How High Construction Costs Are Impacting CRE In The OC
The OC is leading the way for under-construction projects, but the cost of construction continues to be a main concern, according to developers.
"On average, construction costs inflation is typically from 2% to 4% per year, but we are now starting to see around 7% to 8% in Southern California and even 10% in San Francisco," McCarthy Cook Vice President Michael Coppin said.
Cost inflation is having a huge impact on his company's day-to-day decisions whether on change orders or major budget-cut items, according to Coppin.
Material costs are going up, and there is a shortage of certain trade laborers, he said.
Coppin said National Ready Mix, the concrete supplier for the parking garage expansion project at The Met, told him the construction of the new stadium has accounted for 40% of the daily total capacity of concrete in the greater LA area on any given day in the past two months.
"So regionally we have this huge demand for both labor and materials," Coppin said.
Menlo Equities Senior Vice President Chad Iverson said he thinks the recent hurricanes and the earthquakes in Mexico will also pose a big problem for the industry when it comes to labor and materials. The anticipated rebuilding after those natural disasters will demand a lot of time and materials.
Equity Office Vice President and Portfolio Director Rich McEvoy agreed construction costs are up.
He said the brokerage community has been slow to adapt and understand the cost impact of it.
He said the market will need to adapt.
Pricing will continue to be an issue not just on the construction side but also on the leasing side, according to McEvoy.
"Those costs are real, and they're impacting the cost of doing business here in California," he said.