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San Francisco Tech Surge Boosts Costs in High-End Building Boom

San Francisco Tech Surge Boosts Costs in High-End Building Boom

(Bloomberg)—For real estate developers such as Jeff Peterson, losing construction workers who can hang drywall, install plumbing and pour concrete in the San Francisco Bay area has become routine.

“Guys are literally going to jobs and saying to the concrete crew, ‘Hey, what are you making per hour?’” said Peterson, a purchasing director at Trumark Cos., a San Ramon, California-based developer of residential real estate. “‘We’ll pay you $2, $3, $4 more to come work for us.’ It’s driving up the labor costs quickly.”

With San Francisco in the midst of an office and condominium construction boom to accommodate the technology industry and its workers, real estate companies are vying for crews to finish projects in a tight labor market. That’s contributing to soaring costs that are leading residential developers to focus on high-end properties, exacerbating an affordability crisis in one of the most-expensive U.S. housing markets.

“Everybody’s fighting for the same labor force,” said Sean Keighran, president of the Residential Builders Association of San Francisco. “There’s so much work going on. I would say this is a new high-water mark for work activity in San Francisco in decades, perhaps ever.”

Builders are extending a construction surge begun after the last recession. There’s 10 million square feet (930,000 square meters) of San Francisco office space that’s been built, in progress or about to start construction in this decade through 2018, the most since the 1980s, according to brokerage CBRE Group Inc.

Thirteen condo projects were completed in San Francisco last year, the most since 2008, and an additional 73 have been proposed or approved for building, according to research firm Polaris Pacific. Construction of rental apartments has also surged, particularly for high-end towers.

The increasing supply of homes has started to ease some price pressures in San Francisco. The median price of a condo rose less than 1 percent in the second quarter from a year earlier, according to Paragon Real Estate Group, and apartment landlords have warned that a flood of new units is limiting rent growth. But rising expenses for developers mean they are hemmed in to building for the relatively wealthy at a time when lower-priced homes are in high demand.

Cost Justification

Fierce competition for labor is combining with high land prices to increase costs -- a phenomenon that’s happening across the country, according to Kermit Baker, chief economist for the American Institute of Architects, which projects a 5.8 percent increase in U.S. construction spending this year. Other expenses, including borrowing costs and construction materials, have remained stable, he said.

“It’s very difficult to justify a project that has affordable rents or affordable sales prices given the large sunk costs that a developer is going to have on a project,” Baker said. “It’s much more feasible to build at the upper end of the market, and that’s where the activity has been the last two to three years.”

The issue has already become a problem in Manhattan, where rising land prices spurred developers to focus on ultra-luxury condo towers that now have units piling up on the market.

Local Challenges

In San Francisco, costs are particularly high because access to the city is constrained by bridges and congested highways, making it difficult for contractors to come from outside the city, said Gregg Nelson, Trumark’s co-founder. There’s also a shortage of skilled workers who can handle large-scale commercial projects, he said, estimating that direct building expenses have increased 50 percent to 60 percent since 2012.

The result is that developers are forced to build luxury homes, Nelson said. His company, which has four San Francisco condo projects, has to project revenue of $1,400 to $1,600 per square foot to get a loan underwritten.

“Because the costs are higher, you can’t deliver product at an affordable price in those markets,” he said.

That’s another blow to affordability for the Bay Area, where the median home price has surged 88 percent in five years to $712,000, according to CoreLogic Inc. In San Francisco, it’s much higher -- $1.17 million as of June. Building of single-family homes in the region, while rising, has been far below growth in jobs.

Base Prices

The average base price for new single-family homes in the area jumped 10 percent in the first quarter to $856,000, a reflection of soaring demand and rising land prices, according to research firm Metrostudy. Builders face increasing development fees and requirements from local governments, along with higher construction costs, Greg Gross, the company’s regional director, said in an e-mail.

Homebuilders “have no other choice than to pass along these increases to the consumer,” he said.

Nationally, homebuilding jobs that are advertised but unfilled are at their lowest level since 2006, the peak of the last real estate boom, said Robert Dietz, chief economist of the National Association of Home Builders.

“We’re clearly not in a housing boom like we were back then, but there’s an increasingly large number of builders and developers who are having trouble filling jobs,” he said. “That is causing construction wages to rise.”

Chronic Shortage

The construction labor force can dwindle to almost nothing in a recession, making it difficult to rebuild fast enough when the economy comes booming back, said Gabriel Metcalf, president of the San Francisco Bay Area Planning and Urban Research Association, a nonprofit urban-policy organization.

“So you end up with chronic labor shortages,” he said. “In order for people to afford to be here, they have to be paid a lot of money, which drives up the cost of labor.”

In San Francisco’s office market, where leasing is slowing amid new supply, development costs have grown to $1,000 per square foot this year, up 43 percent from 2013, CBRE data show. This includes land expenses, which have doubled to $250 from $125 three years ago, according to the brokerage.

A city program implemented in 2013 to retrofit more than 5,000 older, wood-framed multifamily buildings in preparation for the next earthquake also is tying up construction workers.

Hathaway Dinwiddie, a San Francisco-based commercial general contractor, has increased its workforce about 8 percent each year since 2012 to keep up with demand, said Chief Executive Officer Greg Cosko.

“In the last 12 to 24 months, we’ve seen certain trades with more spiking in the pricing,” Cosko said. “There’s a surge of demand and no letting up in ongoing, planned projects.”

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net ;Daniel Taub at dtaub@bloomberg.net Kara Wetzel, Jeffrey Taylor

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