A shortage of skilled labor and expensive materials have pushed construction costs to the highest point since the Great Recession just as the spring construction season gets underway.

High prices threaten to put the brakes on some new developments as the industry struggles to find workers in a state where unemployment has been below 4 percent for more than 37 months. Added costs to find, keep, train and pay overtime to workers are pushing bid prices up.

“There are a certain amount of projects that aren’t going forward because the pricing doesn’t work and the developer is not willing to pay that much if the numbers don’t work,” said Gary Vogel, an attorney at Drummond Woodsum and president of the Maine Real Estate and Development Association.

The price for construction grew 5 percent last year to the highest level since 2006, according to an index of prices maintained by the federal Bureau of Labor Statistics. Construction prices grew at twice the rate as other industries, about 2.5 percent, and more than double consumer prices, 1.9 percent, according to the agency.

For developers, that meant unexpected costs while a project was under construction.

When Jack Soley, a Portland developer, started work on Parris Terraces, a 23-unit midrange condo development on Parris Street in Portland 18 months ago, he budgeted $190 per square foot for construction costs. By the time the project is done this spring, it will be up to $227 per square foot, a 20 percent increase.

“We are trying to create quality housing at a low cost,” Soley said. “It really creates hurdles you don’t expect.”

Soley said he kept per-unit prices in the building – from $215,000 to $230,000 – in line by charging for parking and slimming his profits. But high construction costs, coupled with expensive land in Portland, mean he is having a hard time creating more workforce housing in the city right now.

“The difficulty is, with construction so high, we can’t afford to pay as much for a prime site,” he said. “It is definitely a problem and it is not going away at the rate we need.”

PROBLEMS BECOME MORE ACUTE

Skyrocketing costs for materials like steel, aluminum and diesel fuel partially drove construction expenses last year, said Ken Simonson, chief economist for Associated General Contractors, a national trade group. Prices for steel products rose almost 19 percent and aluminum increased 6 percent in 2018, amid U.S. tariffs on imported metals.

But a national shortage of skilled labor is the major driver of construction prices. Construction wage growth has kept pace with private industry averages, but employers are paying more for overtime, recruitment and training and new technology to compensate for a lack of skilled workers, Simonson said.

U.S. construction companies hired 219,000 people in December, but the industry still had 382,000 open jobs, according to the Bureau of Labor Statistics.

“The industry would have hired twice as many people as it was able,” Simonson said. “The number of job openings has really soared in the last few years. The labor shortage has grown more acute.”

In 2018, the construction industry in Maine employed 28,900 workers on average, about 2,400 fewer than in 2006, the pre-recession high point, according to the Maine Department of Labor.

When work dried up a decade ago, a lot of skilled labor left the area, said Mark Patterson, co-owner of Patco Construction, a commercial and residential builder in Sanford, and acting president of the Homebuilders and Remodelers Association of Maine.

“We certainly need people to replace them,” Patterson said. “Labor has been an ongoing problem for five or six years.”

Those workers may not come back and no one wants to fill their shoes, said Ryan Francis, 34, owner of Maine Construction Group, a modular home dealer and homebuilder in Holden. He offers a competitive wage, on top of insurance, and budgets for other overhead and fluctuating material costs. But even offering more money doesn’t bring in new employees who will do a good job, he added.

“The average age of my labor crew is 50. I can’t get people my age to do it,” said Francis, 34. “If I was to put out applications, I’m not going to get anyone under 50 that is qualified to do the job.”

SHORT SUPPLY, HIGHER PRICES

Because there are fewer skilled tradesmen, construction companies are forced to hire less experienced workers, said Tim Hebert, owner of Hebert Construction in Lewiston. Even though construction wages aren’t going up substantially – the median weekly wage for most Maine construction jobs in 2018 was $900; it was $807 five years ago – costs are spiking because workers are taking longer to get work done and adding to overhead costs, Hebert said.

“Nobody is making more money,” Hebert said. “You are paying two guys to do what one guy used to.”

A flurry of new building projects in southern Maine is also straining the ranks of specialty subcontractors like plumbers and electricians.

Jobs that would typically get bids from five or six specialty subcontractors are now only drawing one or two offers, Hebert said.

“The subcontractors that you need to get the jobs done are not all available at the same time. Those trades are naming their price.”

Gino Mancini, president of Mancini Electric Inc. in Portland, agrees.

With so many jobs on offer, his company gets to pick and choose the projects they work on. They can focus on work they like – such as supermarkets, schools and high-end residential – and stay within an hour of Portland.

Mancini wouldn’t disclose his hourly rates, but he estimated electrical contractors in Portland were bidding $75-$100 an hour for work, about 15 percent more than two years ago.

“When the economics drive it, you have to charge more, you have to pay your guys more,” he said.

The U.S. Labor Department reported in October that average hourly earnings for all employees in construction rose nearly 4 percent in 12 months – the fastest pace in 10 years.

FACING UNCERTAINTY

Developers still aren’t used to the sticker shock when they unseal contractor bids, said David Leatherwood, CEO of Norwich Partners, a hotel development company based in New Hampshire and Florida.

“I think the industry term is ‘yikes,’ ” Leatherwood said.

Norwich Partners recently completed construction of an AC Hotel on Fore Street in Portland and plans to break ground in the next few weeks on a hotel and condominium complex called Hobson’s Landing on Commercial Street. He’s confident he has the financing straightened out on that project, but developers looking out a year or more are facing a lot of uncertainty, Leatherwood said.

“If you are looking at a project 12 months from now, increasing costs would certainly be a challenge,” Leatherwood said.

That puts companies that want to expand in a bind.

Prices for new construction are prohibitively high and at the same time there isn’t enough suitable warehouse and industrial space to lease, said Justin Lamontagne, a commercial real estate broker with The Dunham Group in Portland. Vacancy rates in the Portland area for industrial space are below 4 percent.

That gives expanding businesses a choice – work more efficiently with the space they have or put off an investment that could grow their company.

“If you think about it, if you can’t expand your business you are not adding jobs, you are not adding wealth to people,” Lamontagne said. “It is inhibiting the overall economy if they can’t grow and develop because of brick-and-mortar challenges.”

 


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