Reply #25: Rising Steel Prices Force Changes in Construction Plans [View All]

[RawMaterials]

But since planning started on the development, which had a $50 million construction budget two years ago, the prices of steel and other construction materials have soared, and Mr. Friedman undertook an eight-month redesign to bring the construction budget, which had risen to $70 million, down to $64 million. Because of the higher total cost, he was also required to put up an additional $6 million in equity.

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Since June 2003, the price of steel has doubled. The costs of copper, gypsum, plywood, lumber, cement and petroleum used to fabricate, transport and install many materials have also increased steeply, if less drastically.

In construction, steel is pervasive. It is in structural frames, floor decks, ceiling grids, air-handling systems, wiring, plumbing, interior studs and bars that reinforce concrete. Last November, an index reflecting the cost of a theoretical market basket of steel products peaked at 412.6, according to the Producer Price Index compiled by the United States Bureau of Labor Statistics. Prices then turned down and by January, the most recent month for which the index is available, they had eased off to 330.7, but this is still double the level of 165 in mid-2003.

Such nettlesome price increases have been compounded by the difficulty at times in obtaining steel and other materials as the fast-growing economies in Asia, especially China, soak up supplies

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Furthermore, for the college's wider expansion plan, totaling approximately $500 million, "the inflation of construction dollars may delay some projects," he added.

In February, the Trump Organization started site preparations in Chicago for an $850 million, 2.6-million-square-foot mixed-use tower. To keep costs in line, it now has a concrete foundation rather than the steel frame that the architect, Skidmore, Owings & Merrill, had originally planned, said Donald J. Trump Jr., the vice president for development. He cautioned that if steel prices spiked again and interest rates rose, "the real estate market will decline."

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Architects must design years in advance with prices of land, financing, materials and construction in mind. Now, by the time construction starts, "it's difficult to foresee what will happen to costs," said Mark Sarkisian, a partner at Skidmore, Owings & Merrill in San Francisco.

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Indeed, Mr. Timothy added, because of "the largest price increases I've seen in 25 years" for steel, he estimates that overall construction costs in 2004 increased about 12 percent compared with a more common annual inflation rate in construction of about 3 percent. "Private developers can adjust by cutting quality, but cities and states everywhere are finding it real tough," he said.

Recently, the nearby city of Waltham delayed construction of two schools in its $154.2 million eight-school expansion plan as high building costs compounded other problems. "If the United States still had a major steel industry, this wouldn't be such a problem," said John Cervone, chief of staff to Mayor Jeannette McCarthy. "It's gone beyond a ripple to a domino effect."

http://www.nytimes.com/2005/04/13/business/13prop.html?pagewanted=2&oref=login