The Real Deal New York

Building costs add up to bigger bucks

By Jaffer Kolb | November 16, 2007 01:03PM

While residential prices flatten out amid speculation that the housing market will head south, the cost of construction keeps heading north in New York, where average costs are about twice what their average rates were in 2001.

Local and national factors – from Hurricane Katrina to busy city contractors flush with work who are able to charge more – have fueled the recent rise.

The increase adds to construction costs that have risen by $20 to $30 a square foot since 2001, coming close to doubling materials costs in four years.

“There used to be a 4 percent annual increase that we would account for,” said Jon McMillan, director of planning at Rockrose Development. “That increase is now much higher even for the bread and butter stuff.”

McMillan said construction costs are now averaging around $240 to $270 a square foot, compared to around $130 per square foot in 2001, with prices temporarily falling after Sept. 11.

The most recent impact on area construction costs is the rebuilding in New Orleans following Hurricane Katrina. The final toll varies from source to source, but all suggest that the storm has pumped up costs in a year initially predicted to see a drop in construction costs.

Isaac Katan, principal of Katan Development in Brooklyn, said plywood was greatly needed in New Orleans, and the price immediately changed in response to the demand. “We need plywood here for single-family homes, and in high-rise construction for roofing, floors, and more,” he said.

A report by Engineering News- Record, which tracks the construction industry, found that the price of plywood, which had fallen dramatically since the second quarter of 2004, has increased since the hurricane.

The report also found that cement and structural steel both also saw a sharp upturn in price around the same time. In early 2003, steel cost on average $300 per ton, but shot up during the first quarter of 2004, leaping to almost $550 per ton by the second quarter. Prices began a slow descent throughout 2005, only to head back up around the time of Katrina.

But it’s the cost of concrete – which rose even as steel prices slowed – that raises eyebrows and prompts new calculations by developers.

“For a long while steel was a big issue in the materials market, but now concrete is the big issue,” said Marolyn Davenport, senior vice president at the Real Estate Board of New York. “These types of price changes are often the result of supply and demand and not external issues.”

Energy costs, including costs involved in processing materials, are also driving construction costs higher.

“One fact that surprised me to learn was that about 35 percent of the cost of sheetrock is determined through the process of fabrication, which shows that it’s not really about the cost of raw materials in every situation,” said Davenport.

Transportation costs, which are directly related to energy costs, also factor into construction prices. Damaged oil fields along the Gulf of Mexico ushered in a period of soaring gasoline prices.

In the long term, increased construction costs can also be attributed largely to the economic development of countries like China and India. Though demand appears to be leveling off slightly, the impact of the world’s two largest countries consuming a greater share of resources has had a global impact.

“China is sucking up raw materials which, in turn, causes their prices to skyrocket,” said McMillan. Katan said that developing countries have also created a newly increased demand for oil, which increases the prices of petroleum-based construction products.

Closer to home, the city’s building boom has given contractors more leverage.

“All of the contractors and subcontractors in the city are currently busy, they don’t need the work, and they can charge more,” said McMillan.

One way construction costs may go down – which may not be of much comfort to developers – is if residential prices decline. That could take a year, though, following any price declines.

“Construction prices,” said McMillan, “tend to lag about a year behind sales prices.”

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