Real Estate Weekly
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Construction & Design

Trade war could send construction prices north

The New York City real estate industry is counting the cost of the ongoing trade war with China, with building contractors adding between five to 10 percent onto total construction costs to mitigate the impact of tariffs on the prices of steel, aluminium and other materials, Turner & Townsend has found.

The company calculates that the cost difference of constructing some individual supertall buildings in New York, before the introduction of the trade tariffs and today, could be up to $100 million for buildings with an overall cost of approximately $1-1.5 billion.

A cost study undertaken by Turner & Townsend of a completed 90-story building at the Hudson Yards Development revealed that if it was being built now the cost of the core and shell construction alone would have increased by up to $150 million due to tariffs and the knock-on effect driving general pricing increases on the steel structure, piping, aluminium goods and other construction materials.

US manufacturers and steel mills have already increased their prices in response to both actual tariffs on foreign competition, and to price-in the risk of additional tariffs.

Due to increased demand for home-grown steel, and recent production reductions in steel coming from China, the cost of domestic steel has risen an average of 22.4% over the last year.

While a slight price dip was experienced toward the end of 2018 and early 2019, this trend is now reversing with prices of steel rising. Reducing global steel market competition has added to the confidence of US steel manufacturers raising prices.

Turner & Townsend is warning clients and owners that they should add up to a minimum of a five percent contingency costs on the total value of their core and shell steel framed buildings, along with considering early buyout packages and direct purchase of materials to lock in pricing on items such as steel and curtain wall as early as possible.

Additionally, it recommends that clients put in place proper supply chain governance and controls to ensure that they are not paying for unsubstantiated tariff claims.

In some markets, such as the San Francisco Bay Area, contractors are attempting to add 10 percent to 15 percent on the cost of new building construction as allowances to absorb real or perceived pricing increases.
In some instances, west coast developers are exploring different construction methods for large scale low-rise buildings, including mass frame wood structures.

The professional services company is also recommending that clients introduce an internal management reserve of 5 percent of the total budget cost to mitigate any uncertainties that will arise due to the tariffs and other residual effects through the supply, delivery and installation chain.

John Robbins, managing director, USA and North America Head of Real Estate, said, “While contractors shouldered some tariff costs initially in the open competitive market, we are now seeing opaque pricing strategies being applied by some companies in an effort to mitigate the impacts of import tariffs or create additional profit under the guise of tariffs.

“Many projects are highly reliant on global supply chains and while there was a short window to shift some buying to domestic products, those opportunities are seemingly closing as US manufacturers of steel and building products have raised pricing in the face of actual tariffs and uncertainty around tariff negotiations.

“Delays at customs on some Chinese building products are also adding to a perfect storm where building schedules slip and clients are hit by further costs due to the labor overtime required to compensate for trade delays.”

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