Posted by: BayAreaComRE | March 31, 2010

Costruction Costs: An Inside Scoop on the Industry from Bovis Lend Lease

Construction has been hit hard during the recession, in some markets losing more jobs than any other industry. Ostensibly, construction costs should plummet for everyone: less companies are renting machinery, raw materials are cheaper (or are they?), and there are far fewer construction projects. The story is much more complicated, and Bovis Lend Lease helps us sift through the falsehoods and assumptions. 

Developers, banks, owners, investors and tenants are all affected by construction costs. Replacement costs (what it would take to construct a building from the dirt) are pivotal in determining and justifying rents. To dispel the myths of construction costs and trends during a recession, we talked with Bruce Berardi from Bovis Lend Lease, one of the world’s leading project management and construction companies operating in more than 30 countries worldwide, and have offices here in San Francisco. 

In San Francisco, construction has been at an utter standstill, which weathered the storm by not adding more vacancy to the market, but created a highly competitive, and even desperate situation for builders. Construction companies have been known to bid jobs at a breakeven or loss in profit, just to get business flowing. The balance of funding has completely changed as well. Private money is funding roughly 5% of the projects while government spending, including the new TransBay Terminal, is behind 95% of the current projects. According to Bruce, those figures were reversed a couple years ago. 

Here are some of the highlights from our conversation: 

The largest factors influencing construction pricing are subcontractors, and their margins can fluctuate 15%. There is still volatility in the marketplace, which further fluctuates prices. 

Productivity is inversely related to the market. During a recession, productivity improves because the best workers are employed. This means greater efficiency and faster construction. 

Notwithstanding the uncertainty, negative pressure and volatility in equipment, subcontractors and raw materials, when the demand plummets, construction companies need to lower costs to compete. According to Global Insight Data, demand for office construction will be down 54% from 2008 nationally. 

555 Mission, one of the most notable new buildings in San Francisco, started construction in 2007 at approximately $133 MM or $212/sf. The estimated value of this construction has declined 15-20%, along with most new construction. 

The graph below depicts the changes in supply costs year over year starting in 2007: 

 

We will continue our coverage on construction costs. Next post will enlist the expertise of BCCI Construction Company on tenant improvement costs and “green” building. 

Thanks to Bruce Berardi from Bovis Lend Lease.

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Responses

  1. Great work. The post really provides detailed information about the effects of construction costs. The cost trend of San Francisco has shown a downward trend since 2007 but it will soon show an upward trend as the market in San Francisco is improving. There will be some attractiveness for the constructors, developers, bankers and investors in its real estate market.

    • Thanks for the comment. The real cost trend is contrary to most rumors, so we went straight to the source. We hope the trend is upward, but feel it may be flat for some time. Keep tracking our coverage, as we think this is an important issue.


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