Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
Issue link: https://sct.epubxp.com/i/390025
materials. "The primary materials for retail development are steel, asphalt and concrete, and while there have been continual upticks in pricing, I've not seen any big jumps recently," said Townsend Underhill, senior vice presi- dent of development at Covington, La.–based Stirling Properties. The firm owns and manages some 20 million square feet of commercial real estate, in- cluding 15 million square feet of retail, across Louisiana, Mississippi and Ala- bama, and into the Florida Panhandle. Construction cost increases in the Gulf Coast are attributable mostly to labor, Underhill says, though he also says that he is unsure whether that problem is en- demic to the U.S. as a whole. "The big issue is a rare phenomenon of general contractors outnumbering the subcon- tractors by two to one or three to one in the Gulf South," he said. "This is an in- verse relationship, and it is not healthy for the construction economy." It seems that certain subcontractors in the region have been tying them- selves to two or three general contrac- tors and declining to bid on any other jobs. "In most jobs the subs are not bid- ding against the 'preferred' subs for a particular general contractor so you are getting one, maybe two price quotes on each subcontractor job," said Underhill. "There is such a glut of work and such a limited amount of skilled folks in the sub trades, we are ending up with very few bids. These guys don't have to com- pete with each other for projects." Tim Grogan, editor of the Engineer- ing News-Record, which tracks construc- tion expenses for the building trades, finds all this talk of fast-rising construc- tion costs perplexing. The publication reports that unionized labor costs are rising by a moderate 2 percent to 4 per- cent annually. Materials costs did jump, but that was a few years ago, and those have since settled back to absorbable levels. "We might have hit double dig- its five years ago," Grogan said. "Today everything is ranging around a 4 per- cent increase." Grogan says he does not measure specific project types, such as shopping centers, that could make the cost very different. "Overall we have been seeing modest inflation rates for construction," he said. Historically, cement expenses rise roughly 4 percent annually, but in June cement was up by 5.6 percent year on year, according to the producer price in- dex. Steel pricing had its own big move- ment a few years ago but has begun to cool. Structural steel did rise by 4.6 per- cent this year, but it was down by 2.9 percent last year and by 9.3 percent the year before that. And this is after having swelled by some 14 percent in 2011. Pro- jections are that steel will rise by about 3 percent next year. Lumber spiked big when housing began to make a come- back, but then housing stalled. Lumber prices jumped by 15 percent last year and by 13 percent the year before. This year the projections see lumber heading upward at a roughly 6 percent pace. Another company that tabulates construction costs is New York City– based Turner Construction Co., and its second-quarter 2014 building cost index — which tracks the U.S. nonresidential building construction market — was up by 1.24 percent from first-quarter 2014 and by 4.31 percent from the second quarter of 2013. These increases oc- curred because labor costs in markets seeing boosts in construction add to the upward pressure, Turner says. The firm also reports that while raw materials re- main flat, the cost of manufactured and engineered construction components continues to rise slightly. Geography makes a difference. Cincinnati-based Phillips Edison & Co., which does not work the top urban cen- ters, is seeing only moderate increases in construction costs. Phillips Edison owns assets outside the top 25 metros. "There is less activity in these markets, and construction costs are not going up exceptionally," said CFO Devin Mur- phy. "From our perspective, it is not a concern. We have not seen a spike in construction costs, but we have seen increases. That's due to supply and de- mand. Post-financial-crisis, when you were putting out bids for construction projects, there were very few, so you were getting 10 to 12 general contrac- tors bidding. Now you're getting three to four bids. Clearly, the general contrac- tors are marking up costs slightly." Lead times on shopping center proj- ects do vary, but rising costs have thus far been no problem, though the poten- tial for difficulties is there. "Issues occur if costs significantly change in the six to 12 months between tenant rent agree- ments and the start of construction," said Underhill. "Historically, that hasn't been a risk for us. We haven't seen con- struction pricing moving enough in the life cycle of a project. The fear right now is that [it] will happen." Stirling is putting together a very large, multiphase retail project in Lake Charles, La. "It will be 18 to 24 months before we break ground," Underhill said. "In my initial pro forma, I put in a 10 percent annual bump in construction pricing from today's dollars. That tells you how much we anticipate pricing to move. A 10 percent increase in construction dollars — that's historic highs." S C T 56 S C T / O c t O b e r 2 0 1 4