Cost of Building Climbs

Rising fuel costs, demand in foreign countries and rebuilding
efforts all contribute to spike in prices
Gilroy – When electrician Chris Costello went to Home Depot to buy shrink coil earlier this month, it was selling for $38.90 a roll. He went back a day later and the same roll of protective tubing was selling for $48.90.

One day the coil was “only 15.6¢ a ft.” The next, it was “only 19.6¢ a ft.” In one day, the price of shrink coil jumped 26 percent.

“Everything’s going up so high it’s going to make everything come to a halt,” Costello said Thursday as he worked a job on Monterey Road. “It won’t affect this job, but on future projects bid prices are going to have to go up.”

The price of every conceivable construction material has shot up in recent months, a combination of rising fuel prices, demand in countries such as China and Brazil, and rebuilding efforts in Iraq.

For now, suppliers and contractors are absorbing the added costs. Under normal circumstances, they would pass them on to consumers, but some are worried that the market may not bear it. And, they say, when massive construction projects get under way in the Gulf Coast states, it’s only going to get worse.

“The storms haven’t even affected [the building industry] yet,” David Hartwig, a sales representative for Orco Construction Supply, said of Hurricanes Rita and Katrina. “Wait until the major rebuilding begins; that’s when prices are going to go up even more. It’s over the edge.”

Hartwig said the price of water-resistant floor sheeting has more than tripled in recent months. Shipping a load of steel rods from Oakland to San Jose used to cost about $325. That same load now costs $525. Costello said he’s paying 35 to 40 percent more for copper wire and that the cost of plastic piping has doubled.

Small contractors are suffering more than suppliers, who have more flexibility with their prices. Hartwig said he’s not profiting from higher prices, but with some products, the markup rises with the price. Orco places a 25 percent premium on the floor sheeting whether it costs the company $38 or $113.

“I get about the same 25 percent markup,” Hartwig said, “but when the market is going like this, profit margins do shrink because customers are expecting value.”

James Suner, a local developer with a number of projects in Gilroy, said he expects material costs to climb another 20 percent before they level off. He said he’s not worried about the possibility of a housing market crash because there’s a supply shortage in South County and the Bay Area. But he does expect the price of land to come down as developers try to compensate for increased building costs by refusing to pay top dollar for land.

“It’s a supply-demand equation and there’s a very constricted supply,” Suner said. “Ultimately, it will have to adjust in the land price. That ebbs and flows. It’s typically slow to respond.”

Randy Kirk, who’s building Suner’s Ervin Court project on Monterey Road, said he’s worried that rising costs will make it hard to clear a profit on future projects.

“Fortunately we were able to lock in prices for this months ago. It will hit us considerably,” Kirk said. “It basically comes right off my bottom line. I’m a small business owner so I don’t have any buying power.”

Kirk believes that housing prices are not likely to go up with the cost of materials, and he said the homes on Ervin Court must remain in the $900,000 range or they’ll lose buyers to more affluent parts of town.

“I don’t think the market will bear it. If prices go into the next bracket, people will go to Eagle Ridge,” Kirk said as the first catering truck of the day pulled on to the job site. “The good news is, prices at the gut wagon haven’t gone up.”

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