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South Bay Real Estate Construction Costs Keep Rising

The cost of construction in the South Bay has skyrocketed over the past few years. Much of what I have observed cannot be quantified with market statistics, but through my own experiences with flipping homes and developing from the ground up over the past nine years.  The “feel” of rising costs in the South Bay along with other factors nationally and statewide could have an impact on South Bay real estate prices in the next couple of years.

South Bay Construction Increases
In 2013, I built a spec home on The Avenues for about $175/sf. Over the years, my five additional spec projects have steadily climbed but if I was to go back to the first job on The Avenues, in today’s dollars, I could reasonably expect to build that home for $250/sf. That is a whopping 42% increase over five years.

A three-on-a-lot North Redondo town home build was quoted two and half years ago for $175/sf. It is now being quoted at $200/sf. A 14% increase in 30 months!

Manhattan Beach varies on the finished product, but in the past you could get the job done between $250 and $300/sf. Now, the standard is pushing closer to $350/sf for professional developers. And it can go way up from there.

The South Bay has recovered nicely from the housing crisis and recession, which in turn, has created more demand for new construction and remodels. I find my contractors complaining that “subs control the jobs.” What this means is subcontractors, like framers, concrete, plumbing, electrical, etc., are in high demand so they are increasing prices to the highest bidders. With a lack of labor and good subs, these companies can raise prices along with rising material prices.

The lack of labor is a big issue. In 2010, when I was flipping houses in South L.A., I was told a full-time worker was worth $100/day on payroll. Now, that price is going to $200/day. There is likely more pain ahead as California and L.A. County begin to increase minimum wage standards.

Growing Pace of California SFR Construction
According to the U.S Census Bureau, California new construction single-family homes is on the rise.

2016: 49,400 starts (12% increase YoY)
2015: 44,100 starts (14% increase YoY)
2014: 38,600 starts

And 2017 is already at 37,900 after eight months, which is 5,234 more starts over the same period in 2016 (another increase of 16% YoY).

These numbers only put more of a squeeze on labor and likely more rising costs to come.

Potential Tariffs on Lumber
The U.S. Commerce Department levied a 19.88% counter vailing duty on Canadian softwood lumber to the United States this past April. This has caused lumber to jump and subs to raise prices on long term contracts in anticipation of rising costs.

Additionally, the Commerce Department is making a final ruling in November on if they intend to impose an additional anti-dumping duty on Canadian softwood of 6.87%. That is potential tariffs closing in on 27% in one year alone. Yikes!

Framing costs, according the National Association of Home Builders, make up about 15% of a home’s total cost of construction. Lumber is at almost 13-year highs and it does not look like any relief is in sight.

Another potential risk to materials is the price of concrete. If Donald Trump gets his way, and begins building a wall, local impact to concrete in San Diego could easily trickle up to the South Bay.

The Hurricanes and California Fires
The hurricanes have created billions of dollars in destroyed and damaged homes. Shouldn’t that increase the cost of materials nationwide? I certainly think so. However, research from Cumming Corp studied impacts from past hurricanes and how it might impact local and national material and labor costs. Take a look here.

It is interesting to see how locally, almost everything is predicted to increase in the near-term and continued to put pressure on rising costs over the long term (see chart). What’s even more interesting, is how little it will affect the national and even regional markets over the long-term. So perhaps the hurricanes will be moot for the South Bay?

That said, northern California has experienced horrible impacts due to the recent wildfires. According to the Washington Post, the city of Santa Rosa has lost almost 3,000 homes and according to the Los Angeles Times, 5,500 homes have been lost in Sonoma County. To put that in perspective, the homes lost are over 10% of all new single-family starts last year. That is close to the annual rise in housing starts for 2017 year-to-date! It is a massive number.

How many other homes have been damaged? And how many commercial structures have been impacted? The resources to rebuild will be enormous. So why wouldn’t construction workers head up north where there will be plenty of work and likely higher pay due to demand? Sure, housing costs will be higher due to supply loss, but you have to assume there will be large amounts of short term affordable housing made to accommodate labor in the construction industry.

We will not know the impact of the northern California wildfires for years. It may take a year or so for these cities to get their new building codes together to begin rebuilding and tons of toxic ash will have to be cleared from communities before any type of construction can begin.

Impacts on the South Bay Now and into the Future
The South Bay has certainly been impacted by rising construction costs. There are accounts from local contractors to prove it and I like to think my experience reflects others experiences in our local neighborhood.

I think the rise in costs and labor take time to impact homes and the market. That said, I believe the South Bay is beginning to feel the effects and it will impact land prices very very soon. Additionally, small remodels and handyman jobs are getting evermore expensive and virtually impossible to find estimates at a reasonable rate.

Into the future, the lumber tariffs will be felt big time in a year or so, labor cost will rise due to supply/demand issue and upped minimum wage, and the northern California wildfire will hurt in two to three years.

I wrap up my final new construction project in November 2017 (a day care center) and my plan is to put building on hold and see how things shake out over the next year or two. It would be wise for homeowners looking to do a large scale remodel to start ASAP. Additionally, buyers looking to purchase land to build should put hefty increases into their budgets for projects more than 12 months out. And lastly, if you are a land owner considering selling, then right now could be the time as land will depreciate as construction prices go up!