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GOING UP

Owners grapple with sharp rise in cost of steel, concrete

BY STEVE McLINDEN

The rising cost of construction materials continues to vex builders and retail developers, inflating the price tags of new store projects and, in some cases, stalling expansion plans and pushing back opening dates.

“It’s a perfect storm with all these things hitting at once,” said Stacey Berthon, vice president of retail and commercial construction at Birmingham, Ala.-based Hoar Construction. “We’re having to educate our clients, and it’s a hard lesson. Prices were so flat for so long, then they jumped up way above normal inflation. They’re shocked when we tell them it’s a different world out there.”

After years of relatively stable pricing, the retail-building industry this year found itself up against escalating cement and wallboard prices as well as jaw-dropping spikes in structural-steel costs.

China is the main culprit. The Asian giant, building up its infrastructure at a torrid pace, is grabbing huge quantities of materials at above-market prices and diverting shipments ordinarily headed for North America, say building trades associations.

Steel trap
By some estimates, China is consuming about 20 percent of the world’s steel supply. Meanwhile, India and other rapidly modernizing countries have stepped up usage too.

“Steel has been absolutely out of control this year,” said Berthon.

Hoar handled some $200 million in major retail projects this year, including Downtown at the Gardens, Palm Beach Gardens, Fla.; Evergreen Walk, South Windsor, Conn.; and The Shops at Centerra, Loveland, Colo. The company has been forced to make pricing good for only 10 days, according to Berthon. “If we don’t turn around and buy [steel] right away, we’re at the mercy of more price hikes,” he said. Retailers, retail developers and center owners are absorbing the cost overruns as a force majeure or act of God, he says.

Steel prices, pushed higher by the consolidation of U.S. steel mills and a shortage of scrap metal, soared 72 percent over the 12 months ended in September, according to the producer price index. Further, steel importers are having a tough time finding boats to transport steel and scrap metals to North America, several developers say. Simultaneously, exports from America rose to 12 million tons last year from 6.3 million tons in 2000, according to the Washington, D.C.-based Emergency Steel Scrap Coalition, a group of steel producers and users formed to address these issues.

Contractors estimate that cement prices, meanwhile, have risen 10 to 20 percent since last year. This, too, is the result of greater construction activity worldwide. Compounding these problems was last winter’s mild weather and a still-robust U.S. new-home market, which helped the construction industry eat through concrete and cement supplies. Early this year there were spot shortages of drywall products.

Cut back to fight back
In response, many retail developers are cutting back on the store-exterior frills known as ginger-breading, says Chris Darden, president of Las Vegas-based Allied West Construction. “Almost every project we do comes back to us again for value engineering. They’re settling for fewer exterior treatments in order to salvage their budgets.” Retailers are turning to acrylics and other synthetics for exterior dressings, he adds.

Bidding on jobs has become an imposing task for Allied West, which in May completed the island-style Hawaiian Marketplace shopping center on the Las Vegas Strip, near the MGM Grand Hotel and Casino. “If we do a bid today, it may be six to eight months before we start on it, so we just have to go on the track record of what prices have risen recently, then work off that,” said Darden. Shortages have delayed some completions, he adds. The firm is currently building Imperial Valley Mall, in El Centro, Calif.

There are other slowdowns in evidence. At press time a rollout of showroom kiosks planned for April at DaimlerChrysler dealerships across the country had been pushed to last month because of the steel shortage, the carmaker says. Meanwhile, the Oct. 26 debut of Showcase Cinema near Toledo, Ohio, next to the Town Center at Levis Commons, was delayed until about the same time for the same reason, according to local media reports.

Availability problems “have really had an impact throughout the industry, and they’re touching every trade,” said Michael McBride, executive vice president of Fort Worth, Texas-based Westwood Contractors, which serves 25 national retailers, including Bed Bath & Beyond and 99 Cents Only Stores. Prices of steel studs for drywall and metal framing shot up between 60 and 80 percent early this year, says McBride. “[Steel] went from being readily available to a two-to-four-week wait — eight weeks in California,” he said.

Westwood didn’t miss any grand openings this year, but overtime costs resulting from late-arriving materials did push projects over budget, he says. The firm built half a dozen Belk department stores this year while prices of steel reinforcement bars and other materials climbed.

With larger shopping centers, construction delays can have far-reaching effects. If center owners see they will miss their Christmas-season openings because of materials problems, they’ll choose to wait until the following spring to open, for example, because of the traditionally soft selling months of January and February. “Somebody is really going to have to spend a lot of money to maintain opening dates, or they’re just going to be put off,” Berthon said. “Tenants would miss openings, and that would be costly for them and for their landlords.”

In construction, steel is used for gearboxes, duct work, electrical switches, frames and other components, besides the more obvious structural uses. “It’s amazing how much is used in retail construction,” said Carl Johnson, president of Near-Cal Corp., a Lake Elsinore, Calif.-based retail general contractor firm. “It’s a lot more than most people think.”

Joseph Stadlen, president of Hollywood, Fla.-based Intertech Construction Corp., says rising costs are starting to weigh more heavily in retailers’ store-expansion plans. “Those prices get fed back to the [retailer], who may decide to only build three stores instead of four.”

A load of trouble
Even with domestic plants operating at 100 percent capacity, cement supplies remain tight for immediate needs because U.S. companies rely on imports for 25 percent of their needs, says Ryan Puckett, a spokesman for the Skokie, Ill.-based Portland Cement Association. “People have to rethink the way they order. You can’t just call up the day before and say, ‘I need a load.’ ”

Shortages of Portland cement, which is used in about 99 percent of retail construction, is more acute for smaller contractors, which have little economy-of-scale clout, Puckett says. In addition, ready-mix companies aren’t able to get materials as quickly as a year ago for the cement paste, which contains limestone, calcium, silicon, aluminum and iron. “Our suppliers are still out there,” Johnson said. “But their plants would run [more] if they just had the paste.”

Darden, who is active in the fast-growing Las Vegas market, says his cement costs have risen about 10 percent, “but surprisingly, availability is there, for as much cement as we’re using in Vegas.”

Complicating things further is the Mexican Cement Tariff, which was imposed in the 1990s following U.S. accusations that Mexico was dumping cement north of the border. Mexican cement accounts for about one-fourth of U.S. cement imports. Trade organizations have pleaded with the Bush administration for at least a temporary reduction of the tariff, but instead Commerce Secretary Donald Evans told the Associated General Contractors of America in October that companies should come to some kind of an agreement to help resolve the dumping issue.

Rising construction materials prices have typically been short-term and usually end when suppliers raise production. But U.S. steel mills in particular are facing a persistent raw-materials shortage. And this has trade organizations and contractors speculating that these problems will be long-term and may even shut down more domestic fabricators — those that committed themselves to deliveries at preinflation prices.

Retail construction firms say the pricing fiasco has not only added big dollars to project price tags, it has also strained the bidding system between subcontractors and contractors, and their clients as well. The situation “has thrown the whole estimating thing into a mess,” said Johnson. “Sometimes you have to guess what [the price] is going to be.”

Construction teams “need to be thinking a little further out,” said Portland Cement Association’s Puckett. “Just saying that tomorrow will be a good day to pour is not enough. Waiting for good weather is important, but there are ways to pour in bad weather.”

Meanwhile, construction in China shows no signs of abating and may even heat up as that country prepares for the 2008 Summer Olympics in Beijing. But other factors may cool demand. “If interest rates continue to rise and new-housing demand slackens, the supply side will pick up steam,” Johnson said. “This won’t last forever. There’s only so much infrastructure you can build.”

Indeed, at year-end some aspects of the price picture appear to be easing. Overall construction materials slowed to 0.7 percent rise in September, compared to a 1.4 percent increase in August, according to the producer price index. But concrete itself rose 1.7 percent in September.

“Given the even larger rise in scrap prices and the recent jump in the cost of energy needed to melt, shape and transform steel, it appears likely that construction steel prices will rise more,” said Kenneth D. Simonson, chief economist at the Alexandria, Va.-based Associated General Contractors of America.

“First it was drywall, then gas prices drove up transportation prices, and concrete and steel went up,” lamented Intertech’s Stadlen. “It has put a lot of people in a hurry-up-and-wait mode.”

Roofing materials may be next on the scarcity list, following the hurricanes that ripped off thousands of roofs in Florida and shut down at least one roof-manufacturing plant there. Westwood’s McBride recounts that retail contractors said Florida roofing suppliers were outbidding them for materials at the last minute. Even before the storms, says the Institute for Supply Management, prices for roof shingles and roofing materials were inching up. The hurricanes also damaged hundreds of retail sites “and really kicked the industry into crisis mode there,” said Stadlen. “It was a matter of patching them up and putting off everything else off until later. You’ve got to keep those registers running.” Construction workers, too, became scarce in some regions, as many migrated to Florida to take advantage of the ample rebuilding work there.

Some of Stadlen’s larger retail clients are looking at different material choices and designing “smarter” in response to higher costs. “Unfortunately, that process takes time,” he said. “For now, there are slimmer profit lines across the board.” And some nervous retailers and developers, to boot.