Will Bay Area construction costs curb region's building boom?

SAN FRANCISCO (KTVU) -- A Chicago-based commercial real estate firm has issued a report that lists three Bay Area cities in the top tier of the most expensive areas to build in the country, a report that may chill the region's construction projects.

San Francisco, San Jose and Oakland rank in the list of top five most expensive locations for commercial construction along with New York City and Chicago, according to a report by JLL.

With Sacramento and Los Angeles also on the list California has half of the nation's top 10 most expensive places to build.

Bay Area building costs are about 80 percent more expensive than the national average, officials say.

There are three reasons, according to the JLL report:

  1.  The desire of corporations to expand or locate in the Bay Area fuels the demand. Micah Weinberg, head of Economic Institute of the Bay Area Council, a consortium of the region's largest employers said: "The Bay Area is the center of the global innovation economy. So, you'll pay a premium to be here.
  2. Severe shortage of qualified construction workers.  Construction unemployment is at 4.5 percent, the lowest level in 14 years, figures show. In mid-2009, the construction unemployment rate was 18.2 percent. In the last year alone, construction workers wages are up $1 an hour to an average of $30 per hour -- a new record high.
  3.  Soaring costs for building materials.

A slow down appears to be in the offing.

"I don't know that we're going to have an enormous downturn in the Bay Area, but we're certainly going to have a downturn," Weinberg said. "We haven't abolished the business cycle."

Andy Ball, who has led some of the biggest construction projects in the Bay Area for the last 25 years, is now a mega project consultant.

Ball said Bay area building costs have doubled since 2012 and have soared to a level where the costs are unaffordable for many contemplating projects in this area.

"About 8 months to 12 months ago, we saw the rental rates and for sale rates peak out and decline slightly," Ball said.

Even the biggest developers have flinched.

"And they're looking at the costs now and saying, 'You know, I can't afford to do that. I don't have that much financing. I can't afford to make the return I want,'" Ball said.

The soaring costs have impacted the bottom line for many developers. Officials say some 100 planned and approved large scale Bay Area building projects are now on hold.

By KTVU reporter Tom Vacar reports.

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