Three reasons why construction costs are going up in San Francisco

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March 20, 2017

By: David Churton, International Director, JLL

There are three reasons why it’s not going to get any less expensive to build a major office building – or other real estate – in San Francisco. Not, at least, anytime soon.

Cost of land. Cost of materials. Cost of labor.

First, land–we know they aren’t making any more of it. San Francisco also has some unique geographical hurdles when it comes to building. Until the engineers can figure out a viable way to float office buildings in the Bay, land prices are only going to go up or, at minimum, remain high.

‘Calm before the storm’

Materials. Prices never go down, right? Well, they can, but usually not far and usually not for long. Average prices for construction materials rose half a percent last year, according to analysis by the Associated Builders and Contractors. Our own Q4 2016 research shows that San Francisco trails only New York in terms of costs to build. And, while prices dipped slightly toward the end of last year, the ABC sees this as just “the calm before the storm”. Bottom line, materials prices are set to rise again. No one knows how much exactly – that will depend on demand – but if the new Administration’s promise to push $1 trillion into infrastructure holds true, we might expect that competition for steel, cement and other materials will come under pressure and push prices even higher.

Still recovering from recession

Labor. The construction trades continue to suffer from a chronic labor shortage. Between 2006 and 2011, nearly 40 percent of the country’s construction workforce – 2.3 million skilled workers –walked away from job sites. Those skilled workers, for the most part, haven’t returned. No one knows for sure where they went – older workers may have retired, younger ones may have started businesses or moved into jobs outside the sector. The net result is that the cost of labor is going up. While there is clearly a terrific opportunity for younger workers to enter the industry, it takes time to train them, so overall costs aren’t coming down anytime soon.

What’s the bottom line in all this for users of commercial office buildings in San Francisco? Well, occupancy costs are rising, both because of demand and supply-side pressures. Projects under development that will move to vertical construction this year or next will certainly cost more to bring out of the ground than projects already underway. Companies planning near and mid term expansion would do well to consider this before assessing suitable sites. Tenant improvements to existing space will cost more and may take longer to complete, making timely and pragmatic negotiations with landlords essential.

About the author:

David Churton leads JLL’s Headquarters Practice Group in San Francisco. Skilled in the design and execution of office leases enabling his client’s business, growth and productivity objectives, David and his team have completed the majority of the most significant office leases in San Francisco over the past five years.

Contact David directly by phone at +1 (415) 395-4921 or via email at david.churton@am.jll.com.

 

 

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