With housing starts dropping, you’d think workers would leap at the chance to turn an old leather tanning mill in the suburbs of Boston into luxury apartments.

But that’s not what David Levey found when he went looking for sub-contractors this May. Levey is an executive vice president for Forest City Residential, headquartered in Cleveland. For the last year and a half, he has been preparing a deal to create 310 rental apartments in the old Stoller Mill in Haverhill, Mass. The site has been permitted and the construction drawings have been made.

Forest City asked about 150 sub-contractors for bids to work on the mill. “We thought that we would get 100,” Levey said. But the project only received 39 bids, at prices roughly 10 percent higher than the developers expected.

Although single-family home building has fallen off sharply nationwide, contractors who specialize in tall buildings seem to have more than enough work to keep busy, according to Levey.

“There are a finite number of people that can work on a high-rise structure,” he said.

Levey has been disappointed by rising prices this year, after many experts predicted that prices would come back down to earth after the stratospheric rises of the last few years.

“It’s not happening,” he said. In fact, the most important materials and workers are still in very short supply for Levey’s mid-rise and high-rise developments.

Levey found similar shortages of labor and materials nearly 2,000 miles away in Dallas. Construction started in December 2005 on a project to create 229 apartments in the old Mercantile National Bank complex downtown and build a new 20-story tower with 198 apartments next door.

The original cost of the project was estimated at $108 million back in 2005, according to statements by Forest City. The cost has now grown to $149 million. In the last 12 months alone, the price has jumped by 10 percent, or nearly $15 million.

The first apartments should come on line in February 2008. “I used to have a full head of hair when this job first started,” Levey quipped.

Related fights back

Strong relationships with local contractors and a few smart strategies helped Related Group stay on budget with its 500-unit Loft Two condominium project in downtown Miami.

The $75 million development should be finished in September. Related only set aside 2.5 percent of the project’s budget for contingencies, a risky thing to do in what Oscar Rodriguez calls “the most challenging five years that I can remember for construction costs.”

Rodriguez is the head of Related’s for-profit Attainable Housing Division, which creates moderately priced for-sale housing. He specializes in South Florida and has worked for years with a set of contractors there. Those relationships helped Related find workers and materials, even when the competition for these resources was at its fiercest during the condominium boom.

Related is about to start construction on another 500 condominiums at Loft Three at a total development cost of $90 million, or $180,000 per unit.

Rodriguez is using every trick he knows to keep costs low. For example, all the parking at Loft Three will be provided through a lease agreement with a public garage next door. The condominium association will pay for the spaces through a long-term contract with the city.

That takes parking out of Related’s budget entirely—a big deal since building a parking garage can cost more than $20,000 per space, or $10 million for 500 spaces.

The company’s investment is already paying off. Even in Miami’s depressed condominium market, all 500 units at Loft Three sold in just two weeks for prices ranging from $159,000 to $400,000 per condo, with an average price of $350 per square foot for the 400,000 square foot project. That works out to $140 million in sales: Pretty good for a project expected to cost just $90 million.

Costs rise even in Ohio

The cost of construction is rising even for companies that develop wood-frame apartments in decidedly secondary markets.

Gross Builders, based in North Royalton, Ohio, will finish more than 1,000 garden apartments this year at five communities: two in the suburbs of Nashville, Tenn.; two in the suburbs of Akron, Ohio; and one in Huntsville, Ala.

These apartments will be made almost entirely out of materials like wood and gypsum wallboard that are dropping in price. Also, the competition for construction workers is not as tight in these markets as on the coasts.

But construction costs overall are rising even for builders like Gross, whose three-story buildings still need copper pipes for their plumbing, along with steel for their heating and air-conditioning systems. The falling cost of wood and wallboard have only partly offset the rising prices of these metals. Builders like Gross can use less of the most expensive materials, for example by substituting somewhat cheaper steel rain gutters for expensive copper gutters, but there is only so much a developer can do.

As a result, Gross Builders’ development managers may no longer be moaning about projects going over budget, but rising costs are still a headache that cut into profits, according to Dick Devaney, Gross’ general manager.