Construction Costs Continue to Rise

As everyone knows, the price of a downtown Austin condo has increased over the last few years. While supply and demand play their usual role, one of the major factors in rising condo prices has been the rising cost of construction.

For new condo projects, building costs have increased substantially since 2006. As the cost of concrete, steel, and rebar increase, the total cost of downtown construction increases accordingly. With so much simultaneous building, labor costs and crane costs are also on the rise. Finally, with demand for downtown land still very strong, escalating lot prices can add significant costs to new projects.

One reason that this is important is that newly developed condo units play an important role in setting market pricing for all downtown condo units. If new units are nicer, cheaper, and better located than existing inventory, prices can move down across the board as owners of existing units lower prices to remain competitive with buyers. When construction costs rise — and new units are more expensive — two things happen. First, fewer new project get built tighting supply. Second, new units hit the market at a higher price, subsequently pushing prices upward or, if insufficient demand exists, failing to sell.

Here is additional analysis from the Austin Business Journal:

The U.S. Bureau of Labor Statistics added more bad news this week for contractors and developers trying to get buildings out of the ground.Construction material costs increased 10.4 percent during the past year, the agency reported on Tuesday. The bureau’s producer price index measures materials used in construction, including diesel fuel. Meanwhile, highway construction materials increased 18.9 percent during the past 12 months.Ken Simonson, economist for the Associated General Contractors of America, says in a statement “surging prices for diesel fuel, asphalt, steel and other materials are clobbering construction budgets.”He says asphalt prices during the first two weeks in July have increased by 40 percent. Rebar has increased $200 per ton.And Simonson says the situation could get worse.