Big storms, little labor drive up costs
Hurricane Harvey delayed Urban Bricks construction plans when city offices were closed.
Operators planning to build or renovate existing stores in the coming year will likely need to budget for higher costs. The construction industry is feeling the pinch from a shortage of workers, which has been further exacerbated by increased demand from the surge in post-hurricane rebuilding efforts.
San Antonio-based Urban Bricks Pizza was moving forward with plans to build a new store in Beaumont, Texas, when Hurricane Harvey hit Houston in August. The company had submitted plans to the city and was waiting on approvals. However, Hurricane Harvey shut down city offices for nearly six weeks.
Urban Bricks also had bids in hand from contractors, but the hurricane caused the contractors to retract those bids for repricing. “They basically told us that they were getting paid a lot more by the insurance companies. So, we either had to pay more or find ourselves another contractor,” says Sammy Aldeeb, CEO and founder of Urban Bricks Pizza. The new bids increased by about 10 to 12 percent and created some delays in the construction timeline. However, the building is now under construction and tentatively scheduled for completion in early 2018.
Urban Bricks also has a store under construction in South Miami. One of the issues the company ran into with that project is the required hurricane-proof glass was not only expensive, but it also was on back order due to increased demand after Hurricane Irma swept through Florida in September. That back order created a five- to six-week delay in completion, which is expected in early 2018.
Like many franchisors with more stores in its development pipeline for 2018, Urban Bricks is wondering how the lingering effects of rebuilding efforts will impact construction costs in the coming year. “I think it is a short-term phenomenon,” says Aldeeb. Insurance companies were paying top dollar and there was huge need that hit the market all at once. “That obviously increases demand and hikes up the pricing a little bit,” he says. “So far, we haven’t seen increases that are more than 10 to 12 percent, and I’m hoping that will come down again in 2018.”
Pressure on wages
Construction costs were already creeping higher even before the 2017 hurricane season. Hurricanes Harvey and Irma combined created an estimated $200 billion-plus in damage.
Rebuilding has increased demand, and subsequently costs, and has caused delays for some projects in those geographic areas directly affected by the devastating storms.
However, the hurricanes may magnify the bigger problem of a tight labor market for construction workers.
The main concern for rising costs has been the tight labor market for both skilled and unskilled construction workers. Despite the economic recovery, many of the construction workers that left the industry when the recession hit have not returned.
The unemployment rate in the construction sector was at 4.5 percent as of October, which is tracking with the broader national unemployment rate. However, that is the lowest October reading in 17 years, notes Jeff Myers, a managing consultant at the CoStar Group. In fact, the number of construction jobs today is about 10 percent lower than it was in 2007, according to Myers.
Wage growth for residential and commercial construction workers over the past five years is up 24 percent and 19 percent respectively, which is outpacing wage growth for many other sectors, according to CoStar. “That is a combination of the tight labor force and increasing demand during the recovery and the fact that there is such low unemployment for those workers,” says Myers. Unemployment below 5 percent puts pressure on wage growth, he adds.
The labor shortage will be felt more acutely in the affected markets, specifically Florida and Texas. However, it also will have a ripple effect across the southern U.S. with workers and contractors that are drawn to those rebuilding markets where wages are higher and there is an opportunity for them to make more money in the short-term. “When you have all of these properties that need to be fixed, rebuilt and improved, and you are competing with an already tight labor force, I think that is going to put even more pressure on construction wages,” says Myers.
Some firms that are finding it more challenging to fill positions are relying more on paying existing workers overtime pay, which is adding to overall project costs, adds Kenneth Simonson, chief economist at the Associated General Contractors of America in Arlington, Virginia. According to a 2016 AGC member survey, 70 percent of contractors said the hardest positions to fill were hourly craft positions; however, more than half also said they were having trouble filling a variety of other positions, such as carpenters, electricians, brick layers, concrete workers and plumbers.
Prices rise on materials
Construction costs on building materials also have been rising since late 2015. Prices for diesel fuel, steel, copper and aluminum products have seen the biggest spikes. As of October data, diesel fuel has soared in the last year by 37 percent. Copper and brass mill shapes are up 24 percent, aluminum mill shapes have increased by 15 percent and steel mill products by 10 percent. In addition, lumber and plywood and gypsum products are both 9 percent higher, according to the AGC.
“Prices have increased more than they did in recent years, but it is not the runaway in all kinds of products that we saw before the recession,” says Simonson. Overall the Inputs to Construction Industry Index that measures a variety of materials was up 3.9 percent from October 2016 to October 2017. That is more than the 2.4 percent increase in 2016 and a significant reversal compared to the 2.3 percent decrease that occurred in 2015.
However, it is still a relatively moderate increase. “I would not expect that to accelerate beyond the range of 4.5 percent tops and it could even subside a little bit in 2018,” says Simonson. In addition, some products, such as concrete and glass, have seen only modest or no increases.
Simonson anticipates labor costs will rise 3 to 4 percent in 2018 and materials costs will rise 3.5 to 4.5 percent. The price increase is due to increased demand in the U.S., which has been expanding for more than eight years now, as well as the demand from the global economy.
“The impact of the hurricanes, and I would also add the wildfires in California, seems to have been minimal so far on construction nationally,” says Simonson.
It is possible there have been higher price increases for specific materials for high-demand items because of the natural disasters. “However, I think there is much more productive capacity for things like wallboard and better communications and logistics networks than was the case when Katrina and Rita hit in 2005,” says Simonson. “So, I think there will be minimal stories of shortages and price spikes.”