Rising construction costs, labor shortage putting a pinch on Missoula developers
The price of materials and a shortage of skilled labor are driving up construction costs across Missoula, leaving developers scrambling for workers while planning against rising costs.
From the new student housing complex in downtown Missoula to ongoing work at the Old Sawmill District, the cost of lumber and steel continues to climb, and labor is tight.
“In the last year, we’ve seen about a 10 to 12 percent increase in construction costs,” said Jim McLeod, senior managing director with Farran Realty Partners in Missoula. “Just in lumber alone, we’ve seen a 35 to 40 percent increase, and in steel we’ve seen nearly a 50 percent increase.”
Farran Realty Partners broke ground on the Front Street student housing project last year, though it locked in prices several years ago, padding against current costs.
But while material prices continue to climb, finding enough labor is also a challenge in Missoula. And that labor shortage plays a factor in wages, McLeod said.
“There’s a lot of labor that’s being exported in because in Montana we don’t have that deep pool right now, with so much going on across the state,” he said. “When you get into a labor shortage, the subcontractors will increase their prices, so we’re seeing an increase in labor costs as well.”
Despite the rising costs and other market uncertainties, McLeod said Farran and its team of investors are moving forward with plans to develop the Riverfront Triangle in downtown Missoula.
That project, now years in the making, includes a hotel and conference center, along with structured parking, retail and housing. The developers have spent the past few years working the project through with the city, and McLeod said it’s coming to fruition.
“We’re moving toward the design right now,” he said. “There’s a lot of work that needs to be done as far as coordinating how we’re going to relocate utilities. We’re having those discussions right now, but we’re still moving forward.”
Across the river in the Old Sawmill District, construction crews are moving forward with a separate development that includes condominiums, retail and residential. Six buildings have been or are in the process of completion, and several others are planned.
Leslie Wetherbee, part-owner in the Old Sawmill development, said prices have climbed from one project to the next.
“We have seen a constant increase in prices in all our construction,” she said. “Even when we’ve gone from one bidding to the next, in six months it’s amazing how much our costs have gone up. I’ve heard industrywide, materials have gone up 30 percent, but it’s possibly more than that.”
The Sawmill development is facing the same labor shortage as reported by Farran. Wetherbee said subcontractors are seeking employees from outside Missoula and Montana to keep pace with local work.
Still, she said, the development sees a promising future and is now moving forward into Phase 2. That includes residential development on the north side of Wyoming Street – brownstones, townhomes, additional condos and stand-alone cottages.
“We’re moving forward – we’re keeping this going and we’re not slowing down,” she said. “Our sales are going really well and we have a list of people who’ve been waiting for this next phase. We’re meeting a need that’s really here.”
Wetherbee said construction costs will impact the bottom line and what the developers can sell or lease a unit for. McLeod offered a similar sentiment, saying any project has to pencil out, which can be difficult when market prices are high.
“If construction pricing goes up but rents don’t go up, the project won’t pencil out and we won’t do it,” said McLeod. “We look at how much it costs to build, what it costs in the money you’re borrowing, what the vacancy rate is going to be and how much you can rent a unit for.
“If all those numbers are going up but occupancy is going down because there’s an oversupply of product, our financial models don’t work and we’ll pass on the deal.”