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# Costs continue to build in a runaway market
- URL: https://www.smdp.com/costs-continue-to-build-in-a-runaway-market/
- Published: 2006-06-14T15:00:00.000Z
- Updated: 2026-10-25T00:15:29.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By JODI SUMMERS*

The Wyoming Water Development Commission has found an effective way to budget in rising materials costs for new construction — they asked the state legislature to set up a special inflation fund for its construction projects.

Commission director L. Mike Besson said his staff uses the fund to cover unanticipated price increases, rather than going to the legislature to seek more money — a process that can take months as costs continue to rise.

“Prices have simply gone through the roof,” said Besson, who budgets in a 15 percent cost increase on projects.

Increased international competition for steel, record rates of construction and recent hurricanes have sent material costs escalating over the past several years. The result is that construction costs have been rising faster than the rate of inflation due to global economic expansion.

“It really gets down to the law of supply and demand, and right now construction materials are in high demand in Asian and other overseas markets,” explains David Lereah, chief economist for the National Association of Realtors (NAR).

The Labor Department recently released data showing the cost of building a warehouse rose 7.6 percent in 2005\. That’s well above the 3.4 percent consumer inflation rate and the 5.4 percent wholesale inflation figure for finished products.

The warehouse figures are the first in a series of construction costs that are being analyzed by the government as part of its monthly producer price index. In the near future we will have measures for the cost of new school, office, manufacturing and industrial buildings. Labor economists also will measure inflation in building trades: electrical, concrete, roofing, plumbing and mechanical contractors. The new Labor Department data will give contractors more of a general sense of whether they are in line with national trends.

Prices are up but like the Wyoming Water Development Commission, most contractors have been able to pass on many of their higher material costs to building owners.

“It showed a little more success than I had expected,” said Ken Simonson, chief economist of the Associated General Contractors of America.

Higher building costs and a tightening economy mean a drop in construction.

Builders are gambling on rising rent rates and are focusing on multi-family projects. According to the California Building Industry Association (CBIA), the number of multi-family building permits issued for the first four months of 2006 was up 12.2 percent compared to the first four months of 2005\. This is contrary to the number of building permits issued for single-family homes in California, which were down approximately 18 percent compared to the first four months of 2005.

“Continuing the trend of the past few years, multi-family activity continues to expand,” said CBIA chief economist Alan Nevin. “Most of the downturn in single-family permits is in more distant areas which have been accommodating the housing demands from those employed in the more urban areas.”

Statistics compiled by the Burbank-based Construction Industry Research Board note that the number of single-family building permits dropped the most in Napa (-71.4 percent); Yuba City-Marysville (-61.3 percent) and Salinas (-60.7 percent) metro areas in the first four months of 2006 compared to the first four months of 2005.

Single-family building permit activity increased the most in the Madera (21.5 percent); Santa Rosa-Petaluma (17.4 percent) and El Centro (15.9 percent) metro areas in the first four months of 2006 compared to the first four months of 2005.

Home sales in Southern California are at their slowest pace since 2001, according to DataQuick information services. The median price paid for a home in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties was $485,000 in April, up 9 percent from $445,000 in April 2005\. The 9 percent year-over-year increase in the April median price is the first time appreciation in SoCal has dipped into single digits since November 2001 when the $238,000 median rose 9.2 percent from $218,000 the year before, according to DataQuick.

“Builders are a bit more careful than they were,” said Marshall Prentice, president of DataQuick. “They used to build tracts and put up ‘For Sale’ signs.

“This time around they’re building a couple of homes to show potential buyers, getting sales contracts signed with a deposit, and then building the rest of the tract. They don’t want to get caught with unsold inventory.”

Nevin noted that the price of fuel may be a factor to the decline in construction in outlying urban areas. Adding to the increased expenses associated with building is the 21st century concept of disposable architecture. Towns in California Governor Arnold Schwarzenegger’s homeland of Austria stand for more than 700 years. In the U.S., the current expected lifetime of a building is about 30 years. Think about our recently-reconstructed library and police station. Commercial properties like the Santa Monica Place Mall will make it less than 25 years. New structures are built with a limited lifespan, built as flimsily as usage will allow, with the plan that they will be thrown away when we’re finished with them.

“It was the unmatched prosperity of the post-World War II era that gave rise to the concept of the disposable society,”said property historian Arrol Gellner. “With a booming economy and material goods aplenty — not to speak of persuasive corporate advertising — Americans bought into the idea that the world’s resources were essentially unlimited, and that throwing things away and buying new ones made better economic sense than conservation.”

Perhaps because we do not have to prepare the logs, chisel the rocks and smelt the iron, that we treat raw materials differently than our forefathers. Records show that the English aristocracy historically used salvaged stone, iron, lead and glass in the construction of their manor houses.

“People will not look forward to posterity, who never look backward to their ancestors,”said English statesman Edmund Burke.

For more on Southern California commercial properties there is a great information blog at www.socalindustrialrealestate-blog.com (Jodi Summers is director of the investment division at Boardwalk Realty Santa Monica. For your real estate needs, , or call (310) 309-4219\. Visit her Web site at www.santamonicalandmarks.com.)

*Originally published in the Santa Monica Daily Press print edition on June 14, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/061406.pdf?ref=smdp.com)