Two big challenges construction companies and builders in the Greater Houston area encountered in 2014 are expected to continue in 2015. The rising cost of building materials means the price of construction is rising, and a shortage of skilled laborers has led to an increase in wages, which is also driving up costs, according to area builders and developers.
The rising cost of construction has had notable effects on the development of major projects. Officials at Cy-Fair ISD and Lone Star College System both said construction costs are closely monitored and taken into account when new schools and buildings are being considered.
Residential developers have also been put under pressure by rising costs as they work at a rapid pace to meet demand for new homes throughout Cypress, which has been particularly strong in master-planned communities such as Bridgeland. Homebuilders have found themselves with project opportunities as demand for work remains steady.
"A major concern for builders at this point is the rising cost of labor due to the shortage of labor," said Kevin Frankel, president of the Greater Houston Builders Association, or GHBA. "This has been a focus for years. It's something we have sat down and had discussions about to try to come up with ways to alleviate it."
The increasing cost of construction for office projects can be linked in part to the growing depth of the tenant pool creating more demand. A number of projects went online in 2014 to alleviate that demand, but the glut of projects only intensifies the labor shortage, according to officials with Kirksey Architecture, a Houston-based company that publishes an annual report analyzing construction costs.
"High demand, labor shortages, concrete shortages, long lead times for critical components and subcontractor fees and availability are among the drivers of the cost surges," the authors of Kirksey report concluded. "With so many projects under construction, contractors and subcontractors have become much more selective about the opportunities they are pursuing."
Cost of materials
Although it can be difficult to pinpoint the cost of individual materials on a local level, prices have been trending upward in the Greater Houston area for at least three years, according to one company.
Turner Construction Company, which has offices around Houston, developed its own cost index to track nonresidential building construction. The company's methodology, which takes labor rates and productivity, material prices and the competitive condition of the marketplace into account, shows steady increases every quarter since 2011. Overall, costs have risen about 11.7 percent since that time.
"Growth in nonresidential construction was steady in the fourth quarter in virtually all domestic markets," said Turner Vice President Attilio Rivetti. "Higher construction cost escalations in urban centers with increased construction activity as well as selective mega-projects, are driving the average domestic construction cost increases."
The rising cost of materials has wide-ranging effects. Officials with LSCS and CFISD, both of which passed recent bond elections that included major construction projects, said rising costs and inflation mean the sooner projects can get underway, the better.
"When we passed the bond, we laid out a timetable for the construction we needed to do through 2020," said Roy Sprague, CFISD's associate superintendent of facilities, construction and support services. "There is some concern whether we will have enough money for the projects set for the later years if inflation continues at its current rate."
The district factored projected inflation rates into its budget, but it can be difficult to accurately project more than a few months out, Sprague said.
"We don't know what it's going to be a few years down the road, but we hear the market may stabilize a bit over the next few months," he said. "We should be able to balance it out."
For the builders themselves, rising cost of materials is worked into the overall price of the home once it hits the market, which often acts as a disincentive to buyers, Frankel said.
Mark Dotzour, chief economist and director of research at Texas A&M University's Real Estate Center, noted that falling oil prices are not likely to have a significant direct effect on Houston's home sales.
Home sales should be able to survive cuts in the energy field just because of how diverse Houston's economy is, he said at a GHBA conference in January. Despite a possible construction slow-down, home prices will continue to rise.
Fewer skilled hands
An element of the rising cost of construction that has been particularly persistent is the shortage of skilled workers across various fields. Skilled labor differs from unskilled labor in that it requires specialized training or a learned skill set. Examples in the construction field include industrial electricians, commercial plumbers, heavy equipment operators and concrete finishers.
A 2014 survey conducted by the National Association of Home Builders found that about 46 percent of Houston building companies are struggling with the skilled labor shortage. The labor shortage is also expected to intensify as millions of baby boomers prepare for retirement.
The shortage has been so widespread in the Houston market that area schools and colleges have developed programs to try to address it. GHBA has partnered with Houston Community College to support educating students on career opportunities, and LSCS has its own objectives.
"We have been working very closely with the business leaders in our community to learn about what the needs are and tailor our programs accordingly," LSCS Chancellor Steve Head said. "People in construction are all telling us how hard it is to find skilled workers they can depend on. That was a major part of our bond expansion plans, which focus considerably on specialty workforce classes."
Although Houston added more construction jobs than any U.S. metro market in the latest report from the American General Contractors of America, the labor shortage continues to persist into 2015. The declining unemployment rate has actually made it more difficult to find qualified workers, officials noted.
