Sometimes numbers don’t add up. The
San Diego housing market has been
slumping, with housing starts down, residential builders closing their doors and
scores of mortgage industry workers enduring layoffs. The application of basic
economic principles to this scenario might
suggest that commercial construction
costs would be declining in the near future.
“The reality is that, while the residential
market is down, there’s so much commercial and municipal construction going on in
San Diego County that the cost for build-outs has continued to rise,” says Kirt
Gilliland, senior vice president of project
management and principal, Irving Hughes.
Smart Business recently spoke with
Gilliland about San Diego’s rising construction costs and how they impact commercial leasing, our cost of living and Southern
California’s future growth.
How do increased construction costs affect
commercial leases?
The reality is that the cost of construction
materials is driven by the international demand for basic construction materials like
fuel, concrete and steel. Locally, the cost of
living drives the cost of wages that contractors and subcontractors have to pay,
whereby San Diego is still one of the most
expensive markets in the country. As we’re
negotiating new leases, construction costs
continue to rise. Since some amount of
build-out costs typically are amortized in a
lease, the instinct is to want to ask for less
tenant improvement money to lower lease
rates, but it’s not that simple.
Why isn’t the housing slowdown cooling
commercial construction costs?
There’s so much commercial and municipal construction going on that many of the
housing subcontractors have simply been
absorbed into these other environments.
San Diego County’s adjoining suburban
markets — Vista, Escondido, San Marcos,
Chula Vista and others — are going
through huge growth, building retail and
commercial projects. Additionally, public
entities, such as city governments and redevelopment agencies throughout the
county, are all undertaking large projects.
In National City, there’s been a proposal for
a new sports facility for the Chargers, and
they’re considering a new billion-dollar convention center, so the pipeline of work doesn’t have contractors concerned.
Add to all of that the work on Interstates
15 and 125, the ongoing hospital modernization projects and huge projects at nearly
every college or university, and it’s easy to
see why the demand for builders has not
diminished. If you’re a pool installer, you
may have seen a slowdown, but if you’re in
concrete, framing, drywall installation or
plumbing, you don’t care whether you’re
doing a residential or a commercial project. There’s enough commercial construction out there now for workers.
What factors are driving the increased costs?
Increased costs include higher fuel costs,
rising consultant fees, public improvement
fees and ‘green’ requirements. Fuel costs
not only impact the manufacturing of
materials, they ripple their way through
everything. Materials, equipment and
workers have to be transported, so when
gas prices increase, contractors are forced
to pass the increase along to the end users.
Consultant fees are also on the rise for
the first time in several years. There is now
such a shortage of quality architects and
engineers that most firms in town are
scrambling to hold on to their good people
or find good people. The higher salaries
used to attract and retain these workers
are then passed through to the corporate tenants and landlords hiring these firms.
Further, since government agencies have
less money for public improvements, when
people apply for building permits, the agencies are saying, ‘Great! No problem. You
can have a building permit, but you have to
pay to upsize the intersection, modernize
the stoplights and add a merge lane onto
the freeway.’ These are huge costs, and
they get passed along to consumers or
whoever is building the project.
What are ‘green’ requirements?
It is a general term for items like energy
efficient equipment, the use of renewable
resources and the process by which waste
is recycled. We’re finding more clients that
want to be somewhat green and do their
part to combat global warming. These requirements add from 1 percent to 10 percent to the cost of a project, but they’re willing to pay the dollars to have these things
done. Some of the green add-ons do have a
payback, like solar energy systems that
generate electricity and reduce utility bills.
How is San Diego’s cost of living impacting
construction costs?
The cost of living in San Diego continues
to rise and this affects wages and, ultimately, the cost of labor to install materials
and equipment. There also is a shortage of
labor here in town because people don’t
come to San Diego for entry-level construction work. They can work someplace
else and make the same kind of money
without the high cost of living. In order to
keep their best employees, contractors are
raising their prices to retain workers.
How will this cycle play out?
I don’t see things changing any time in the
near future. Some people are talking about
the economy crashing, but in the last election, we approved several billion dollars
worth of bonds for public improvements
and construction. Just because there’s a
housing slowdown doesn’t mean people
aren’t being born here and moving here. As
long as our population is increasing, there
is going to be a demand for construction.
KIRT GILLILAND is senior vice president of project management and principal for Irving Hughes. Reach him at (619) 238-1518 or [email protected].