ULI San Francisco hosted a sold out event at the SPUR Urban Center on the morning of November 21st to discuss rising Bay Area construction costs. The message from the panel of industry veterans was knowledgeable and consistent – a result of their commonplace in the GC world and their collaboration weeks in advance. With TMG’s David Cropper at the helm, refusing to lob soft balls, the 90-minute conversation was packed with hard facts and valuable insight. Here’s the breakdown:
How much have costs risen?
On the low end, construction costs for structural steel office buildings in the Greater Bay Area rose 8% in the last 24 months. For concrete construction, the increase was 10% to 13% – greater Bay Area “open shop” vs. San Francisco union. In the same period, cost escalation for residential buildings was nearly double, between 18% and 21% for all construction types.
What caused the rise?
Savvy subcontractors recognized the shortage of competition in the marketplace and began bidding higher, or elected not to bid at all. “Subs are picking and choosing what jobs they want to participate in,” said John Moyer. Union labor rates are fixed and the cost of materials has stayed flat or gone down in most cases. “There are a limited number of subs that can handle a 40-story high rise in downtown San Francisco,” Jeff Hoopes added. The GCs have admittedly attempted to escalate margins as well, but developers are quick to find that line item and demand compression.
What does the crystal ball say?
Expect costs to rise 3% to 5% (open shop vs. union) for structural concrete office buildings in the next 12 months. By comparison, the range for steel construction is 6% to 8%. In the same period, residential costs are predicted to increase by 4% for open shop markets outside of San Francisco. In San Francisco, estimates vary by construction type – 4%, 6% and 8% for Types I, III and V, respectively.
- Tenant demands for more dense workspaces have contributed to rising TI costs – 8% in the past 24 months, and estimated to rise another 6% in the next 12 months.
- Sophisticated developers see the value in involving the General Contractor very early in the design process – “GCs are always chasing the design and they never catch up.”
- The most successful projects today are design build – you must commit to your design-build contractors early, and engineering fees or compensation for design should be contracted separately so commitment is limited.
David Cropper, Managing Director of TMG Partners (Moderator)
Jeff Hoopes, CEO of Swinerton Incorporated
John Moyer, President of Johnstone Moyer, Inc.
Bob Nibbi, President of Nibbi General Contractors
Jes Pedersen, CEO of Webcor Builders
Authored by: Kevin Bixler, Trumark Urban, San Francisco