Costs Tough As Nails to Cut

By JAMES QUIRK, STAFF WRITER

Commercial builders and project managers already scrambling to adapt to high steel prices from three years ago are bracing themselves for a predicted 25 percent cost increase in 2008.

North Jersey construction and project-management companies are placing more emphasis on cost-control measures, and more projects are being reconfigured in the design phases to keep them within budget.

"Projects now are more expensive to construct," said Obi Agudosi, senior vice president and principal of DMR Architects, a Hasbrouck Heights-based firm that has designed and constructed public buildings in Bergen County.

"We find ourselves designing projects, and when the numbers come back after review, the cost is too high. So we try to reduce costs, but in some cases the client is just not able to implement the project. Because steel is the fundamental of most projects, you can’t just value-engineer it."

The price of nearly every type of steel more than doubled in the U.S. in 2004, which has increased the construction costs of most projects that use the metal. In New Jersey, this has boosted the costs of schools and slowed the construction of office buildings.

In 2004, hot-rolled steel, used to produce sheet metal, shot to a peak of $780 per metric ton. It has since fallen to the current price of $510, Charles Bradford, a metals analyst for New York- based Bradford Research Inc., said. But the price for other types of steel, such as the steel beams used in most office construction projects, as well as steel plates, has not diminished significantly, he said.

Two years ago, the average cost for DMR to install a ton of steel was $2,500, Agudosi said. Now the cost is between $3,500 and $3,800.

Building boom

A massive building boom in the Middle East and China has driven up the demand for steel, and slowed the supply in the U.S., Bradford said.

Demand for iron ore will rise by as much as 55 million metric tons in each of the next three to four years, said Paul Gray, an analyst for Goldman Sachs & Co. As China, the world’s fastest- growing major economy, consumes more of the steel it would have previously exported, steel prices worldwide will increase.

The $200 million mixed-use Center City project in Paterson has one of the largest current steel orders in North Jersey with about 4,000 tons of steel slated to be used, said Nick Tsapatsaris, principal of Ridgewood-based Center City Partners LLC. Tsapatsaris said he believes he avoided the biggest surge in steel prices by purchasing in bulk from a Canadian buyer within the last 12 months, as costs retreated from the highs of 2004.

If he were to build a project as large as Center City next year, Tsapatsaris said, he would carefully "value-engineer" his project to substitute other materials, such as wood, concrete or various composites, where possible.

Few alternatives

To cut costs, many residential home builders are shifting away from steel where they can, and using various forms of concrete, said Ronald H. Schmidt, president and chief executive officer of the Englewood-based architecture and project management firm Ronald Schmidt & Associates.

This is not always practical or possible for many commercial buildings, nor is it necessarily cheaper, as concrete structures still require steel reinforcement, said Tsapatsaris.

"Steel is really the only way we build today," Schmidt said. "Concrete is only used in specific projects, such as apartment buildings. Steel commercially is used in 90 percent of our projects."

Similar to DMR, half of the buildings that Schmidt’s company constructs are public, such as school and hospital expansions. Because public projects almost always have tightly defined budgets, the possibility of a renewed increase in the cost of steel presents a vexing problem to many commercial real estate businesses, Schmidt said.

"I don’t think the industry has figured out what to do yet," he said. "The clients have to understand it’s going to cost them more."

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Commercial real estate appears Thursdays. E-mail: quirk@northjersey.com

(c) 2007 Record, The; Bergen County, N.J.. Provided by ProQuest Information and Learning. All rights Reserved.