New Bay Area crown: Most expensive place in the world to build
Marin Independent Journal
High demand, tight labor and tariffs lead to record prices
The Bay Area is the most expensive place in the world to build an apartment building, office tower, hospital, warehouse or school.
And it’s not even close — the region is 13 percent more costly to develop than second-place New York, according to a new report by UK-based consultant Turner & Townsend.
“Another dubious award for the Bay Area,” said Russell Hancock, CEO of the non-partisan, regional think-tank Joint Venture Silicon Valley.
The report blamed high costs on a combustible mixture of high demand, labor shortages, steel tariffs and rapid economic growth.
Even as the expanding Bay Area economy demands more homes, offices, roads and transit projects, rising costs could threaten development, forcing project delays or changes in size and scope.
The region eclipsed New York for the first time last year, and also outstripped London, Zurich and Hong Kong for the top spot. The average construction cost per square foot in the Bay Area is now $417, besting New York’s average of $368 per square foot.
Costs for commercial development, including apartments, grew 5 percent in the Bay Area last year, tied with Seattle for the fastest-rising market in North America, according to Turner & Townsend. And it could get worse — the real estate consultant firm expects Bay Area prices to grow 6 percent more this year.
John Robbins, North American managing director at Turner & Townsend, said Bay Area developers have been forced to bring in labor from outside the region to handle the demand, and also raise prices as tariffs drive up the cost of steel, aluminum and other materials.
“It’s good old supply and demand,” Robbins said. “Contractors are stretched.”
The labor needs have pushed wages up for Bay Area construction workers, whose earnings now only trail workers in New York and Zurich. The region is also one of many in the world facing a shortage of skilled labor, according to the report.
Bay Area prices have also been pushed higher by tech giants desire to create more inventive and complex buildings, Robbins said. Facebook last year unveiled its sprawling new campus in Menlo Park designed by renowned architect Frank Gehry. The social media company spent an estimated $1 billion on recent construction in Menlo Park, according to city permits. Two years ago, Apple opened its vast, spaceship headquarters in Cupertino, estimated to cost $5 billion.
Google also has ambitious plans in Mountain View and San Jose. “These are not just square boxes anymore,” Robbins said. “They’re going to make some beautiful spaces.”
Although the study focused on commercial construction, Robbins said the labor and materials crunch is felt acutely in the residential home building market as well. He added that major tech companies definitely recognize and want to help address the region’s shortage of affordable housing and reliable transit.
It’s another hurdle for Bay Area policymakers to leap — rising construction costs have made it unprofitable for developers to bring homes for low- and middle-income residents to market.
Josh Roden, president of Brookfield Residential in the Bay Area, said the region’s labor shortage started about a decade ago during the last recession, when construction workers found other jobs and moved to cheaper areas.
During the recent economic boom, residential developers have had to compete for skilled workers with major commercial and municipal projects, driving up prices. “It becomes a feeding frenzy,” Roden said. “Some projects don’t get started.”
According to a study by Joint Venture Silicon Valley, the region is running a housing deficit of more than 100,000 units. More than 80 percent of the new homes permitted in the last four years were priced at the top of the market, affordable only to residents in the top-quarter of all earners.
Hancock said Bay Area developers plan for a long, costly public process to build a project, often complicated by legal and regulatory challenges. Cash-rich companies and individuals are also willing to pay a premium to get projects done, inflating prices. “We have a marketplace for affluence,” he said.
High construction prices means higher costs for building new apartments, often driving up rents in new projects. Government subsidies could help add more affordable housing, Hancock said, but “at the moment, that’s not a conversation we’re having.”
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