As the single-family housing market began to tank last
year, many developers were expecting the cost of building
apartments to drop this year. But prices for labor and
materials keep rising faster than inflation and should
continue to rise for the foreseeable future, experts
“We haven’t seen any let up,”
said David Levey, executive vice president for Forest City
Residential, headquartered in Cleveland. Although the news
is especially bad for developers of mid-rise and high-rise
buildings like Forest City, costs are up for all types of
It might seem illogical at first: Demand for materials
and labor has dropped sharply, but prices keep rising.
As the housing bubble burst, housing starts crashed to
reach a seasonally adjusted annual rate of 1.5 million in
April, down from 2 million in 2005. That should leave
enough construction materials sitting in warehouses to
build half a million homes and apartments, an oversupply
that would seem likely to damp prices.
Instead, the price of new multifamily construction rose
3.5 percent over the 12 months that ended in April. The
cost increase isn’t as bad as last year’s
7.9 percent jump, but it’s still above inflation
as measured by the overall consumer price index, and
it’s a huge disappointment to developers who hoped
prices would drop.
The problem is that even as demand from the housing
industry for materials and labor has dropped, commercial
developers and builders overseas have picked up the
An appetite for metal
The rapid transformation of China into an industrial
superpower has fed an insatiable appetite in the
world’s most populous country for tremendous
amounts of concrete, steel, and other metals.
Meantime, U.S. developers started $97 billion worth of
non-residential projects over the 12 months ending in April
2007, a 22 percent increase from the prior year, according
to Reed Construction Data, an Atlanta-based research
Hotel and office construction has been especially
strong, using many of the same workers and equipment needed
to build apartment or condominium towers.
High energy prices are also pushing up the cost to
produce and ship construction materials. The price of crude
oil has risen back toward $70 a barrel after falling to
around $50 in January.
Still, developers of garden apartments, which need less
of the copper, steel, and cement that have risen most in
price, are benefiting from declining prices for a few
materials, such as framing lumber and gypsum wallboard.
Single-family homes, which use similar materials and
labor, endured just a 2.7 percent rise in construction
costs in the 12 months that ended in April.
“Copper is still an issue, and steel is still
an issue,” said Dick Devany, general manager for
Gross Builders, a garden apartment developer based in North
Royalton, Ohio. “But some of it has been
compensated by the price of wood.”
One result: Some developers have changed their plans to
rely more on wood and less on steel and concrete, even for
high-density projects For developers who know
they’ll need materials with fast-rising prices, it
could pay to buy the items in advance and hold them in a
warehouse, said Kenneth D. Simonson, chief economist for
the Associated General Contractors of America.
“Anyone that wants certainty should be willing to
buy at the time plans are set,” he said.
Other developers are moving to the opposite extreme and
asking their contractors to sign contracts in which the
price of their services moves upward or downward with the
cost of materials.
Although that leaves the developer with the price risk,
it can be much less expensive than having contractors set a
fixed price. Smart contractors will work the worst-case
scenario into their bid, especially if they are a small
shop that could be put out of business by a price
Workers still scarce
You’d think that if contractors were building
fewer apartments and condominiums, then more apartment
contractors would be looking for work—but
that’s not necessarily so.
“I’ve been hearing that many
subcontractors that formerly concentrated on residential
work are now doing commercial construction,”
Employment on non-residential construction jobs, like
hotel and road building, grew 2.4 percent over the last 12
months. That nearly offset the 3.9 percent drop in
residential building and specialty trades employment.
As a result, it is still difficult to find contractors,
especially if those contractors have skills that can be
used in commercial work. “The trades are very busy
right now,” Levey said.