Mortenson Construction’s recently released cost index predicts a 5-6 percent increase in construction costs for 2015. Mark Wagner, Mortenson’s chief estimator, says the trend is slightly more dramatic than the first quarter of 2014 and will hold at least through 2015.
“We don’t see that (trend) stopping anytime soon. We’d also say that we don’t see that ballooning to the level that it was in 2007, where things were almost out of control,” Wagner says. “But not everywhere in the country is seeing the same level of growth that we are.” Wagner says, based on his office’s research, only the Minneapolis and Milwaukee markets matched the Seattle area’s rate of growth during the past 12 months.
Wagner says average annual escalation is 3-3.5 percent increase annually, based on the past 50 years. After the market bottomed out in 2008, prices remained relatively flat until the end of 2011, when costs started to increase. More momentum picked up in 2013. Mortenson was predicting a 3-4 percent cost increase then, and the market has been on the rise since.
One element Wagner and others are concerned about is capacity. When construction boomed leading into 2007, companies increased production, capacity, and employees to keep pace. Then, many companies went out of business when the bottom fell out. Wagner says that similar to the popular “lean startup” mentality adopted after the 1990s dot com bust, construction suppliers and companies are wary of rapid unbridled growth.
“It’s still fresh in memories, that drop, and so they’re more cautious about adding capacity and overextending their books and taking on too much work,” Wagner says. The caution has a balancing effect on the market’s prices.
The increase in construction costs could impact current projects, such as Kirkland’s Parkplace and Bellevue’s Spring District, as well as beginning new ones like the Tateuchi Center and the proposed Mercer Island Center for the Arts. Costs have to be passed along somehow, whether it’s the developer re-evaluating how the project is constructed, what amenities are included, or the leasing price of the completed space, Wagner says.