But since planning started on the development, which had a $50 million construction budget two years ago, the prices of steel and other construction materials have soared, and Friedman undertook an eight-month redesign to bring the construction budget, which had risen to $70 million, down to $64 million. Because of the higher total cost, he was also required to put up an additional $6 million in equity.
The architects, Cambridge Seven Associates Inc. and Ann Beha & Associates, removed the basement that had been planned in the addition, reduced the distance from each floor to the floor above and added a 15th story, said the project manager, Darren D. Messina.
Despite a four-year effort to put this deal together, "it's been a nightmare," Friedman told the newspaper, expressing a sentiment heard around the country from private, public and institutional developers, builders and architects. To rein in construction costs that are often 10 to 20 percent over budget or even more, they have had to redesign or re-engineer projects, increase investments or borrowing, cut projected profits and delay or cancel construction.
Since June 2003, the price of steel has doubled. The costs of copper, gypsum, plywood, lumber, cement and petroleum used to fabricate, transport and install many materials have also increased steeply, if less drastically.
In construction, steel is pervasive. It is in structural frames, floor decks, ceiling grids, air-handling systems, wiring, plumbing, interior studs and bars that reinforce concrete. Last November, an index reflecting the cost of a theoretical market basket of steel products peaked at 412.6, according to the Producer Price Index compiled by the United States Bureau of Labor Statistics. Prices then turned down and by January, the most recent month for which the index is available, they had eased off to 330.7, but this is still double the level of 165 in mid-2003.
Such nettlesome price increases have been compounded by the difficulty at times in obtaining steel and other materials as the fast-growing economies in Asia, especially China, soak up supplies.
Meanwhile, the output of steel in the United States has fallen. From 1999 to 2002, when prices were more stable, the value of steel products made in the United States fell from $171 billion to $131 billion, said Joseph P. Kowal, the bureau's senior economist for the Producer Price Index, who adjusted these prices for inflation.
All this combines to create risk and uncertainty for developers, builders and architects.
In California, foundation work was halted in December on a retrofitting of a 2.2-mile span of the San Francisco Bay Bridge so it can better withstand earthquakes. Construction of the actual span, which was scheduled to start last October, has been delayed indefinitely as state officials and lawmakers grapple with the price tag of $6 billion, up from the 2001 estimate of $2.6 billion, largely because of the rise in the cost of steel, according to state transportation officials.
At the Pennsylvania State University medical center in Hershey, just three hours east of Pittsburgh, once the heart of United States steel production, the metal is so expensive that the college cannot afford to build a planned 264-bed residence. Instead, the plan was downsized. This summer construction will start on a new 105-bed dorm, and 152 beds will be placed in renovated buildings nearby, said Linn Morris, the senior project manager.
In February, the Trump Organization started site preparations in Chicago for an $850 million, 2.6-million-square-foot mixed-use tower. To keep costs in line, it now has a concrete foundation rather than the steel frame that the architect, Skidmore, Owings & Merrill, had originally planned, said Donald J. Trump Jr., the vice president for development. He cautioned that if steel prices spiked again and interest rates rose, "the real estate market will decline."
According to William Wheaton, professor of urban economics at the Massachusetts Institute of Technology, developers in markets where demand is strong for housing and industrial facilities are not hurt as badly by rising construction costs. For those that specialize in office construction, however, "this could ultimately put a damper on development because tenants are not in the mood to pay higher rents," he said.
One company that has not suffered with higher construction costs is the AMB Property Corporation, an industrial real estate investment trust based in San Francisco with a $6.4 billion portfolio. It has ramped up its construction of new warehouse-distribution space worldwide even though it must pay more to build it, because many prospective users are doing so well that they are less resistant to higher prices than office tenants.
But many developers working on office projects are struggling with rising material costs. In suburban Framingham, Mass., for example, the profit margin was halved on a $10 million office that National Development, based in Newton, is constructing for a tenant that has leased the entire building, said a partner, Jack O'Neil. From last August, when he started negotiating rents with his tenant, to December, when the lease was signed, rising steel prices consumed much of his profit.
