After Drop In 2020, Construction Execs Foresee 'Price Creep' This Year As Activity Returns

A slowdown in new development starts during the pandemic has led to a temporary break from the years-long trend of soaring construction costs, but D.C.-area construction leaders expect to see prices rise as more developers break ground on new projects this year. 

The heads of several top construction companies in the D.C. region said Wednesday on Bisnow's D.C. Construction and Development digital summit that the industry should expect to see construction prices increase later this year after a brief respite.

"We saw recently, and for the near future, a drop in pricing, a little bit of a trough and people being very competitive," Rand Construction CEO Bob Milkovich said. "However, I think as we go forward, we're going to see a little bit of price creep come back into the equation."

Davis Construction President and CEO Jim Davis said construction pricing over the last year has been 6% to 8% lower than the firm had anticipated at the start of 2020. But he doesn't expect that trend to last much longer. 

"We're starting to get notifications from suppliers about steel increases, we've experienced a lumber increase, and some drywall and acoustical things," Davis said. "We're in a sweet spot right now, but we're expecting that sweet spot is going to start to evaporate as 2021 progresses."

Davis said he expects a rise in new development starts this year will increase demand for construction materials and labor. He predicted construction costs this year will begin to increase but will still be 3% to 4% below their pre-pandemic norms.

"I am expecting an increase in our construction activity in Washington," Davis said. "Costs] will still be lower, but they're not going to be as low as they are at the moment."

Nonresidential construction starts in the D.C. region last year totaled $7.3B, according to Dodge Data & Analytics, a 38% decrease from 2019. Total construction starts, including residential projects, were down 22%. 

According to January data from Associated General Contractors of America, nationwide prices for new nonresidential building construction increased 1.3% during the 12 months ending in December, compared to 4% and 5.4% during 2019 and 2018, respectively. 

HITT co-President Drew Mucci said he expects as vaccines are more widely distributed and concerns around the coronavirus pandemic start to go away, more developers will break ground on projects, pushing up demand for construction and increasing prices.

"It's going to be on demand as some of these projects start to come back, it's going to push us all in that direction," Mucci said. "It really comes down to when people are going to start making those decisions ... It's going to follow that confidence that COVID is really behind us."

The pandemic and the recovery are not the only forces impacting construction costs. Government regulations can also push up costs, and D.C. Building Industry Association CEO Lisa Mallory said the District has implemented new rules this year. 

"Here in the District of Columbia, we have certain things that have come into fruition like the Clean Energy Act that has building energy performance standards that came into effect January of 2021 that increase our need to retrofit some of our older stock," Mallory said. "So that adds to our cost of construction, and that's not even related to the pandemic."

Clark Construction Division President Lee DeLong also said regulations have created upward pressure on construction costs, as have the complications of building during the pandemic.

"In addition to materials and labor availability, the fact of the matter is that the cost of doing business will continue to grow in the near future," Delong said. "Compliance, regulations, working around COVID, what we all hope will be the tail end of COVID here, there's some added burden there as well."

Carr Properties CEO Oliver Carr, speaking on a separate panel during the summit, said his two projects in the D.C. area, a 940K SF mixed-use development in Bethesda and a 228K SF office project near Union Market, weren't delayed by the pandemic because the region's government's deemed construction an essential operation.

But in Boston, where construction was temporarily halted, he said his firm's 1M SF office tower was delayed by about 90 days. He said that delay increased costs, but not by a significant amount.

"For us, the pandemic really has not slowed our project timelines or affected our costs in any meaningful way," Carr said. "For us, it's all about the increased emphasis on the health and safety of our construction workers and our employees. For the most part, the underlying projects are still moving forward as planned."

Skanska Executive Vice President Mark Carroll said the firm had been preparing to break ground on its 410-unit apartment project in Tysons when the pandemic began. After weighing a variety of factors, the developer broke ground in the project in August. 

The factors Skanska looked at included financing, which wasn't an issue because it funds its own projects from its balance sheet. It also looked at construction safety, and the firm's construction arm put together guidelines for on-site work, plus he said the early stages of the construction process would be outdoors. The final factor it looked at was potential impacts on construction costs from supply chain issues. 

"There were some rumors we may see supply chain impacts, but we got comfortable that we weren't going to see any of those impacts," Carroll said. "We started construction in August, and we haven't seen any construction delays."