Building boom spurs worry over labor shortage, cost increases
The issue has been broached at a number of industry panels in recent months, and is a topic of concern for both the commercial and residential sectors. Experts say it is simple supply and demand. More construction activity means more demand for white-collar and blue-collar workers, as well as for building materials. The result? Increasing costs on both accounts.
“A lot of people don’t want to talk about it, ” said John Moss, a partner with the large Bay Area-focused apartment developer and owner Prometheus, at a recent industry forum sponsored by Marcus & Millichap. “We’ve seen 13- to 15-percent annual growth in anticipated costs on new construction, which is very significant.”
Taken to the extreme, the dynamic could impact the industry negatively in several ways. Higher costs could scuttle planned projects if developers didn’t anticipate them in their pro formas. And labor shortages could delay projects if the right talent isn’t available to work at the right times.
But even projects that are getting built out are feeling a pinch, Moss said. “A lot of the rent increases are getting completely wiped out by construction costs,” Moss said at the panel, referring to apartment developments.
There’s plenty of jobs in the pipeline to keep workers busy in housing and commercial. Up to 25,000 apartment units are ready to build in Silicon Valley. On the commercial side, the biggest project that has yet to take off is Apple’s radical new 2.8-million-square-foot spaceship campus in Cupertino, which experts say will create 9,200 direct new construction jobs. Also on the boards: Nvidia’s 500,000-square-foot polygonal campus in Santa Clara; Google Inc.’s first ground-up campus in Mountain View, at 1.1 million square feet; and Jay Paul’s Moffett Place in Sunnyvale, at 1.8 million square feet. Bay Area Rapid Transit’s expansion into the South Bay is also a jobs-rich endeavor.
The crystal ball
A recent Urban Land Institute panel titled “Bay Area Construction Costs: Still on the Rise?” tackled the issue directly on the local level. Experts said construction costs rose 8 percent in the last 24 months for steel-boned office buildings in the region. For concrete construction, the number was 10 to 13 percent (read more about the event with some key takeaways here).
These experts added that costs will increase by 3 to 5 percent in the next year for concrete office, 6 to 8 percent for steel office, and 4 percent for residential construction.
Not everyone thinks the costs will continue to increase indefinitely, though, with market dynamics solving the problem naturally.
“I don’t think higher costs are sustainable,” said Karim Allana, CEO of architect Allana Buick & Bers, at the Marcus event. “I think more people will come from outside to fulfill projects, and they will come down.”
On the flip side
Of course, no one is complaining about the shift in fortunes for the area’s construction industry, which was decimated by the recession. Citing data from McGraw Hill Construction, The Mercury News last month pegged the value of new construction and renovations in the nine-county region at up to $6.7 billion in 2013. That would surpass a 2000 record of $6 billion, according to the Merc.
Estimates of construction-industry employment in the San Jose metro area stood at 41,700 in October of this year. That is up from a 14-year low of 29,700 in February 2011 when the economy was getting back on its feet, according to the California Employment Development Department. But it is still down from a high of 52,500 in September of 2000, before the dot-com bubble burst.
The renewed strength of the industry is suddenly good news for workers, especially because wages have been fairly stagnant. Marty Shapan, a managing director who focuses on Bay Area construction recruiting for Kaye/Bassman International, said construction superintendents — those who directly manage subcontractors and supervise trades — are in particularly high demand. Estimators and project managers with technical experience are also job categories that are getting hard to fill.
Shapan said the worker drought was exacerbated by changes wrought by the recession: Some industry professionals left the business altogether. At the same time, fewer new workers came into the industry through school programs or apprenticeships, given the slack job market at the time.
“There was a brain drain,” he said. “I think now we have a perfect storm that’s created this unbelievable war for talent. And I think it’s going to go on for several years.”
The upshot? Higher wages. Signing bonuses are also becoming more common.
“We’re starting to see the return of all the crazy stuff that went on in the middle of the decade,” Shapan said.