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Rising material prices hammer Charlotte-area construction industry

Some say they would be happy just to break even

A crew paints a new home Feb. 11, 2001, in Summers Walk, a master-planned development in Davidson. Rising construction costs are making it hard some builders in the Charlotte area to make a profit. Mecklenburg Times file photo

In Charlotte, as in the rest of the country, the construction industry is feeling the pinch.

The cost of building materials keeps rising. According to a March 16 Associated General Contractors of America report, material prices for all types of construction have risen 6.1 percent in the past 12 months in the U.S.

Some Charlotte-area builders say the rising costs are making it tough for them to make a profit at a time when demand for projects is low thanks to lending challenges and other lingering effects of the recession.

“It’s very challenging to raise prices in today’s market,” said homebuilder Darrell Fries, vice president of construction for Irvine, Calif.-based Standard Pacific Homes.

“As much as we’d like to, we’ve not been able to do that,” said Fries, who works out of Standard Pacific’s Charlotte office. “We’re all scraping by. If we could break even, we’d be happy.”

Homebuilders, especially, are finding it hard to raise their prices as low-price foreclosure properties lure homebuyers. Home prices in the Charlotte metropolitan area fell 4.8 percent in January from the same month a year ago, according to Standard & Poor’s Case-Shiller Home Price Index.

Russell Zavatsky, owner of Waxhaw-based Zar Homes, is encouraging anybody considering building a home or remodeling one to do it now before construction costs increase even more.

He expects rising petroleum costs to result in almost industrywide price increases.

Petroleum-based construction products include everything from vinyl siding to asphalt. Wood-based products are also hurt when fuel prices jump, Zavatsky said.

“You have to cut the trees down, move them,” he said, “and you need petroleum to do that.”

Madison Geer, owner of Charlotte-based Sterling Builders, a residential construction company that also does commercial work, said increasing building costs have become especially burdensome in a market where some builders have been undercutting others in bidding wars over projects.

The undercutting is not good for the building industry, he said.

“I think in general it lowers the overall standards,” he said. “The prices should be at a certain level, and when guys go in there and do it for darn near nothing, it affects everybody across the board.

“Painters should be making $15 an hour. That’s the standards, but if he does it for $10 an hour, it hurts everybody across the board.”

Fueling the pain

Fuel costs, especially, are straining the construction industry.

Zavatsky said a construction company might have 10 to 20 trucks on the road at one time, with each using diesel, the price of which climbed 7.1 percent in February from January and 40 percent in the past 12 months, accounting for the biggest price increase during the past year for builders, according to the AGC report.

From February 2010 to this past February, prices for copper and brass mill shapes increased 20 percent, steel mill product prices rose 13 percent and prices for insulation materials rose 6 percent, according to the AGC.

The AGC also noted that prices for materials used in residential and commercial construction rose 1.1 percent in February from January and 6.1 percent during the past 12 months.

The increased costs come at a time when construction spending is at a 10-year low, the AGC said.

As a sign of an even bleaker picture for builders, and an even smaller window for profits, consumer price indexes for finished buildings stayed nearly level during the past year, according the AGC.

Robert Denk, a senior economist with the Washington, D.C.-based National Association of Home Builders, said any industry dependent on petroleum and energy will be increasing in costs. Costs for steel and copper, both of which trade in international markets, will also be rising because of increased demand worldwide, he said.

“It’s quite clear that the uncertainty in the world is driving up the price of a barrel of oil,” he said. “Demand in the developing world drives up prices.”

But prices for other products should be slowly decreasing, he said.

“Things like concrete and wood products, those are more domestically produced and sourced,” he said. “So cement, for example, it’s sort of slowly drifting down (in price) since the housing boom. That’s not really pinching the builders’ profit margins.”

No relief in sight

Fries doesn’t seen any relief for builders dealing with rising costs.

“Over the last six months, we’ve seen a 2 to 3 percent increase in our costs,” he said. “The increases are coming in petroleum-based products, like vinyl siding, carpets and windows. Drywall uses a lot of heat, and I think we’re going to get hit because of those energy costs. There are lots of things looming on the horizon.”

Geer said he has seen a 10 percent increase in insulation costs.

“They’ve had two increases in the past year,” he said. “Maybe I need to shop around.”

The AGC has reached out to the federal government to help the building industry.

The AGC said its plan, “Building a Stronger Future: A New Blueprint for Economic Growth,” would boost private sector demand for construction by tackling a nationwide infrastructure maintenance backlog and reducing needless regulations and red tape.

The AGC said it developed the plan to fight the construction downturn that has left more than 2.2 million U.S. construction workers unemployed. The national unemployment rate for construction workers is 21.8 percent, more than twice the national average, according to the AGC.

‘Can’t take the increases’

As building materials continue to rise, Fries expects builders to push back.

They have no other option, he said.

“We can’t take the increases and still stay in business,” he said. “We can’t raise our prices and we can’t pay the price increase. We’ll have to look for a different product, and that can be challenging.”

Geer, who said he refuses to use an inferior product just to save money, suspects that he has lost jobs because his prices for projects have been too high.

Now, he’s wondering whether he should stay in the industry.

“Every day I wake up and ask what can I do differently today to make my business work better or if I should just maybe do something else,” he said. “But I’ve done this for so long, I don’t see switching now.”

Tara Ramsey can be reached at tara.ramsey@mecktimes.com.

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