Rising Construction Costs: A Discussion With Developers

With construction costs, interest rates, and land prices higher than we’ve seen in years, many developers are looking for ways to save on building costs. Projects were put on hold while the industry waited to see what would happen with construction and with interest rates. Now, many of these projects are moving forward as seasoned self-storage developers adapt to numbers that may be the new normal, while newcomers may find themselves priced out of entering the market. 

David Dodge, president of Little Rock, Ark.-based Paramount Metal Systems, says costs have increased considerably since COVID. “They’ve somewhat stabilized lately, but at a price higher than what everybody’s been accustomed to,” Dodge says. “Electrical, steel, insulation, mechanical, labor—almost every sector has seen increases.”  

Cost Factors 

Although the construction industry overall is reporting rising costs for materials, Nick Bergmann, COO and partner at San Antonio-based Capco Steel, says this is not what his company saw in the self-storage sector in the first few months of 2024. “There has even been a slight decrease in costs since the beginning of the year,” Bergmann says. “But that could change in two months.” 

Not only has the cost of materials leveled off, Bergmann says, but supply chain issues have eased as well. However, prices are still elevated from four years ago. “It’s all supply material driven, so we’ve seen some stability in the metal markets and better availability getting mechanical units and electrical gear,” he says. “We had problems for a while getting those and getting roofing materials, but we can get them now.”  

However, labor is a persistent factor of higher construction costs. “The construction industry as a whole has been suffering on labor for 20-plus years, and it’s becoming a real problem,” Bergmann says. “It’s become a challenge for contractors and a big issue for the subcontractors.” He notes that like everyone else, laborers are facing higher costs for goods and services, and they need pay raises. “They have to be able to put gas in their cars and buy groceries and pay rent,” Bergmann says. 

Starr Cannon, vice president of Lawton, Okla.-based Cannon Storage Systems, says her company hasn’t seen materials costs leveling out yet. “We had price increases in January, February, and March,” she says, adding that metal, doors, and all of their main components have seen increases in addition to an increase in labor costs.  

Cannon says stricter building codes are also adding to development costs. “In Oklahoma, every 2,500 square feet now requires a firewall,” she says. “If you build a climate-controlled building, you have to have a bathroom within 500 feet.”  

In addition, municipalities are demanding more expensive aesthetics in public-facing sections of new self-storage facilities. Expensive exterior finishes, more glass, and upgraded landscaping are adding substantial costs to building in many urban and suburban areas. 

Staying aware of new requirements and rising construction costs can prevent surprises. “Developers only remember the last project,” Dodge says. “It was X amount per square foot, so they used that as their budget for the next one. So, now they’re spending more money than they want to, and the higher costs may have to come out of pocket.” 

Cannon says construction inflation and higher financing costs haven’t significantly affected the larger operators they work with; however, high costs are keeping others from upgrading or developing. “We’re not getting as many calls from mom and pops or brand new investors,” Cannon says. “They used to make their money back in three years, but now it’s going to take five to seven years. It’s hard to just put up a building with costs around $24 per square foot. So, the people we are building for now have been in the industry a while.” 

Looking For Savings 

Bergmann says until late 2023, many seasoned developers were preparing for interest rates to drop while doing much of the prep work for upcoming projects. “Rather than rolling out projects and moving forward with construction last fall, they were putting those on the shelf while doing all of their homework with the design and contractor pricing,” he says, “so that when the interest rates drop, they have a project ready to hit the ground.” Bergmann says that although construction costs have gone up, lending costs have been the biggest issue.  

Although financing costs may be the biggest issue, there are ways developers can cut building costs. “Developers are looking at maybe doing different site or building pad preparation, or changing the sub-grade on the site,” Bergmann says. “It’s going to have a pretty big impact. We’ve looked at different building pad assemblies for some of our customers. We can work with the geotechnical engineer and the civil engineer, and together, we can look at the site as a whole and try to find ways we can do something a little bit differently to save the customer money.” 

Dodge agrees that this is an area for potential savings. “One project we’re doing now, our engineers took a look at it and we felt like the foundations were way over-engineered,” he says. “We sent it to our consulting engineer, and he was able to save them $100,000.” 

Roofing choice is also a cost factor. “They can use metal roofing in lieu of membrane roofing,” Bergmann says. “In fact, we recently had a project that had membrane roofing. We were able to change to metal roofing and save the customer 25 percent on the roof. That’s substantial.” 

Developers can also save on exterior aesthetics if municipalities will allow it. “Some require so much brick and so much glass, which drives the costs up,” Dodge says.  

Even in aesthetically demanding municipalities, compromise might be found. “Depending on the jurisdiction, they may choose to go with an all-metal clad exterior rather than masonry or stucco,” Bergmann says. “With metal cladding, the architects have done a really good job of mixing some of the metal profiles and colors where they can look really awesome. They’re mixing vertical and horizontal and it's trendy.” Savings may also be found by looking into alternative lighting materials. 

A principal area in which a developer can drive down costs is strategic site selection. “They may be able to buy a site that already has utilities at the front of the roadway,” Bergmann says. “Or they may be able to buy a site that’s a little bit smaller overall, so they don’t have to develop more than they need.”  

Bergmann has seen some deals pencil out because they chose a very good site from a construction standpoint. “There are definitely sites that are easier to build on than others,” he says. “For a developer, site selection is everything.” 

Building Less 

With lending tighter than it has been in years past, another trend is banks are asking developers to reduce the size of the project. “It may have been marked as a 120,000-square-foot project and reduced to 100,000 square feet,” Bergmann says. “We did see multiple requests to reduce project size toward the end of last year.”  

While the cost per square foot will increase, scaling back may be necessary if there is a demand issue. “Money is very expensive, and the banks are cautious,” Bergmann says. “They are scrutinizing every deal making sure that there is plenty of demand for what they’re trying to build.” 

Dodge has also seen projects being downsized. “If you have a site that will handle 100,000 square feet, you’d love to build it all out but maybe you can only build 60 or 70 percent out because that’s all your budget will allow,” he says. Sometimes the demand isn’t there for the larger build, even if the funds are. “We highly recommend a feasibility study to determine demand,” Dodge says. “Wouldn’t you rather spend $10,000 to see if you need to spend $10 million?”  

Cannon has seen another trend related to rising construction costs: developers who would rather pay today’s prices than risk unknown building costs in the months to come. “We are noticing that people are building in one phase instead of two or more,” Cannon says. “They are taking the hit all up front because they may get a better cost and they want to avoid the risk of the costs increasing for a second or third phase.” Although the developer is paying interest earlier, they know what the costs will be, she says, adding that those costs could go up 5 percent in a year. 

Scaling back on how much climate-controlled space is built is another potential cost cutter. “Ask whether it’s necessary,” Cannon says. “You can look at putting up a non-climate-control building with extra insulation to make it cooler and more airtight.”  

Dodge says that when a developer hires architects and engineers, they usually focus on optimal design rather than figuring out the minimum required for the building to function. “They will take the path of least resistance rather than looking for minimum essential design,” he says. 

To that point, Cannon says some layouts can leave money on the table. She recommends going back to a simpler design and getting rid of wasted space. “Redesigning a site can yield them more storage,” she says. “If you have a 10-by-20 and you have to get $200 for it, you can instead do four 5-by-10s for $2 per square foot. People don’t blink at that, while getting $200 for the single unit may be more difficult.” 

Higher costs affect self-storage development in many ways. Meeting the budget may require scaling projects back in size, redesigning for maximum storage space, or changing materials. Some materials’ costs leveled off in the first quarter of 2024; however, there is no guarantee they won’t rise again. Even if these prices stall, self-storage builders say it’s unlikely they will come back down. Despite this, they agree that these higher costs won’t have a significant effect on development because demand is still very high.   

“I’ve been doing this for 40 years, and in the first 30 years, we saw cycles,” Dodge says. “About every five years it would slow down for two or three years until housing caught up. But in the last seven to 10 years, the word got out. Now everyone who has a few expendable acres wants to build mini-storage.” Although higher costs may be an impediment to some, self-storage development remains robust. 

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Tammy LeRoy is a freelance writer based in Indianapolis, Indiana, and is a long-time contributor to Messenger.