses haven't been able to raise condo sales prices enough to make up for the added costs because the market won't bear it, sources say. Those trying to get out of the game by selling their sites are seeing half as many offers and a 10 percent (or more) drop in prices from a year ago, say brokers.

    With two residential projects in the pipeline, developer Andrew Heiberger, CEO of Buttonwood Real Estate, has felt the impact of the higher construction costs. Heiberger has seen an overall increase of $85 to $100 per square foot in Sundari Lofts & Tower, a new construction development at 158 Madison Avenue. (The project was cancelled just as The Real Deal went to press.)

    The increases in costs have been less dramatic with his Greenwich Club Residences development, a condo conversion at 88 Greenwich Street -- about $30 per square foot since the beginning of the year.

    "With Sundari, there have been surprises, cost increases that not only surprised me, but dozens of others," said Heiberger. "The increase in costs of steel, concrete and sheetrock -- those three line-items have gone up, along with labor."


    Spikes, from concrete to copper

    Economic development in China, which is increasing demand for raw materials, is partly to blame. According to a construction cost index by the Engineering News-Record, which tracks the construction industry, the price of cement increased by 8 percent from this time last year, and the price of steel increased by 8.4 percent during the same period.

    Concrete is 15 to 18 percent more expensive today than a year ago, says Chris Zegler, vice president of New York construction services at Turner Construction.

    Also seeing a substantial increase is the cost of copper, used for both plumbing and electrical construction; Turner reported national costs of copper wire increased by over 100 percent since the end of March.

    Contributing to the national demand for construction materials is the reconstruction in areas hit by Hurricane Katrina in 2005. The demand for oil is further aggravating the issue, pushing prices up in fuel costs and oil-based construction materials.

    With land prices running $300 and $400 a square foot in many cases and construction costs as high, it's easy to see that developers don't have an extraordinary amount of wiggle room to charge less than $1,000 a square foot for condos and still turn a profit, according to observers.


    Labor pains

    Labor costs are another consideration. Condo conversions like Heiberger's Greenwich Club Residences require fewer materials, but labor remains a high line-item cost across the board.

    "Three years ago, the New York market was still recovering from September 11, and subcontractors didn't have a full book of transactions," said Bassuk.

    Now demand for subcontractors is so high it has many development budgets in the red. "Subcontractors are extremely busy and while you can still get subcontractors to perform in time, it has been over the budget," Heiberger said. "The demand is so great that, effectively, there is a labor shortage."

    Unfortunately for developers, it will take fewer condo development starts before the demand for subcontractor services levels off, said Bassuk. "When [subcontractors] don't have an unlimited amount of work, they'll start to adjust their pricing," he added.


    Little leeway

    In the meantime, developers are the ones adjusting their sale prices to include the rise in costs -- with hopes that the demand will still be as strong when these condos hit the market.

    According to Heiberger, some investments likely to fail were secured last summer with little financial leeway for construction costs. "Some developers can't just raise the price to make up for the short-term shortages," Heiberger said.

    There have been a few deals so tightly budgeted that the rising construction costs will strangle financing, says Heiberger. "But three out of a hundred developments is not an epidemic amount of bloodshed spread."

    At investment banking firm Sonnenblick Goldman managing director and principal Rick Swartz said he has seen projects get put on hold because of the increases in construction costs combined with the slowdown perceived in the rising of prices. (Swartz declined to name particular projects.)

    "New construction premised on aggressive price increases is hesitant to go forward," he added.

    But, said Heiberger, new condo construction jobs are not entirely in jeopardy, as new construction continues to sell fairly well. "It's the condo conversions that are having a tougher time selling but those are less susceptible to the four big [construction cost] variables," he said.

    With a watchful eye on conversions and new construction, investors are taking more conservative steps in the condo market. There has been a pull-back in purchasing sites for the residential market, says Brian Leary, partner at Massey Knakal.

    "A year ago we were in a market where you could get 15 to 20 offers for a development site in a short time frame," said Leary. "But now, we are seeing anywhere from half a dozen to 10 offers -- at a 10 percent decrease in asking price -- for a buildable site."


    Heading for the exit

    Investors still entering the market are spending more time looking over alternatives and exit strategies. According to Bassuk, more investors are considering mixed-use developments.

    "The appetite for aggressive development has slowed down. Investors haven't gone away, but they are putting their money elsewhere," Leary said.

    Although Leary maintains the rate of return is currently at 6 to 7 percent, demand is lessening and the new development will likely slow down due to lower profit margins.

    Lower profits aren't sitting well with lenders, either. Lenders have become more cautious in underwriting new construction projects.

    "Costs are rising so quickly, making it harder to justify building than it was previously," said Francis Greenburger, CEO of Time Equities. "The concern is whether prices will stay high enough to make it viable to build given the increase in costs."


    Receding rentals

    The prudent attitude toward new construction is more likely to lead to a rental crisis, said Heiberger. Having already lost units to condo conversions, the rental housing market now has a less than 1 percent vacancy rate.

    An estimated 7,500 rental units pulled offline for recent condo conversions will not be easily replaced, sources noted. While rents have risen, they haven't kept pace with land and construction increases -- and those skyrocketing costs should slow new rental developments.

    For the next two years, the pipeline has a majority of condo developments in the works but close to no rental developments, Heiberger said. As a result, Heiberger believes in the next two years there will be a trend of people moving from rental to condo housing to avoid elaborate rent increases.

    "If you pencil out the costs of construction, land, and soft costs to do the deal and see what it will be to rent the property, it will not cover the costs," he said. "You'll lose money because of the construction costs. It's prohibitive and preventing new projects from coming out the pipeline."


    High costs spur change in building materials

    As construction costs continue to rise, condo developers are using alternative methods to build without breaking the bank.

    "There is an aggressive value engineering going on to try and reduce costs in all respects," said Francis Greenburger, CEO of Time Equities. "Developers are taking into account construction techniques and materials as a function of the costs."

    Architect Steven Kratchman, who runs his own firm, has noticed a switch from steel to reinforced concrete in residential development in Manhattan. "In the initial costs, reinforced concrete is more expensive," says Kratchman. However, he notes, "concrete builds faster. In a week's time, developers can put up three floors versus two floors."

    At the same time, building with concrete uses less space between floors and the sum of saved space means developers can add more floors to their developments. As a downside, reinforced concrete lacks flexibility when tenants want to combine apartments, which becomes a rather costly procedure.

    In some smaller condo developments, developers are building wood-frame structures and using cold-rolled steel bent into the construction of the walls. According to building codes, these materials are acceptable for limited use in buildings with three to four stories. But while developers can save money by going this route, it is at the cost of quality, according to Kratchman.

    Andrew Oliver, managing director at investment banking firm Sonnenblick Goldman, says developers are more willing to cut back on the exterior of the building by using less glass than to compromise on finishing out the units inside condo developments. Buyers want a nice-looking building, but living in top-quality units is more important, he said.

    Copyright 2003-2005 The Real Deal.

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    October 3, 12:03 pm

    City construction spending on record pace in '06

    Spending on construction in New York City is expected to top $20.8 billion this year, besting a record of $18.8 billion set in 2005, according to a new report from the New York Building Congress. The report also forecasted that spending will top $21 billion in both 2007 and 2008, if all planned spending occurs.

    Fueling the jumps in construction spending is an ongoing demand for 30,000 housing units annually in the city. An analysis by The Real Deal revealed developers submitted to the state attorney general in 2005 plans for 14,159 new condominium and co-operative units in Manhattan alone. Through August 2006, developers submitted plans for 11,265 new Manhattan units.

    Office construction, too, has contributed to the rise in construction spending. As much as 10 million square feet of new commercial floor space is expected to push non-residential construction spending in New York City over $4 billion for 2006, according to the Building Congress, a booster group for the construction industry in the New York area.

    Eleven office buildings will have been under construction in 2006, up from eight in 2005. Seven office buildings are forecast for 2006, and five for 2008, the group's report said.

    Still, rising construction costs may stymie the pace of construction -- and subsequent spending -- in New York. The city has experienced larger increases in construction costs than any other U.S. city, the Building Congress reported. From 1979 through 2005, construction costs increased by 300 percent here. In Boston, for instance, costs during the same period were up 175 percent; in Los Angeles, costs increased 130 percent.

    New York's construction costs this year are increasing at a rate of about 1 percent every month. This reality, the Building Congress concluded, adds "to uncertainty about the timelines and funding of projects large and small."
    By Tom Acitelli

    Copyright 2003-2005 The Real Deal.

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