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You are here: Home / Uncategorized / Rising Construction Costs: Creative Solutions Needed

Rising Construction Costs: Creative Solutions Needed

October 1, 2006 By Nevada Business Magazine Leave a Comment

Nevada’s economy and steady job growth are attracting record numbers of new residents, causing a rapid urbanization in the state’s major cities. Developers and investors are now fast-tracking projects in order to meet the demand for services ranging from offices and homes, to shops and restaurants. The state’s unprecedented development activity has taxed its contractors and suppliers who are struggling with industry-wide issues of a shrinking labor pool and rising material prices.

In Las Vegas, high-rise condominium projects are being canceled due to higher-than-expected building costs. Southern Nevada added 81,043 new residents in 2005, or 6,753 people per month. Demand for land has skyrocketed, with prices averaging $708,000 per acre in the third quarter, a 99 percent increase over 2004. While a record 38,517 new homes were sold in the Las Vegas Valley last year, permitting activity was down 5.7 percent, reports Home Builders Research Inc. Fewer permits are being pulled, but the same number of units are still being planned, reflecting the increased use of denser, multi-unit projects by home builders. Escalating land values and higher building costs are now fueling a vertical building boom in Southern Nevada.

“There are 60,000 condominium and 19,000 condo-hotel units currently proposed, planned or under construction in the Las Vegas Valley,” said John Restrepo, principal of Restrepo Consulting Group, a Las Vegas real estate research firm. “But we anticipate that less than 25 percent of those units will actually be built in the next five years.”

Related Las Vegas LLC, a joint-venture between The Related Cos., New York City and The Related Group of Florida, called off its “Icon Las Vegas” project in January 2006 due to escalating construction costs. The $325 million, 514-unit development at Convention Center Drive, one block east of the Strip, consisted of two 48-story glass-and-concrete towers with residences priced from $526 per square foot to $1,360 per square foot. Designed by Arquitectonica, Miami, the 4.5-acre project was nearly sold out when Related pulled the plug. Related blamed a six-month delay from a lawsuit filed by an adjacent rival project that complained of obstructed views and emergency vehicle easements. The case was later settled.

“During the time it took to resolve the lawsuit, construction prices had increased so drastically that we were unable to build Icon based on its original pricing,” said Marty Burger, president of Related Las Vegas.

Diversified Real Estate Concepts canceled its $600 million, 825-unit Aqua Blue condo-hotel off-Strip project in July 2005 due to building costs. “Only 13 of the valley’s 107 planned projects have broken ground thus far, and just 10 have gone vertical,” Restrepo said. “Experience, financing, location and branding are the key ingredients for a project’s successful transformation from a Web site into a vertical reality.”

There was $8.6 billion worth of construction in Southern Nevada in 2005, a figure that is expected to top $8.9 billion by 2009, said Cliff Brewis, a McGraw-Hill Construction economist. The resort sector alone has $7.1 billion worth of new hotel-casino projects, totaling 11,939 rooms, planned for 2006-2007, reports the Las Vegas Convention and Visitors Authority.

Construction is one of the state’s fastest growing employers. The industry was responsible for 140,700 jobs last year, a 12.1 percent increase over 2004, reports the Nevada Department of Employment, Training and Rehabilitation. It trails only the hospitality sector in terms of new job growth.

Contractors are quoting prices on a week-to-week basis due to rapid material, equipment, and labor cost increases, which have climbed 10 to 30 percent over the past year.

Slow-selling condominium projects must factor enough money into the budget for inflation.

“We’re currently quoting up to $400 per square foot for condos based on the design and pricing from local subs,” said Richard Rizzo, chairman of Perini Building Co. “The general rule-of-thumb is that sale prices will have to be double the construction cost or more in order for the project to be profitable.”

Perini is currently building the $5 billion, 66-acre Project CityCenter in Las Vegas, which calls for 18 million square feet of hotels, shops, casinos and residences. The four-year undertaking will require 7,000 workers, or about one-third of Southern Nevada’s total skilled-trades workforce. The company has been importing workers from out-of-state to ramp up manpower for the project, paying 10 to 15 percent over scale wages as well as moving expenses. It’s also working with subcontractors to ensure their availability, as well as placing advance material purchase orders.

“To better control material costs, we’re recommending to our clients that they purchase certain items in advance to lock down prices,” Rizzo said. “We can buy some items up to one year ahead of time.”

Panattoni Development Co. is seeing price hikes in concrete, steel and asphalt in both the Reno and Las Vegas markets. Oil, PVC pipe and other resin products experienced sharp across-the-board increases after Hurricanes Katrina and Rita disrupted natural gas production in the Gulf of Mexico.

“We’re receiving notices from our subs on a monthly basis on pricing increases,” said Jason Kuckler, Panattoni’s development manager. “We believe prices will stabilize in 2006 for concrete and steel, but asphalt and labor are still going to go up.”

Panattoni is building a new $40 million, 330,000-square-foot office-industrial complex called Park West in southwest Las Vegas. The project calls for 19 mixed-use buildings at the northwest corner of Rainbow Boulevard and Sunset Road. It’s expected to open by fourth quarter of 2006.

“Construction costs have outpaced the normal rate of inflation as well as commercial rents,” Kuckler said. “We are now incorporating more mixed-use components into our development plans in order to achieve the rents needed to recoup our construction expense.”

Byars Construction Co. is seeing volatility in the petroleum market, impacting fuel prices for running construction machinery and oil needed for asphalt paving. The firm is currently doing $4 million worth of site improvements for the first phase of The Reserve at Monte Rosa, a 40-acre, 32-home residential subdivision along the Mt. Rose Highway outside of Reno.

“Our purchasing agent has relationships with our vendors, and they have been very good about giving us indications of future price increases,” said Dan Johnson, a Byars project manager. “We make developers aware of increases in order to buy at the most opportune time.”

China’s rapid industrialization has strained U.S. steel supplies over the past two years, driving prices skyward. A recent slowdown in that country’s economy, coupled with its increased production capacity, could soon reverse that trend.

“We’ve seen the bulk of our cost increases in the steel market, but it seems to have leveled off recently,” said Stephen Roel, chairman of Roel Construction Co., whose company is building the 350,000-square-foot Qualcomm office/distribution facility in North Las Vegas. “Concrete and lumber, however, are still in flux, and going up all the time due to supply and demand; whereas, costs for labor are fairly static since everyone is working.”

The demand for concrete is expected to continue to outpace supply, predicts Edward Sullivan, chief economist for the Portland Cement Association, a Skokie, Ill.-based industry group. Cement consumption is anticipated to reach more than 130 million metric tons this year, which is 3.7 percent more than in 2005. PCA expects to see a 2.5 percent year-to-year increase through at least 2009. Nonresidential construction and public construction are expected to rise 7 percent and 4 percent, respectively, in 2006, with industrial and office buildings, hospitals and water supply systems among the most active markets. “Public works such as highway construction and government buildings will also increase in 2006, contributing greatly to the increase of cement consumption,” Sullivan said.

The increases are needed to offset an expected 2.2 percent decline in residential construction due to rising mortgage rates and a decline in single-family starts. Single-family housing accounted for nearly 31 million metric tons of cement consumption last year, or 26 percent of cement’s total consumption.

Cement prices rose 11.7 percent during the last 12 months, says Ken Simonson, chief economist for the Associated General Contractors of America, a national trade group with chapters in Reno and Las Vegas. Tight supplies will likely continue as vendors try to fill the growing number of orders for cement and related concrete materials.

“For 2006, I expect to see healthy demand for nonresidential construction, but also double-digit price increases for many construction inputs,” Simonson said.

Filed Under: Uncategorized

Paul Krakovitz: Intermountain Healthcare

Edward Vance: EV&A Architects

Scott Arkills: Silver State Schools Credit Union

Tonya Ruby: Cox Media Las Vegas

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