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  • Roland Li - San Francisco Chronicle

San Francisco passes New York to become world’s costliest place to build

San Francisco is now the world’s most expensive place to build.

The city’s construction costs rose 5% last year, and it’s now more pricey than New York, according to a report released Thursday by consulting company Turner & Townsend.

Costs rose amid demand for new buildings from the booming tech sector, plus a severe construction labor shortage and a spike in steel prices attributed to U.S. and China tariffs. Rising costs are stalling and killing much-needed San Francisco housing projects, exacerbating the shortage, according to developers.

A long-standing problem is the lack of construction workers, with many veterans leaving the industry after the 2008 recession. High housing costs also have caused some workers to move out of the area, and many commute for hours to reach job sites.

“There’s just so much construction going on. There’s only so many contractors,” said John Robbins, Turner & Townsend U.S. managing director. “For many, it’s become too expensive to live in the area.”

Meganne Pryor, a San Francisco engineer, said it’s the busiest job market she’s seen in six years, and she’s received as many as four work offers in one week.

“I actually had to turn down a couple jobs, because the work is so busy right now,” said Pryor, who is working at a city office and residential project under construction at 1500 Mission St.

She’s worked 70-hour weeks, and some of her colleagues have worked 100 hours in a week. Many of them live outside of San Francisco, commuting in from cities such as Antioch and Santa Rosa. Pryor lives in San Francisco on weekdays and Fairfield on weekends.

She said her $44 hourly wage will rise more than $2 an hour in July, under an agreement negotiated by her union, Operating Engineers Local 3, which represents 36,000 construction workers in four states.

Average construction wages in San Francisco were $90 per hour in 2018, third-highest in the world behind New York’s $101.30 per hour and Zurich’s $110 per hour.

Steel tariffs, passed in March 2018, led to a 17% increase in the cost of steel reinforcement bars and a 30% increase in the price of steel beams in San Francisco, Turner & Townsend said.

A burst in building proposals means that San Francisco and Bay Area projects can take years to get approved. “The local building departments are just inundated,” Robbins said. “We are seeing longer permitting periods.”

Stringent building codes and seismic safety requirements also add to costs.

San Francisco construction costs soar

-5%: San Francisco’s construction-cost increase in 2018

-$417: San Francisco’s average cost per square foot to build, the highest in the -world

-$90: San Francisco’s average hourly construction wage, third-highest in the world

Source: Turner & Townsend

San Francisco’s costs are expected to rise another 6% this year. “Short of a full blown recession, I don’t see it slowing down,” Robbins said.

Developer Eric Tao said rising costs have stalled his 299-unit apartment project at 1270 Mission St., which was approved in 2016 but hasn’t broken ground because it’s no longer financially viable.

Tao said his company is trying to redesign the building so it’s more efficient, which could mean smaller apartments or fewer parking spaces. The project will have 25% affordable units and would cost around $150 million said Tao, who is managing partner of developer L37 Partners.

Luxury housing projects and large office buildings are moving forward, but building smaller residential projects and government-subsidized affordable housing has become more challenging, said Tao.

San Francisco offices command more than $80 per square foot annually in rent — the highest among U.S. cities. New apartments generate around $60 per square foot in rent, but common areas like hallways and lobbies don’t have rental revenue, so offices are currently more profitable, said Tao.

It now costs around $500,000 to build a single apartment in a high-rise building, he said.

The report examined the average costs to build six types of buildings: an apartment tower, large office project, warehouse center, hospital, a school and a shopping center. San Francisco buildings cost an average of $417 per square foot to build — seven times the cost in Bangalore, India, or Istanbul.

London, Zurich and Hong Kong made up the rest of the top five most expensive places to build.

In New York, costs rose by 3.5%. Demand was healthy but the completion of the $16 billion first phase of Hudson Yards on Manhattan’s West Side means more labor will be available, said Robbins.

Tech companies such as Google and Facebook are also expanding in New York, but at a lesser rate compared with the Bay Area. Amazon’s cancellation of a huge new campus in Long Island City, Queens, will also dampen construction demand, Robbins said.

Modular construction — when components of a building are assembled off-site and attached together, rather than being built fully on-site — could help lower costs. But the practice hasn’t been widely adopted. San Francisco labor unions have opposed modular construction when work is done outside of the region.

Higher construction costs mean more projects will target wealthier buyers and renters, and more modest projects may be infeasible, said Issi Romem, chief economist at Trulia, a homes listing website.

“They’re knife’s-edge profitable,” he said. “It might make them aim for something that’s higher end.”

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