Commercial Real Estate Blog

Slow down? What slow down. Construction material prices in many markets around the world continue to increase rapidly. In the UAE for example, the cost of steel has risen by about 15% this month alone, with the expectation that prices might rise a further 5% in the ensuing week.

The global demand for rebar sits at about 218M tons, with the Middle and Far East representing roughly 65-70% of that demand. In fact, in the Gulf states, the value of civil projects comes in at a whopping $1.5 TRILLION. Middle East rebard demand for instances, is roughly 15 times that of the United Kingdom, and several more million tons that demand for reinforcing bar in the United States.

Layer on energy prices and rising headline inflation rates around the world and it is easy to see that construction prices, even in the face of the slowdown we are in, are not abating, and will only likely do so when MEA markets slowdown.

In most development projects in Silicon Valley, municipal codes and zoning generally dictate parking requirements. For most office projects, parking requirements are genrally in the ratio of 3.3-4 spaces per 1,000 square feet. For most multi-family developments which have a mix of 1-3 br, ratios are generally in the 1.5-2 spaces or stalls per unit. Retail can vary greatly, as the required ratio of parking for various retail uses can have a big impact on parking requirements, but generally requirement of 4.5 stalls per 1,000 SF is mandated, with requirements moving to 7-9 stalls per 1,000 SF for food-intensive retail centers.

The cost of construction for these parking stalls can also vary greatly depending on what type of parking is provided; will the parking be be subterranean or surface? will it be in a parking garage or in surface lot?

Pricing can vary greatly, but some back of the envelope pricing for the construction of parking in Silicon Valley is as follows:

• Grade-Level Surface Parking - $5,000 per stall
• Parking Garage Below Building
  • Above-Grade - $40,000 per stall
  • Below-Grade - $60,000-90,000 per stall
• Freestanding Parking Garage
  • Above-Grade - $18,000 per stall
  • Below-Grade - $40,000 per stall

Palo Alto has announced that any commercial construction greater than 25,000 square feet will require Green Building Council verification. That move makes it the first south bay city to codify green building. While many new projects coming out of the ground today seek LEED certification, the fact is that ultimately the increased expense of LEED building, at least for the first few years, will be something which will affect the land costs a developer can afford to build. Ultimately, it is the tenants which much demand LEED buildings, otherwise the only difference to a developer is that they are delivering a building at a higher cost. If tenant’s do not demand LEED space and are prepared to pay for it, then mandating LEED does nothing more than reduce the land cost a developer can pay.

The mandate however is not something that will bring commercial construction to a halt. It will simply take a few years to work out as ultimately the tenant demand for LEED space will materialize one way or another; whether voluntary or driven by market forces. Until then, developers will continue to build but it will just take more to make a deal to pencil.

Wachovia issued a report earlier this month on the state of commercial real estate. Generally speaking, they are bearish on almost all asset classes. Citing a tight lending market, oil prices, slowing demand, and other factors, the anticipation is that the run up in asset prices will continue the reverse which was initiated over the past few quarters.

The report contains a lot of useful data and charts, and rather than paraphrase the details, I’ve outlined the key points below. If you’d like to read the whole report, it is available here for download.

• Traditional Commercial Mortgage Financiers Pick-up Market Share
• CMBS Issuance Halts and About Face
• Nonresidential Construction Set to Weaken
• Property Fundamentals Correction Underway
• Domestic Banks Tighten Lending Standards
• Slowing Economy Puts Pressure on Office Fundamentals
• Industrial Demand Cooling Off
• Apartments Expected to Benefit from Housing Slump?
• Retail Slowing with Consumer Spending

There isn’t much that wasn’t generally known in the report, but the numbers and charts quantify what is going on. The prices are national averages so cap rates, costs per square foot, etc. in the report vary significantly from what assets trade for in Silicon Valley and bay area. Nevertheless, money chases opportunity so any fundamental change in other markets will have an impact on our local market as opportunity costs become to great to ignore.

Over the past several weeks, construction prices have climbed about 10% as the combination of a weak dollar and high crude oil prices filter their way through the economy. The weak dollar and global demand has caused base materials products to increase thereby causing an upswing in building material prices. High fuel prices further compound the problem by naturally increasing the cost to transport the goods.