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Construction Costs Could Cause Delays

A growing number of retail projects could be put on hold in 2006 as the price of construction materials continues to rise as much as, or more than, 2005.

"These rising costs are forcing some public owners to put projects out for redesign, rebid or outright delay," says Ken Simonson, chief economist for the Associated General Contractors of America, in reporting the trade group's projections for 2006.

Concrete materials are projected to increase 10 percent to 15 percent in 2006, says Simonson, probably more than the 10 percent rise in 2005.

"The demand for concrete has been outstripping supply for several years," says Simonson. "We've become more steadily dependent on imports." While there is enough production worldwide to meet U.S. demand, higher oil prices increases transportation costs for developers, says Simonson.

The national average for diesel fuel was about $2.46 on Dec. 21, according to the Energy Information Administration. While that is down from a high of $3.16 in October, diesel fuel is still up 18 percent from a year ago.

Concrete shortages could be especially acute in 2006 due to the amount of public infrastructure construction along the Gulf Coast in the wake of Hurricane Katrina.

Costs for other materials, such as asphalt and plastics, that use oil and natural gas in their manufacture will also rise in 2006. Asphalt prices are expected to jump 10 percent, while plastics could climb between 10 percent and 20 percent, says Simonson.

The availability of steel could improve somewhat, according to the AGC, because India and China, which have competed for a giant share of available product, have been ramping up domestic production.

Scott Rehorn, one of the founding partners of Red Development, says developers are getting squashed between high construction costs and the inability to raise rents due to little growth in sales. So margins for new projects are becoming smaller. "If construction costs keep rising and tenants can't pay more rent, you got to figure out a solution," says Rehorn. "Sooner or later, something's got to give."

--David Koch

TAGS: Development
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