Rising Construction Costs Versus Interest Rates: Both Hurt, But In Different Ways
By Erika Morphy | National via Globe St
WASHINGTON, DC—Talk about the irony of timing—or should that be the inescapable grip of market supply and demand? At any rate, on Wednesday the American Institute of Architects announced that the Architecture Billings Index reached its highest level since 2007 in July with a score of was 55.8, up markedly from 53.5 in June. The bottom line conclusion, according to AIA chief economist Kermit Baker? “Business conditions for the design and construction marketplace, and those industries associated with it, appear to be well-positioned for continued growth in the coming months.”
Just in time, as it happens, for accelerating construction costs. Over the past few days we have been looking at twin threats to the commercial real estate industry—the almost sure likelihood of rising interest rates and the rapid ascent of construction prices. Interest rates hikes are coming, but they are not here yet, while construction increases are. With that as background we asked a number of readers which was worse. A behavioral scientist might opt for the construction costs: those are happening now, while the pain of future rate hikes are still unrealized. And many respondents did agree-they are worse. But others are more leery of rate hikes. Read on to see the reasoning in both camps.
Count Steve Fifield, chairman and CEO of Chicago-based Fifield Cos., as most worried about rising construction costs. He doesn’t believe the Fed will raise rates until 2015. Meanwhile, construction bids are 8-10% higher than six months ago, he tells GlobeSt.com. “That concerns us most. We’re already building in 5-7 year term borrowing rates at 5.5-6% for projects that stabilize in 2016 and beyond versus today’s 3.5-4.4% rates.”
Lydia Stefanowicz, partner at Edwards Wildman Palmer, also leans towards construction costs as worse of two bad options, mainly because rates are so low and will remain low even as they start to rise, if all signs of the Fed can be trusted.
Rapidly increasing construction costs, however, have made it very difficult to hold to construction budgets from the point of planning to substantial completion, she tells GlobeSt.com. “A lot of the costs increases are attributable to shortages resulting from a failure by suppliers to anticipate increased demand for building products and from increased use of just-in-time inventory policies that are based on post-2008 demand patterns, rather than inherent shortages of building materials.”