San Francisco Developers, Contractors Finding Solutions To High Construction Costs

With more than 3M SF of office and thousands of housing units expected to deliver this year, San Francisco is undergoing a construction boom. But increased construction costs have some developers rethinking future development plans. 

Developers, contractors, city officials and consultants discussed their latest projects and the latest development and construction trends at Bisnow's San Francisco Construction and Development event Wednesday.

The central subway and Transbay Transit Center are among the city-led projects having the most significant impacts on the development of San Francisco. Once the central subway opens, it will be among the busiest transit lines in the city, transporting riders from Third Street in the Bayview District to Chinatown, according to San Francisco Municipal Transportation Agency Director of Transportation Ed Reiskin. The Central SoMa plan, which is expected to be approved later this year, will spark additional office and housing development.

“The thoughtful, deliberate wave of land-use planning and funding of transportation improvements needs is a big part of why we are seeing the boom,” Reiskin said.

While construction and job growth have led to traffic congestion in the city, Reiskin said additional congestion is not necessarily a bad thing.

“Congestion is a byproduct of the attractiveness in a city,” he said. “If you have tumbleweeds going through the city, it is not a good place to be.”

Reiskin said his agency has been working closely with developers to balance their needs with sidewalk and street space. He said the real solution is getting a public transportation system resourced and funded to provide a more reliable and attractive option for commuters.

The Transbay Transit Center is expected to reduce some congestion once it opens next year. Initially, 14,000 buses will use the center and serve about 100,000 commuters. Anticipating the success of this project, many developers flocked to the area to build large projects, including 181 Fremont and Salesforce Tower, that have redefined the city’s skyline.

The John Buck Co.’s Park Tower will carve its own space in San Francisco’s skyline. The John Buck Co. Senior Vice President of Construction and Development Evan Schwimmer said the project is about to start its sixth story. The building will be split into three tiers with different floor plate sizes.

The first dozen floors will offer 28K SF floor plates and then transition to 18K SF floor plates on the 13th story with a 10K SF outdoor terrace. On the 28th story, it will start into a side core floor plate of about 14K SF. The 750K SF 40-story building will have a half acre of parks allocated across the project, which will include the large decks and 1K SF sky deck terraces every third floor. Schwimmer said the building will create a vertical campus that will complement the Transbay.

“Having flexibility is more important than the actual amenities themselves,” Schwimmer said. “We want to make sure when we are designing a building, we can service any type of tenant whether or not it is tenant demands of today or 20 to 30 years from now.”

The Impact Of Rising Construction Costs

Even while all of this construction is going on, rising construction costs are having a dramatic impact on how developers consider future and current projects in the Bay Area. Construction costs have risen 5% to 7% within the last few years, according to Pankow Builders Project Executive Wally Naylor. He said while labor costs have trended up every year, the real problem is labor productivity. With a shortage of local labor, contractors have to get people from outside of the area, which can decrease productivity.

The design and review process also has added to the total cost to build. Every time a developer is told by a city to redesign a project, it increases the costs, Bridge Housing CEO Cynthia Parker said. Entitlements take a long time. One of Parker’s projects underwent 11 years of entitlement and the original master pro forma was $500M cheaper than what it costs today.

The John Stewart Co. CEO Jack Gardner said one project his company is doing with Bridge Housing reported a significant increase in per unit costs in just one year. He said the 180-unit project along the waterfront came in at $100K more per unit than its estimates from a year ago, and the project now costs about $500K/unit for construction costs only.

“That’s heart-stopping,” Gardner said. “For a variety of reasons, we can’t flex rent levels or prices to accommodate that.”

Gardner said the firms will have to do aggressive value engineering to try to cut down on the costs. He said developers have to be more creative about design and increase density. Instead of 100 units spread over 20 acres at 10 units/acre, his firm is considering 30 or 40 units/acre instead.

Developers also are building smaller units and eliminating parking to keep construction costs down, TMG Partners partner Tom Stubbs said. Developers are seeking cheaper capital and a lot of projects are selling to Chinese developers who have that cheaper capital.

Contractors also are finding ways to cut down on costs. Truebeck Construction Project Executive Travis Schultz said a more collaborative approach that engages the architect, consultants, contractors and others involved often leads to achieving budget and on-time delivery. Among the innovations helping improve collaboration is a trend toward 3D modeling. His company has been using lasers to do a 3D scan of a room to create models that can be accessed digitally in real time instead of having to go through pages of building plans.

Other construction innovations include pre-fabrication, which can achieve a high-performance build and provide cost certainty, according to Clark Pacific Executive Director Geene Alhady. He said a myth of prefab is that you cannot use high-quality materials, but as long as you design for manufacturing, any kind of material can be used.

DCI Engineers Principal Jeff Brink said there are about seven or eight prefab modular projects in the Bay Area. Modular construction is being used in residential, hospitality and student housing. Prefab is often constructed off-site with carpeting and paint on walls and the on-site crew is plugging things together. Prefab also can be delivered as a kit of parts put together on-site. He said prefab leads to a lot less waste in factories. He anticipates seeing everything in the future using some type of modular or prefab construction.