For Richard L. Friedman, chief executive of Carpenter & Co. here, redeveloping the historic Charles Street Jail into a $100 million four-star hotel is a dream project. He hopes to start construction soon on a major addition and renovation of the majestic stone structure, which has a prime location near the Charles River, world-class hospitals and the State House. It is at the foot of Beacon Hill, a neighborhood with its 19th-century town houses, brick sidewalks and period lighting.
But since planning started on the development, which had a $50 million construction budget two years ago, the prices of steel and other construction materials have soared, and Friedman undertook an eight-month redesign to bring the construction budget, which had risen to $70 million, down to $64 million. Because of the higher total cost, he was also required to put up an additional $6 million in equity.
The architects, Cambridge Seven Associates Inc. and Ann Beha & Associates, removed the basement that had been planned in the addition, reduced the distance from each floor to the floor above and added a 15th story, said the project manager, Darren D. Messina. “We couldn’t afford it at 14 stories,” he said. Seeking room rates of $250 a night, “we were a little handcuffed in what else we could take out,” he added.
Despite a four-year effort to put this deal together, “it’s been a nightmare,” Friedman said, expressing a sentiment heard around the country from private, public and institutional developers, builders and architects. To rein in construction costs that are often 10 to 20 percent over budget or even more, they have had to redesign or “re-engineer” projects, increase investments or borrowing, cut projected profits and delay or cancel construction.
Since June 2003, the price of steel has doubled, and the costs of copper, gypsum, plywood, lumber, cement and petroleum used to fabricate, transport and install many materials have also had steep, albeit less drastic, increases.
In construction, steel is pervasive. It is in structural frames, floor decks, ceiling grids, air-handling systems, wiring, plumbing, interior studs and bars that reinforce concrete. In November, an index reflecting the cost of a theoretical market basket of steel products peaked at 412.6, according to the Producer Price Index compiled by the United States Bureau of Labor Statistics. Prices then turned down and by January, the most recent month for which the index is available, they had eased off to 330.7, but this is still double the level of 165 in mid-2003.
Such nettlesome price increases have been compounded by the difficulty at times in obtaining steel and other materials as the fast-growing economies in Asia, especially China, soak up supplies.
Meanwhile, the output of steel in the United States has fallen. From 1999 to 2002, when prices were more stable, the value of steel products made in the United States fell from $171 billion to $131 billion, said Joseph P. Kowal, the bureau’s senior economist for the Producer Price Index, who adjusted these prices for inflation.
All this combines to create risk and uncertainty for developers, builders and architects. “What makes this steel situation scary is the speed of the price change and our inability to control it,” said Michael McNally, co-chief operating officer of Skanska USA Building Inc., a builder based in Parsippany, N.J.
David Manfredi, a partner at Elkus/Manfredi Architects Ltd. here, said: “Every sizable project has been affected by the rising cost of steel. It’s the demand in Asia and the decline in U.S. steel production. In a global economy, steel goes to the highest bidder.” As a result, he added, “some developers have stopped design work.”
In California, foundation work was halted in December on retrofitting a 2.2-mile span of the San Francisco Bay Bridge so it can better withstand earthquakes. Construction, scheduled to start in October, has been delayed indefinitely as state officials and lawmakers grapple with the price tag of $6 billion, up from the 2001 estimate of $2.6 billion, largely caused by the rise in the cost of steel, according to state transportation officials.
In February, the Trump Organization started site preparations in Chicago for an $850 million, 2.6-million-square-foot mixed-use tower. To keep costs in line, it now has a concrete foundation rather than the steel frame that the architect, Skidmore, Owings & Merrill, had originally planned, said Donald J. Trump Jr., the vice president for development. He cautioned that if steel prices spiked again and interest rates rose, “the real estate market will decline.”
According to William Wheaton, professor of urban economics at the Massachusetts Institute of Technology, developers in markets where demand is strong for housing and industrial facilities are not hurt as badly by rising construction costs.
While steel prices have eased off about 3.5 percent since January, developers’ woes have not ended, said Peter Timothy, president of A.M. Fogerty & Associates, an independent price estimator in Hingham. Fabricators that supply steel components will guarantee prices for only a few weeks rather than for several months as they once did and construction contractors are reserving the right to charge developers more if material prices rise.
