When will local construction costs return to normal?

There’s a new normal when it comes to commercial construction: plan ahead, be ready for delays and expect to pay more, the CEO of a Las Vegas-based hospitality group said.

There’s a new normal when it comes to commercial construction: plan ahead, be ready for delays and expect to pay more in 2023, the chief executive officer of a Las Vegas-based hospitality group said.

“We remodeled this room, which included building a bar, and we did that in June 2022, and we were still feeling the pinch of supply chain issues,” said Scott Frost, CEO of Titan Brand Hospitality Group, talking from the Marquee room at Slice of Vegas Pizza Kitchen & Bar at Mandalay Bay. “The big thing is you have to communicate with your suppliers, because when you’re drawing stuff up, even if you’re thinking of buying a piece of equipment, you have to check with the manufacturer and find out what the lead time is.”

This is the new normal when it comes to construction costs in Las Vegas, and anywhere in the U.S. for that matter, said Frost, who owns Slice of Vegas at the Shoppes at Mandalay Place and two Hussong’s Mexican Cantina locations at Boca Park in Summerlin and the Shoppes at Mandalay Place.

“The supply chain has caught up lately, it is better, it’s moving again, but you still have to be very diligent and make sure that you are ordering well in advance. And as soon as you know, you have to open up a storage locker and have that stuff shipped to the storage locker. We’d rather pay a couple hundred bucks in storage and pull it and have to move it twice, then risk it not being there for when we get ready to open.”

Construction cost increases

Much like the entire real estate industry, construction costs for commercial projects in the U.S. have been on a roller coaster ride since the start of the pandemic. According to a new CBRE Group Inc. report, construction costs were at an all-time low in 2020 before COVID-19. CBRE’s construction cost index had overall costs at 1.9 percent in 2020, a number that shot up to 11.5 in 2021, then even higher in 2022 to 14.5 percent.

CBRE forecasts a drop taking place this year, with the index coming down to 5.4 percent, but this would still put costs for materials well above pre-pandemic levels.

CBRE’s construction cost index incorporates all three major cost components, labor, materials and margins to provide what it says is a comprehensive indicator that can also be used to forecast future prices.

Much of the construction cost increases last year was due to commodity shortages related to the war in Ukraine and COVID-19 lockdowns in China for such materials as oil and gas, aluminum, nickel, stainless steel, semiconductors and appliances.

Frost said he had to pull the plug on one project in 2021 because of supply chain issues, however his company’s latest project, a third Hussong in Henderson, scheduled to open in May of next year, is on time and on budget so far.

He said his business is relatively lucky because the constructions costs of projects are relatively small to some of the massive ones happening right now.

“It depends on the finishes,” he said about how much specific projects run these days. “If you’re talking about a lot of steelwork on these mega projects on the Strip, man those numbers have gone through the roof.”

Amanda Moss, senior director of governmental affairs for the Southern Nevada Home Builders Association, said when it comes to multifamily and apartment builds, commercial real estate developers have been going back and forth between two key building materials given all the price fluctuations that started during COVID-19.

“It’s either you frame the buildings with steel or wood,” she explained. “So when softwood lumber went up a lot, we got a lot of developers looking at steel as an alternative. And so the challenge with rising construction costs is you may try to be creative with materials, but when you’re seeing an increase across the board, there isn’t much relief for you.”

Las Vegas on the rise

The Las Vegas Valley’s population is booming, bringing a major hurdle to the surface.

Right now Clark County is gaining approximately 115 residents every day, pinching an already short supply of housing on the residential side. Nevada is leading the country in terms of job growth, and visitor volume, according to a Colliers International report.

Construction is the second fastest-growing employment sector in the Las Vegas Valley, behind education and health, and there are a number of high-profile construction projects that are coming to fruition this year, including the Sphere, Project 63 Las Vegas, Durango Resort & Casino and the Fountainebleau Las Vegas.

Charles Dougherty, a senior economist at Wells Fargo, said construction costs were hit doubly hard by inflation from the pandemic, then again when the Federal Reserve Board raised interest rates to try and stem runaway inflation.

“The construction industry has been hit very directly by inflation in a number of different ways,” he said. “For one it’s on the input side, you’ve had a rapid increase in the prices of building materials, and building material prices went up very sharply, even faster than the overall average rate of consumer inflation.”

Dougherty said this all comes down to one thing, taming inflation, which currently sits at 3.18 percent, and the U.S. government’s stated goal of getting that number down to 2 percent. Of note, before the pandemic hit, the Consumer Price Index inflation rate was 1.2 percent in 2020. The current fed fund rate, which is the interest rates that banks charge other institutions, is 5.25 to 5.5 percent, and before the pandemic hit, it was 1.50 to 1.75 percent.

“Our official view is that the fed is probably done raising interest rates,” Dougherty said. “So they are going to sit back and wait for the full impact of the 550 base point rate increase that has already been implemented and let them take full effect on the economy.”

However, there could be minor relief in the coming year, as the same CBRE report noted that “broader supply chain recovery and easing inflation should help stabilize construction input costs (for 2024). For some commodities, this will mean price declines from recent peaks, but most are not expected to return to pre-pandemic levels. For others, price levels will not fall but price growth should slow to a minimal, more predictable pace or remain flat.”

Contact Patrick Blennerhassett at [email protected].