Summit Contractors Group, which has more than a dozen construction projects under way in the East, has more work than it can find tradespeople to frame. PHOTO: Courtesy Summit Contractors Group
The uneven economic recovery is having an uneven effect on the price of construction.
Overall, the cost of construction for apartment properties continues to rise faster than inflation at a rate of about 2 percent to 6 percent a year. That roughly matches the analysis of the Associated General Contractors, which put the increase in construction costs at 3.1 percent in 2013, compared to the consumer price index, which rose just 1.5 percent.
However, the cost of many materials has been constrained by the slowness in the overall economy in general, as well as in specific real estate classes including office, retail, and school construction.
“The real estate industry as a whole is not that busy,” says Marc Padgett, principal at Jacksonville, Fl.-based Summit Contractors Group.
Moderate growth in the world economy is also keeping prices for some materials from zooming higher. In the last building boom, the costs of concrete and metals were driven sky high by worldwide demand, led by emerging markets like China and India.
But prices for many metal products fell in 2013, although concrete products rose 2.4 percent. Cement rose more steeply, by 5 percent.
The cost of materials used by single-family home builders have been rising quickly as the number of new homes under construction continues to grow. The cost of lumber and plywood rose sharply by 9.7 percent in 2013, while gypsum rose 16.1 percent, according AGC.
Labor shortages have also plagued multifamily construction, leading to delays that increase the cost of a project.
“Now it’s late delivery all the time,” says Greg Willet, vice president of research at MPF Research. “You have to be careful that you don’t lose your construction crews to the project down the road.”
Developers should make sure they have a contingency budget that can cover the cost of delays, including lost rental income.
PHOTO: Courtesy Summit Contractors Group
Framing and drywall laborers have been especially hard to find. Some experts speculate that tougher restrictions on immigration may have shrunk the pool of laborers for these trades. Some of the workers may have been drawn to other opportunities during the long lull in construction work.
“Everybody that was working in the wood frame world had to find something else to do,” says Summit’s Padgett.
Labor shortages are especially steep in places like Texas and the Denver area, where the energy sector has provided many workers with new employment opportunities.
General contractors are asking for more money from developers as their business picks up, and as the cost of materials increase.
“We have more work coming through the door than I have ever seen in my life–as far as the boom goes, we are in it,” says Padgett. Summit no longer even bothers to engage in competitive bidding for work. “We can’t go into bid, chasing a bid with five other general contractors, because we have so much work coming in that is negotiated.”