Wednesday, February 25, 2015

Climbing construction costs continue to create problems for development

An increase in building material costs and a shortage of skilled laborers—two problems construction companies in the Greater Houston area faced in 2014—are expected to continue in 2015.

The rising cost of materials has raised construction costs. At the same time, a shortage of skilled laborers has led to an increase in wages, which also drives up costs and contributes to the problem, according to area builders and developers.

Rising construction costs have had notable effects on the development of the Greater Houston area's major projects, including some in Pearland and Friendswood.

Officials with Alvin ISD said construction costs are monitored and taken into account when new schools and buildings are being considered.

Local effects
AISD is set to open its third comprehensive high school in August 2016. The construction cost for the 72-acre, three-story building is projected to be $90.2 million, which is significantly higher than a similar school as recent as even a couple of years ago, according to Daniel Combs, the district's director of communications.

Through comprehensive planning and a strong relationship with builders, AISD has anticipated the increased costs and avoided their negative effects, said Combs.

"All of our construction projects going on right now are for a two-year window," he said. 

"[Planners] were able to foresee the inflated cost that was coming. They were able to catch that to some extent."

But he said costs are getting harder to forecast.

"It's getting more and more difficult to [anticipate inflation] because who knows what the market will do and what a strengthening economy will do to the construction market," Combs said.

While the labor shortage has caused longer-than-anticipated construction periods for other school districts, Combs said that has not been a problem for AISD.

"We have, I would assert, the best facility staff in the state," he said. "They are so planned out, intentional and purposeful that they have the [contracting] crews lined up well before the [construction] start date. So they don't find themselves in the scenario where the market is compromising us."

In Friendswood, the increased costs have affected at least one transportation project. The widening of Friendswood Link Road had to be altered after the project came in over budget.
"The whole roadway was supposed to be a four-lane facility with a median down the middle, but due to the escalation in construction costs it came in 20 percent over budget," Friendswood Assistant City Manager Morad Kabiri said.

He said part of the project had to be modified to only three lanes.

"We didn't have the local funds to match the capital project, so we immediately had to redesign and rescope a good chunk of that project in order to bring it within a more manageable price tag," he said. "This has been the case for the last 18 months to two years."

Homebuilders also have been affected by material cost increases and the labor shortage.

"A major concern for builders at this point is the rising cost of labor due to the shortage of labor," said Kevin Frankel, president of the Greater Houston Builders Association, or GHBA. "This has been a focus for years. It's something we have sat down and had discussions about to try to come up with ways to alleviate it."

The increasing cost of construction for office projects can be linked in part to the growing depth of the tenant pool creating more demand. A number of projects went online in 2014 to alleviate that demand, but the glut of projects only intensifies the labor shortage, according to officials with Kirksey Architecture, a Houston-based company that publishes an annual report analyzing construction costs.

"High demand, labor shortages, concrete shortages, long lead times for critical components and subcontractor fees and availability are among the drivers of the cost surges," the Kirksey report stated. "With so many projects under construction, contractors and subcontractors have become much more selective about the opportunities they are pursuing."

Cost of materials
While it can be difficult to identify the cost of individual materials on a local level, prices have been on an upward trend in the Greater Houston area for at least three years, according to one company.

Turner Construction Company, which has offices around Houston, developed its own cost index to track nonresidential building construction. The company's methodology—which factors in labor rates and productivity, material prices and the competitive condition of the marketplace—shows steady increases every quarter since 2011. Costs have risen about 11.7 percent overall in the past four years.

"Growth in nonresidential construction was steady in the fourth quarter in virtually all domestic markets," Turner Vice President Attilio Rivetti said. "Higher construction cost escalations in urban centers with increased construction activity, as well as selective mega projects, are driving the average domestic construction cost increases."

Officials who oversaw recent bond elections said rising costs and inflation mean the sooner projects can get underway, the better.

For the builders themselves, the rising cost of materials is worked into the overall price of a home once it hits the market, which often acts as a disincentive to buyers, Frankel said.
Fewer skilled hands

One consistent factor contributing to the rise in construction costs is the shortage of skilled workers. Skilled labor differs from unskilled labor in that it requires specialized training or a learned skill set.

A 2014 survey conducted by the National Association of Home Builders found that about 46 percent of Houston building companies are struggling with the skilled labor shortage. The labor shortage is also expected to intensify as millions of baby boomers prepare for retirement.

Despite Houston adding more construction jobs than any U.S. market in the latest report from the American General Contractors of America, the labor shortage continues into 2015. The declining unemployment rate has actually made it more difficult to find qualified workers, officials said.
The shortage has been so widespread in the Houston market that area schools and colleges have developed programs to try to address it. Alvin Community College has recently seen an increased number of students join its technical skills programs as construction companies continue to seek more laborers. Employers even help prepare students for their specialized certification tests near the end of the courses.

"Our [area] employers are telling us to please keep the pipeline going," said Gayland Capps, ACC workforce training specialist. "They intend to have job [openings] for the next couple of years, very definitely."