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Builders Are Feeling Squeezed as Steel Prices Jump

Builders Are Feeling Squeezed as Steel Prices Jump

Supply, Demand Problems At Heart of Current Spike

BY MATHEW PADILLA

Rising steel prices stand to squeeze profits for real estate developers by pushing up costs for commercial buildings, high-rise condominiums, and even new homes.

In the past three months, prices have shot up 40 to 60 percent, depending on the type of steel. In the past year, steel prices have nearly doubled. The increases come despite the December scrapping of the Bush administration’s 24 percent tariffs on imported steel, which were deemed illegal by the World Trade Organization.

Developers here aren’t alone in their dependence on steel. Aerospace contractors and other manufacturers also are feeling the sting of higher steel prices.

“Steel, unfortunately, is everywhere,” said James Camp, senior vice president of Voit Development Co. in Newport Beach.

No one stands to feel the impact of higher steel prices as much as Vancouver, British Columbia-based Bosa Development Corp., which is building several concrete and steel condominium towers in San Diego and Irvine.

Bosa has ordered and settled prices on nearly half of the steel the company needs in Irvine, according to Eric Martin, Bosa’s vice president of development.

But prices are rising fast on the other half, he said, and there are delays in getting steel. Deliveries could be off by as much as two or three months, which could slow the project and add to the costs, Martin said.

“We are talking in the millions of dollars,” he said. “We are not talking small numbers.”

Bosa already has sold hundreds of condos under construction in San Diego and more than half of the 232 condos planned in Irvine. Those prices are fixed, Martin said. As such, any added construction costs are set to come out of Bosa’s profits, he said.

Weak Dollar, Demand From China

Steel prices are rising for several reasons, including increased demand from China and the weak dollar’s impact on imports.

The benchmark price of hot-rolled sheet shot up nearly 80 percent in March from a year earlier to $500 a ton, according to Purchasing Magazine, a Newton, Mass.-based trade publication. The price is up from $350 a ton in January.

Demand for steel, especially from China, has shot up after a three-year lull, according to the trade publication. China is a big producer of steel, but demand has outpaced supply as it builds roads, bridges, and other projects, in part to prepare for the Olympics in 2008. China’s booming factories also are big steel users.

The good news is runaway steel prices may not hold.

China, for one, plans to increase its own steel production and cut spending on big projects that could bring down steel prices this year.

Steel’s surge has taken many by surprise, industry sources said. It follows a series of shutdowns and consolidation among steel mills in the U.S., they said.

All developers are being affected, sources said, even those that specialize in concrete-framed buildings and housing.

Voit Development this month is set to begin construction on 19 small industrial buildings at the former Steelcase Inc. campus in Tustin, Camp said. The buildings are set to primarily be concrete, but a type of steel, known as rebar, is used to reinforce the concrete. Steel also is used to protect electrical wiring and in the roofs, he said.

Delays Of Up To Six Weeks

Delays are hand-in-hand with price increases. Normally, a developer or contractor working on a concrete-framed building has no problem getting a price quote and picking up steel, even if it’s the same day an order is made, Camp said.

But that’s all changed, he said. A developer may have to wait six weeks for steel.

“There are some suppliers that won’t give you a price,” Camp said. “It’s like gasoline. It’s changing daily. We have never experienced this kind of a spike in price before.”

Camp said Voit’s project, dubbed Tustin Gateway, is supposed to sell from $126 to $192 per square foot. He said those prices could rise, but not as dramatically as steel prices are rising since steel is just one of many building costs. He said the cost of the project, and thus the sale price, could rise 3 to 5percent on higher steel prices.

It’s unclear how long the price spikes and supply shortages are going to last, sources said.

The Irvine office of Phoenix-based Opus West Corp. plans to build a five-story office building, two condo high rises and apartments in Irvine.

Opus West hasn’t yet bought steel for the office and condo buildings, said Paul Marshall, a senior vice president with the company. He said Opus West is looking for an anchor tenant for the office building and is in the planning stages on the condo towers.

The developer is paying close attention to the steel trade.

“No one has any indication of exactly where the level-off price is going to be,” Marshall said. “Is this here to stay or temporary inflation? We are hoping for the latter. Every indication would be it’s a demand and supply problem.”

Marshall said office projects must charge market rents; his company can’t charge higher rents just because its costs are rising. He said if higher steel prices are here to stay, then rents could rise over time because many projects will be affected.

As for the condos, Opus might raise prices slightly, but it’s too early to tell, he said.

Residential Builders Affected

Homebuilders, meanwhile, also are seeing their costs rise amid a steel shortage.

“The typical impression is that houses are mostly made of wood and things that are visible,” said Richard Douglass, president of the Irvine division of Dallas-based Centex Corp. “But steel is present in many, many other parts of the home.”

Douglass said prices are doubling and tripling for steel used in concrete foundations and wire meshes used to hold together stucco in walls.

Morgan Sheet Metal, a division of Huntington Beach-based Morgan Holdings, sells steel panels for new home construction.

The company generally has a six-month supply of steel to make panels, said Morgan spokesman J. Nabs Carlson. The large inventory has kept the company from raising prices, but that should change, he said. He declined to say by how much.

“It’s fluctuating monthly,” Carlson said.

Mathew Padilla writes for the Orange County Business Journal.

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