Construction is getting expensive. Why is this happening?

(…and is modular a preferable alternative)?

Construction prices have been sharply rising in major cities around the US, and this was true even before the pandemic.  Needless to say, rising construction costs are not a good thing.   It impacts things such as affordable housing, homelessness, and growth.  This also means that the built in advantages of modular construction are more impactful than ever.  Modular construction is not immune to the current climate of heavy inflation, but in relative terms the advantages of modular versus on-site construction are widening.

To help figure out why costs are high and rising in some areas, we looked at where construction is expensive and whether modular construction would help bring down the cost. Below is a list of the top ten most expensive cities for construction in 2020. The list was compiled by Arcadis, a global design, engineering and management consulting company:

 

  1. New York
  2. San Francisco
  3. Boston
  4. Philadelphia
  5. Seattle
  6. Chicago
  7. Los Angeles
  8. Las Vegas
  9. Washington, D.C.
  10. Salt Lake City

 

The big two: New York and San Francisco

 

According to Arcadis, New York’s top position isn’t terribly surprising for a variety of reasons.  New York has strict building codes and has significant access and logistics challenges.  These challenges mean that materials and labor are allocated slower, which means more time projects are ongoing and that workers must be paid.  Compounding this is a general skilled labor shortage, something that is common in hot markets (New York is just about always a hot market).  Labor of all kinds in New York is easily the most expensive among US cities which is probably influenced by famously high cost of living in New York City and the surrounding areas.

Of the remaining US cities, San Francisco’s costs are a close second after New York, with the remaining US cities all being a significant drop-off after the top two.  This might seem surprising given the bay area is only the 12th largest metro area in the US, with growth numbers that are only about median level compared to other cities west of the Mississippi.  So what makes San Francisco so inexplicably high?

For starters, California cities are no stranger to stricter building and energy codes. According to a report by the California Legislative Analyst’s Office in 2015: “The state’s building codes and standards are considered “more comprehensive and prescriptive, often requiring more expensive materials and labor […] For example, the state requires builders to use higher quality building materials— such as windows, insulation, and heating & cooling systems—to achieve certain energy efficiency goals.”

However, the bulk of the price increase is very likely a downstream result of the tech boom in Silicon Valley, which created a region wide impact in two ways.  The first is that the high earnings in Silicon Valley drastically increased property values and therefore wages.  The second is that the area being so attractive for the tech sector meant there was a flood of people moving in for tech sector jobs, and therefore the ratio of tech vs labor is well out of the norms, thus creating a labor shortage and further raising labor costs.  After all, who would move to a tech mecca to be a bricklayer?  Nobody, until you pay them $70 per hour.

 

General reasons for cost increases

 

It’s not just in cramped, tech savvy cities that construction costs are increasing.  Costs are generally rising across the nation, and it’s worth looking into reasons that might help explain it.

Due to tariffs and uncertainty, the price of steel has risen a staggering 43.7% over the past 13 months.  This has a major impact on large scale urban construction projects which tend to use a lot of steel.

For as bad as the price increase in steel has been, the price of lumber is even worse.  In some areas the cost of lumber has doubled or even tripled in recent years.  Lumber prices have been rising since Hurricane Harvey in 2017, but the recent economic uncertainty around the pandemic has really caused lumber prices to explode.

Labor is perhaps the biggest driver in costs, and today skilled labor is in low supply over much of the developed world.  In 2016, only 4 of the top 43 construction markets in the world reported a labor surplus.  By contrast, 24 of the top 43 markets were experiencing labor shortages, including the top four US markets.

Other factors that lead to increased costs include tight construction spaces, traffic management, and site delivery management.

 

Pandemic impact

It’s hard to say exactly what kind of impact the pandemic has had on construction labor.  An Economic study determined that the Covid-19 crisis has had “an unbalanced effect on different earnings groups in the labor market.”  This makes intuitive sense, in that certain sectors such as restaurants and movie theaters were hammered whereas many other job sectors felt minimal impact.

However much this has limited the skilled labor pool for construction is not known.  Many cities and public areas have received massive amounts of stimulus and funding during the pandemic, which has led to a boom in construction across the country.  Therefore, it is at least somewhat likely that the demand for construction labor is actually higher as a result of the pandemic.

 

Modular construction is less impacted

 

Traditional construction costs are rising in many key markets across the US.  This is occurring mainly because of labor scarcity.  Additional factors include rising steel costs, strict building codes, logistics challenges typically related to the tight spaces of big cities and construction sites, as well as the need for traffic and delivery management.

Many of these issues driving up costs are circumvented by modular construction.  Modular factories have their own steady labor pool and has less need to contract outside the company.  Modular construction has a more streamlined process that significantly reduces material waste; and they are typically less dependent on steel.  Since the buildings are created in factories, many of the logistics challenges of construction in big cities do not apply.  And since the buildings are built off-site, there is no need to hire traffic management for long periods of time.

If you are looking for a restroom building, all of the above advantages apply to prefabricated restrooms. These advantages are arguably more pronounced with restrooms because the standard floor plans reduce the necessary design work. Many restrooms are small enough to be installed within hours. In comparison to a work site that remains active for weeks or months, this dramatically reduces costs (permits, traffic management, etc.) related to a construction site disrupting the community.

Anyone planning for a construction project in an area with high construction costs should consult with a modular manufacturer. Green Flush Restrooms can easily and quickly estimate the installed cost for a restroom anywhere in the US or Canada.

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