Construction costs are continuing to climb. Last year alone, construction pricing increased 5.07%. Materials costs and a labor shortage are the main driver of the rising pricing, and they are likely to fuel another increase in costs this year.

“Both material and skilled labor costs in construction have been on the rise for some time, and today's multifamily developers are seeking cost-effective ways to bring multi-unit projects to fruition,” Richard Lara, president and CEO of RAAM Construction, tells GlobeSt.com.

The labor shortage had been the major challenge for contractors and developers, but recently, increased materials cost has been an equal burden. “In 2018, material costs increased 10% over the previous year, with the price of crude petroleum rising by 49%, iron and steel up 14%, and softwood lumber jumping 23% from the year before,” says Lara. “Causes include a scarcity of resources caused by natural disasters and a rise in construction activity nationwide.”

In addition to the price of materials, rising oil and energy prices have increased the cost to transport materials. “In addition, tariffs have created a degree of uncertainty in the market, which has resulted in materials providers raising prices to offset their anticipated increase in costs,” adds Lara.

Of course, the labor shortage remains a serious problem for the industry. The shortage has driven up pricing and expanded the timeline for development projects. “Skilled labor is also more expensive now. At the end of 2018, construction costs had risen 23.6% since 2004, largely due to higher labor costs,” says Lara. “This is mostly caused by a labor shortage: unemployment is at record lows across the country, so following the supply-and-demand dynamic, skilled labor costs more as wages have skyrocketed.”

To combat these challenges, developers are working closely with contractors during pre-development to identify materials costs and find ways to replace some materials with lower cost options. Finding solutions to labor shortages also requires a close relationship with a contractor. “Developers should ask about the longevity of a contractor's relationships,” says Lara. “Those of us with a long-term network of subcontractors are more likely to be able to ensure that a macro-level skilled labor shortage does not negatively impact the projects we work on.”

Lara says that more developers are also taking on some of the tasks originally allocated to the contractor. “Self-performing work is another way to combat continuous price increases,” he says. “Developers who hire a GC to self-perform much of the construction work will benefit from time savings and reduced costs, since self-performing contractors already know how to do the work and can get it done efficiently.”

Looking ahead, Lara expects prices to continue to rise, especially with the announcement of new tariffs. “That said, increasingly advancing technology has the potential to make construction less costly, and smart general contractors are developing innovative construction methods to help offset rising costs for their clients,” says Lara. “For example, our team at RAAM continues to implement new strategies and technologies to value engineer and budget for multifamily construction projects throughout California.”

Overall, flexibility has become imperative to multifamily developers facing rising cost challenge. “As all involved become savvier about the challenges and solutions to rising costs, the multifamily development sector as a whole grows increasingly nimble in the face of these costs,” says Lara.

Instant Insights /

Construction Costs Increased More Than 5% in 2018

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