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How The Bay Area's Biggest Construction Companies Cope With Costs

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The San Francisco Bay Area has officially passed New York as the world's most expensive place to build. But the region's construction costs have been high for most of this ongoing building cycle, and contractors of all shapes and sizes are looking for ways to adjust.

Related California 1500 Mission project
A Related California luxury apartment project at 1500 Mission St. in San Francisco

By the end of 2018, construction costs in the Bay Area averaged $416 per SF, according to consulting firm Turner & Townsend's international 2019 market survey

"It is certainly challenging," said Clark Construction Project Development Executive Ryan Haworth, who led the construction of both Salesforce Tower and Facebook-leased Park Tower, among other projects. 

"Nobody has a crystal ball, and [cost escalation] makes it very hard to make decisions about a client's program aspirations or architectural elements," he said.

Haworth will speak alongside Alexandria Real Estate Equities co-CEO Stephen Richardson, Slack Global Head of Real Estate Linda Shaw and EQ Office Senior Vice President Alan Walker, among others. 

But one crucial factor both Haworth and Skyline Construction Vice President of Operations Jessica Callahan, who will also speak at the event, emphasize: starting a dialogue with clients and partners as soon as possible.

"The sooner we can get in front of our clients to help them budget and get ahead of increases in unit costs, general escalation and government impact related to tariffs, the better," Callahan said. 

For Skyline Construction, which specializes in tenant improvements, that means clients reaching out to them much sooner than many assume.

How The Bay Area's Biggest Construction Companies Cope With Costs
Under-construction Park Tower in San Francisco

"For interiors, companies naturally think it takes 12-14 weeks to build, and then want to get us in a month or two months in advance," Callahan said. "In an ideal world, we're ahead of that pre-planning four-six months to get in there and really understand before leases are signed what each building case brings, exposures in different cities and code changes."

Both firms say they are methodical about how they select subcontractors and materials suppliers, as preventing ill-advised partnerships and subsequent cost overruns is a key way for construction companies to negate at least some of the more uncontrollable expenses. 

"We spend a lot of time trying to understand the capacity of the various subcontractors and materials suppliers so that we're trying to engage them at times that make sense, as opposed to times where they're already stressed," Haworth said.

Accurate projections of uncompromising raw materials prices add stability to the process as well, according to Haworth.

Like Clark, S.F.-based Skyline Construction focuses on the viability of trade partners, Callahan said.

"We do a full vetting process, and we use contractor scoring for ensuring that any sub we bring to the table is financially stable, which also is a process that assesses how much work different contractors are bringing on," Callahan said. "A small sub in this market is very dangerous if they are just grabbing a bunch of projects, none of which they can execute."

How The Bay Area's Biggest Construction Companies Cope With Costs
Workday's Pleasanton HQ

Callahan says Skyline also sees more cost-effectiveness in many of its East Bay projects.

Skyline does 60% to 65% of its business in San Francisco but has benefited from some of its key accounts being in the East Bay, where Callahan says less costly permitting and building help with projects, like tech company Workday's ongoing TI work in Pleasanton. 

The company, which is also working on a new six floors at Oracle's Redwood Shores campus, also encourages many of its clients to phase their projects, Callahan said. By doing so, improvements are made alongside a more realistic growth schedule for the company, rather than all at once. 

Costs are also strongly influencing tenant preferences, which itself leads to some level of unpredictability, Callahan said. Tenants have sought densification, or more people on smaller floor plates, which affects things like restroom sizes and building exits, which affect costs. 

In the end, Haworth said, the hope of contractors is that construction cost growth slows down, but expectations are more complicated. 

"We continue to be surprised year after year," Haworth said. "I think we're cautiously optimistic things will slow down but also prepared if they don't."

Join Jessica Callahan, Ryan Haworth, Alexandria Real Estate Equities co-CEO Stephen Richardson, Slack Director of Global Real Estate Development Linda Shaw and Swift Real Estate Partners Director David Copeland at Bisnow's Bay Area State of Office event on Sept. 26 at Hotel Nikko in San Francisco.