By Meghan Hall
Any booming economy that has become a locus for development will in turn see increasing construction and development costs. Expenses associated with development are usually a central cause for concern and can derail projects entirely if property owners and contractors do not allocate appropriately for rising prices when it comes to both labor and material goods. In Seattle over the past several years, increases in the construction cost index have been particularly acute and well above the national average. However, those at Mortenson, a national construction firm, are predicting that despite high rates of previous growth, construction costs will moderate in 2020.
“Seattle construction costs are at an all-time high; they continue to rise, and they continue to outpace national construction costs, both when it comes to the construction cost index and Seattle’s construction employment trends,” explained Phil Greany, Mortenson’s director of business development. “Both are major factors in Seattle being one of the cities where costs continue to grow at an exponential rate.”
Both the Seattle and national construction cost indexes trended upward throughout 2019. While the national index increased 3.3 percent since the end of 2018, and the Seattle index increased 2.1 percent, the Seattle index still comes in at four points higher than national construction index levels. Construction employment in the Puget Sound region grew four percent over the course of the past year, caused by low regional unemployment and a tight labor market.
In terms of building components, steel framing and stair erection parts saw the highest rates of growth during the end of 2019, with price increases of five percent. Suspended acoustical ceilings followed closely behind with a 4.5 percent cost increase. Materials with more moderate rates of growth included plumbing systems (2.7 percent growth), asphalt paving (1.8 percent growth) and roofing systems (1.6 percent price growth). HVAC and electrical systems, earthwork, flooring and carpeting, and unit masonry, among other materials, saw no price increases at the end of the year.
Up until this point, increases in construction costs have been largely the result of rapid tech expansion, which has created a need for all product types. Investors, according to Greany, have jumped into the market over the past several years in an effort to stake their claim while land and resources were less expensive so that they could capitalize on the growing market.
“If you look at Seattle itself, there was this huge growth in residential over the past several years, and there was a rush by both international and national developers to come to Seattle and get their product in place while the market was hot,” stated Greany. “…It all correlates with the growth of Amazon and other technology firms in the Puget Sound region.”
However, growth in construction cost is slowing, and is expected to stabilize through 2020 as development reached a peak in previous years. Greany continued, adding, “I think that there has come appoint where developers are looking around and seeing how much product has been going in place.”
Greany also emphasized that investors are also closely watching the economy, trade with China, national elections and coronavirus—all things that continue to impact the construction industry in a multitude of ways.
“[There are] factors that are making everybody take a pause; I think they are trying to hedge their bets a little bit,” Greany said.
On March 25th, Governor Jay Inslee announced specific guidance for construction sites, stating that in general, commercial and residential construction activity is not considered an essential activity and should be paused, unless it prevents damage under unsafe conditions, is related to a necessary need such as housing, or is to further a public purpose related to a public entity or government function.
Mortenson did not have any specific commentary on how the coronavirus will impact the industry moving forward and currently is recommending owners plan on a three to 3.5 percent increase in construction costs this year. The increases are much more modest than years past, noted Greany.
“I would say the softening of the market was a little surprising in that we were not expecting it to soften so quickly,” said Greany. “We saw that most everything levelled out pretty well.”
However, a softening in construction costs does provide an upside.
“Now is a better time to start looking at investing in the region,” said Greany. “What we’re telling our customers now is that cost trends are down, and the rate of cost increase over that two-year period is flattening out, so now is a good time to invest, especially if the need is there.”