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Tuesday, Dec 5, 2023

Special Report: Increases Expected in 2019 Construction Costs

Percent of product used by construction industry

A year ago, construction costs were rising so fast with fear of tariffs so shaking the industry that some contractors started stockpiling materials.

That’s over, with many San Diego County contractors predicting a slow but steady rise in costs through the end of 2019.

“We’re sort of at that tipping point of construction costs where they can’t keep escalating at the pace they were,” said Tim Wright, president of Wright Real Estate Management and Development. “Owners and developers are going to start going, ‘I think I’ll wait.’”

Andy Feth, project executive with C.W. Driver Cos. in San Diego, said he’s building in an escalation factor of 5 percent to 7 percent in preparing bids for 2019 — still above inflation but well below the double-digit increases some predicted in early 2018.

Tariff Uncertainty

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“There’s still uncertainty as far as the tariffs,” Feth said, citing ongoing trade negotiations with China.

“The pricing on commodities seems to be almost anticipatory of the problem,” Feth said. “Suppliers are still guessing what’s going to happen.”

Jim Roherty, president of Pacific Building Group, said he hears little concern about tariffs at this point, but material costs are rising, “especially electrical equipment, light fixtures, copper, electrical switching gear, those areas, HVAC (heating, venting and air conditioning) equipment, that type of equipment is going to continue to go up.”

He attributes much of that increase to a strong economy.

“I believe that a lot of manufacturers of all sorts of material were caught a bit off guard the last couple of years by the dramatic expansion in our business,” Roherty said. “I think it took them a while to catch up to the demand and I’ve sensed they’ve caught up with the demand a little bit, so I don’t think we’re going to see quite as dramatic a price increase.”

Prices Starting to Rise Again

Nationally, Ken Simonson, chief economist with the Associated General Contractors of America, said he expects construction costs to rise from 4 percent to 6 percent by the end of 2019 after softening in mid to late-2018.

“We’re sort of at the low point of a wave that is about to rise up again,” Simonson said. “I think contractors are in for another round of paying more. Whether they can pass on this increase is something I can’t predict.”

Prices have already started rising on the diesel fuel used in construction equipment as they have for gypsum products, such as wallboard, and copper prices are on the rise after dropping last summer, he said.

“Most of those prices subsided or flattened out over the second half of the year,” Simonson said, adding that overall construction prices rose about 2.8 percent from January 2018 to January 2019.

Fears that tariffs would disrupt the industry in 2018 proved unwarranted, Simonson said, but he said tariffs are likely to have a greater impact in 2019.

“While the steel tariff certainly hit construction last year, there are a lot of products that had steel in them that had already been fabricated or steel had been purchased before the tariffs hit,” Simonson said. “Contractors who basically escaped that tariff last year are going to be paying it if they’re going to be buying steel.”

Difficult to Estimate Project Costs

Naveen Waney, a principal of Platt/Whitelaw Architects Inc., said rising prices over the past year have made it harder to estimate project costs.

“There is one project in particular that the bids were very different from what we had estimated. In that case, we have to go back and do a redesign of the facility,” Waney said. “In another case, the bids came in higher than expected and we had to do some value engineering.”

Waney declined to name the projects.

Dominica Correia, vice president and market lead for the commercial real estate brokerage JLL in San Diego, said rising construction costs have prompted some of her clients to take a harder look at projects.

“For our clients that are looking to improve their space or maybe relocate, they’re really having to look at that number and make a financial decision on whether they’re going to go forward. They don’t cancel entirely, but there’s a lot of Plan B’s,” Correia said. “They look and say, ‘are we just going to renew our lease and do minor refresh or do we want to make an investment and kind of relocate.’”

Beyond prices, Feth of C.W. Driver said the problem he’s seen on commodities like steel is that demand is so high that getting them in a timely manner can be difficult.

“We are advising our clients as we’re engaging them that the market is challenging, so we have to be looking out further,” Feth said. “It could be 20 to 24 weeks from the time we say go until steel shows up on site.”

Roherty of Pacific Building Group said delivery times for materials “are up by 25 percent.”

“That, in turn is making it difficult to finish fast-paced jobs on time. I don’t know we’ve had to delay projects, but it’s caused challenges toward the end of projects when materials are coming so late.”

Real estate reporter Ray Huard may be reached at rhuard@sdbj.com or 858-277-8904.

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