The $1.2 billion MGM National Harbor resort will create
thousands of jobs and drive work to hundreds of small and local businesses
during the roughly two years it is under construction. But the MGM effect,
according to one leading development executive, isn't all boon. It may be a
drain, too, on the pockets of other developers.
"In fact in some of the cities, some of the larger
projects like the potential casino that's going to be built in Everett
[Massachusetts] and the current casino that's being constructed at National
Harbor are major users of both materials and labor," Douglas Linde, president of Boston Properties Inc., told investors during his
company's Jan. 30 earnings call. "And given that the revenue models of
those types of projects are such that time is critically important, they are
prepared to pay whatever it takes to get resources, and that impacts the
overall availability from a construction perspective in those markets as well.
So we're seeing it and we don't expect for it to abate any time soon."
Oil prices may be down to their lowest level in years,
Linde said, but "it's not being reflected in reduction in construction
costs in our markets." Mega projects like MGM, combined with a
post-recession reduction in the number of qualified contractors and a healthy
volume of construction activity in major markets, is driving up costs.
Boston Properties, Linde said, is budgeting for annual
construction cost increases of up to 4.5 percent, "and we really don't
expect to see much in the way of a change in that."
Linde's comments, all of them, jive with what the
Association of General Contractors of America is hearing from its members, said
Brian Turmail, AGC spokesman. While construction
material costs (save for gypsum board) have generally remained flat, Turmail
said, the industry has seen a decrease in the number of subcontractors and
qualified construction workers, and most general contractors "are
reporting they've having to pay more and pay more benefits to retain and
recruit qualified workers."
"Certainly we've seen a decrease in the number of
contractors, especially subcontractors, because the contractor downturn started
earlier and ended later," he said. "A lot of firms reduced staff and
a lot of firms closed their doors."
MGM executives declined comment.
Their project, led by McKissack & McKissack and Whiting-Turner Contracting Co., is quickly
emerging from a 1,550-foot-long, graded stretch of dirt between National Harbor
and the Tanger Outlets in Oxon Hill. It is expected to open in the second half
of 2016, with a 23-story, 308-room hotel tower, a 4,646-space parking garage,
26,582-square-foot spa and salon, 12 food and beverage outlets, 27,431 square
feet of conference space, a 3,000-seat theater, and, of course, a casino with
3,303 video lottery terminals and 160 table games.
Below is Linde's full response to the question on cost
inflation, posed by Brad Burke of Goldman Sachs.
As much deflation as there is in the overall economy
right now in terms of the impact of oil prices and the impact of other
commodities, it's not being reflected in reductions in construction costs in
our markets. And that's largely due to two things.
The first is that the overall amount of activity in
our markets on a relative basis is probably higher today that's it's been at
any time over the past five or six years, so there is more institutional,
residential, as well as commercial development going on in New York City, in
Washington, D.C, in Boston and in San Francisco than there has been in quite
some time.
The other thing that has occurred is that during the
downturn there were a number of contractors who basically gave up and either
went out of business because they decided it wasn't profitable, or they were
forced out of business because they couldn't make ends meet. So the number of
quality contractors that are around to do the kind of work that we need to have
done has been reduced.
And so there has been somewhere in the neighborhood of
3.5 to 4.5 percent annualized increases in construction budgeting over the past
year or so, and that is what we are using as we plan our projects on a going
forward and that's all baked into our numbers. And we really don't expect to
see much in the way of a change in that.
In fact in some of the cities, some of the larger
projects like the potential casino that's going to be built in Everett and the
current casino that's being constructed at National Harbor are major users of
both materials and labor and given that the revenue models of those types of
projects are such that time is critically important, they are prepared pay
whatever takes to get resources and that impacts the overall availability from
a construction perspective in those markets as well. So we're seeing it and we
don't expect for it to abate any time soon.
Source: Washington
Business Journal
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