Inflation, speculation fuel steady rise in building materials costs

Tag : Construction Building Materials

If you think the dramatic decline in homebuilding here and acrossthe country has eased long-running building materials inflation inSilicon Valley, think again. And get used to regular price hikesahead.
While lumber prices have stabilized and heavier competition has puta lid on labor costs, prices that suppliers charge for all mannerof popular commercial building materials are once again moving uprapidly. Double-digit cost increases are hitting not just basiccommercial building components such as structural and galvanizedsteel, but also interior build-out materials such as drywall,ceiling components, utilities conduits and insulation.
According to the latest price lists from major Silicon Valleycommercial building products distributors, such as CALPLY andAllied Building Products/Acoustical Material Services, contractorscan expect some significant additional hikes in coming months, saysScott Greubel, project executive with DPR Construction in San Jose.
Forecasting firm Global Insight reports that the average U.S. pricefor steel rebar, widely used to reinforce concrete buildingcomponents, has risen from about $575 per ton at the end of 2007 tomore than $850 a ton by June. It could approach $1,000 a ton laterthis year.
Chalk it up to the big run-ups in petroleum prices, bristlingdemand in some foreign lands and an ongoing commercial interiorbuilding boom in Silicon Valley as companies continue expanding andrelocating to new facilities. And according to Greubel and JohnMarmesh, a principal with Tico Construction in San Jose, speculative investment in materials and commoditiesmarkets probably share some of the blame.
Building materials made of steel have seen particular inflationsince last fall, with heavy-use products such as the galvanizedsteel used in ventilation ducts up 30 percent to 40 percent ormore. Copper prices have been erratically "spiking" inboth directions, which leads Greubel to believe that speculation ispartly to blame.
While construction costs have eased in many markets across thecountry now that homebuilders are idled, that's just not the casein other markets in the valley that are still seeing plentifulcommercial construction, reports Karl Almstead, the Turner Construction Co. vice president who compiles the national Turner Building CostIndex.
He cites uncertainty over materials' availability and costs as wellas a general shortage of skilled labor for price increases.Almstead is expecting nonresidential construction costs to continueincreasing through the end of the year and probably into 2009.
Indeed, as Greubel and colleagues are all too aware, prices ofpretty much any building product made with metal or petroleum-basedmaterials seem certain to continue inflating. DPR already has beenfactoring monthly general materials cost hikes of 1 percent to 2percent -- well into double-digits on an annualized basis -- intoits budget projections.
Contractors have little choice but to pass these costs along toclients, whether landlords or the businesses slated to occupyimproved spaces. In either case, the inflation cuts into profits.
With more contractors competing for jobs, and factoring in highermaterials costs, contractor margins are indeed shrinking a bit,Greubel acknowledged.
"It's just a more competitive market today," hecontinued, adding that any margin erosion compared with 2007depends on multiple factors defining any particular job.
Depending on how much costs of key materials rise, some plannedbuilding and development projects might no longer be economicallyfeasible.
"It's bound to affect your bottom line if you're developing amultimillion-dollar project and some of your materials costs rise25 percent" over several months, Marmesh says. However,neither he nor Greubel has yet encountered a situation in whichdevelopers or users have opted to cancel a project because of thehigher construction costs.
Project viability today depends more on a developer's ability tosecure financing than purely costs-related factors, Greubel said.Hence, if commercial developers haven't signed precommitted tenantsto leases at acceptable rental rates, construction lenders areunlikely to risk financing a project, he said.