On The Rise

Posted by Poppy Behrens on Jun 1, 2018 12:00:00 AM

Will Self-Storage See Sky-High Construction Costs?

By Kerri Fivecoat-Campbell

When President Donald Trump announced a 25 percent tariff on imported steel and a 10 percent tariff on aluminum in March, prices had already been climbing for quite some time.

The announcement of the tariffs, even with the announcement that key allies such as Argentina, Australia, Brazil, the European Union, Canada, and Mexico would be (at least temporarily) exempt from the tariffs, sent prices soaring even higher.

“We’ve been incurring steel price increases for the past five years,” says Charles Plunkett, CEO and founder of CAPCO Steel, Inc., in San Antonio, Texas. “It’s been a bit of a rollercoaster; the price goes up and then comes down a little, but goes back up again.” Overall, Plunkett estimates steel prices have increased about 25 percent in the past five years.

When interviewed in April, Caesar Wright, president of MAKO Steel in Carlsbad, Calif., had seen price increases implemented each month during 2018.

While the impact for self-storage developers and contractors is greatest in the price of steel buildings, the effect of price increases has been across the board. Rebar, coils, duct work, concrete, hallway doors, and almost every other aspect of the construction process, have seen increases. Plunkett estimates that at least one-third of each project consists of steel or aluminum.

In addition to seemingly accelerating the increase in steel and steel product prices, some believe the tariffs also cause a panic run on steel with developers taking possession of steel they didn’t yet need for projects in order to avoid future cost increases. The resulting shortage has already created some construction delays on existing projects. “I don’t sleep a lot at night right now,” laments Larry Damato, principle of Damato Associates Inc. (DAI General Contracting) in Irvine, Calif.

The History Of Steel Prices And Tariffs

To understand the full scope of what’s happening in self-storage development and construction right now, it’s important to understand the history of tariffs in other industries, as well as the steel industry, and how that plays into the upward trend of steel prices over the past few years.

William Hauk, an associate professor of economics at the University of South Carolina wrote in Market Watch this past spring that tariffs generally have a positive impact on an industry and an economy. He uses a 20 percent tariff on the beef industry as an example.

“The country’s beef producers will be much better off because now imported meat is as much as 20 percent more expensive, meaning domestic companies will be able to sell more rib-eyes and raise their prices. That’s bad news for restaurants and fans of steaks and hamburgers who will pay those higher prices.”

Hauk explains these transfers of prices are typically efficient because the benefits that domestic producers receive from a tariff is generally more than the price increases passed along collectively to individual consumers. As a whole, individual consumers make up a great deal of the population and, while they are the end hit with the higher prices, it generally doesn’t affect one individual or family significantly. Generally, most consumers don’t balk at tariffs in these types of industries.

However, steel doesn’t follow this rule. That’s because most of the steel consumers are concentrated in the automotive and construction industries and it’s those industries that will hurt the most from such tariffs.

The last time tariffs were put into place on the import of steel was in 2002 when then President George W. Bush levied tariffs of up to 30 percent. The reasoning was then as it is now—to help curb the flow of cheap steel into the United States, which some believe is at the expense of domestic steel producers who can’t compete.  

The tariffs were just as controversial then as they are now because, while they did help domestic steel producers, they hurt the automotive and construction industries. The Consuming Industries Trade Action Coalition found that 200,000 workers in manufacturing jobs in the U.S. lost their jobs as a result of the tariffs in 2002 and 2003, more than the 197,000 jobs at the time in the U.S. steel industry.

The tariffs were eventually lifted in 2003. Wright said that while the tariffs back then did affect the self-storage industry, he didn’t think it was as far-reaching or as fast. For one thing, he explains, projects just didn’t total what they do now. In comparison, he said that projects back in that time frame averaged from $700,000 to $1 million. Today, projects can range anywhere from over $1 million to tens of millions of dollars. “I did one yesterday that will be affected by a $187,000 increase,” says Wright.

Another key difference between the Bush-era tariffs and the tariffs of today is that there weren’t as many price increases every month as there has been since the tariff announcement, which also ensured there wasn’t such a dramatic run on steel and steel products in order to beat future price increases.

In the 2016 presidential campaign, then candidate Trump promised to levy steel and other tariffs on what he termed unfair trade practices. When he announced the tariffs in March, he cited national security as the main concern. When it was later announced that many of our allies would be exempt from the tariffs, steel prices in a jittery market were already starting to climb.

The European Union and other countries also threatened, as they did back in 2002, to initiate a trade war.

The tariffs were both lauded by some in government and in certain industries and decried. The Steel Manufactures Association (SMA) released a statement after the announcement in March that applauded the action.

“The Steel Manufacturers Association welcomes President Trump’s proclamation instituting tariffs of 25 percent on steel imports, effective in 15 days. U.S. steel producers have supported broad and effective action under section 232 of the Trade Expansion Act of 1962, designed to remove the threat that these imports are having on the U.S. national security.”

Phillip K. Bell, president of SMA said in the statement, “We are optimistic that these tariffs will adjust imports to provide a level playing field and ensure that the steel industry in our country is able to serve our national security needs. We look forward to the measure being in effect for a period of sufficient duration for companies to reinvest in the steel industry.”

The statement also states the support for exemptions of key allies and cites that steel imports had increased 15 percent from 2016 to 2017 and accounted for 25 percent of all U.S. steel consumption.

Other organizations, such as the National Retail Federation opposed the tariffs, say it would create higher prices for consumers who purchase canned goods and other products. Some economists wondered just how much of an effect the tariffs would have on steel imports given Canada, which is responsible for the greatest amount of steel imports at 18 percent, is reopening shuttered U.S. steel mills and creating new steel jobs. Canada is, at present, exempt from the tariffs.

For their part, politicians on both sides of the aisle condemned the tariffs, lead House Republican and Speaker Paul Ryan being among them. However, some notable economists supported the tariffs, including Peter Morici, a business professor at the University of Maryland, who tweeted, “Trump is not starting a trade war, because we are already in one.”

Due to the fact that many of our key allies were exempt from the tariffs, and it is now being used as a bargaining tool by President Trump in the renegotiation of the North American Free Trade Agreement (NAFTA), the move was largely seen by many as an effort to block mostly cheap Chinese steel from coming into the U.S. market.

“What it boils down to is foreign countries with a cheaper labor pool and U.S. steel companies that failed to invest in technology to keep their stock prices high,” says Plunkett. “China has been dumping steel into the market at or below cost just to provide their workers with jobs.”

It didn’t take long for China to react to the steel tariffs, imposing 128 tariffs worth $50 billion to its country, touching off a trade war.

The Effects On The Self-Storage Industry

Construction in the self-storage industry has been especially hard hit because many projects are still built largely with steel exteriors, roofs, and doors. “Sixty to 70 percent of what we do is in self-storage,” says Damato. “We have seen increases in other types of projects we’re working on, but nothing like self-storage.”

California has been one of the states booming with new self-storage development in the past few years. “We have seen increases in steel prices before, but this is the first time that these steel suppliers aren’t holding their prices,” says Damato. “We are passing along substantial price increases, and many of our clients don’t understand.”

The prices just haven’t impacted one area. As previously mentioned, the price increases have bled into almost every part of each construction project. Damato notes the average cost of a self-storage facility has risen from $65 per square foot for a “typical” three-story project in June of 2017 to $75 to $80 per square foot this year.

Fred Hanhauser, also a principle with DAI, estimates the overall total steel cost increase to the entire project can be as much as 20 to 25 percent. “I don’t know if it’s all due to steel price increases,” says Damato, “but at least part of it is.”

Of course, everyone has contingencies on each project, but most of the price increases occurring now are more than what developers added in as contingency. “No one really saw these kinds of increases coming,” says Damato. “If a two percent contingency was penciled in and we blow it up to five percent, it could take years for them to make that up.”

Damato states that both their company and subcontractors have taken hits on steel prices, but no one can take the kind of price increases currently being levied. He added the only thing they can do is go back to their clients and “massage” the increases as best they can. “It’s just very hard for us to navigate,” says Damato.

On top of price increases, contractors such as Damato have had to deal with product shortages that have created delays in steel and aluminum products delivery. “Part of what happened was just the uncertainty,” says Hanhauser. “Foreign companies stopped manufacturing months ago in anticipation of this, and American steel companies can’t keep up.”

Damato adds, “When delays happen, we’re paying out $1200 to $1,500 per day in penalties at the end of the contract. We’ve navigated all of this in the past, but it’s very difficult to schedule shipping.”

Tarik Williams, vice president of TLW Construction, Inc., in Phoenix, Ariz., says the price increases have had a huge impact, but the run on steel has had an even greater impact on his business. “In the past, it would take two to three weeks for steel to arrive,” says Williams. “Now it comes in bits and pieces. The ability to receive all of the steel in one delivery is bad.”

For his part, Wright at MAKO notes that all he is doing at the present is “dealing with pricing, clients, and contracts”. He’s seen total steel construction costs go up as much as 30 percent. “We’re trying to be as transparent as possible,” says Wright. “We’re telling the customer what the absolute cost is without overhead or profit margins.”

Texas is another state in which self-storage development has been booming the past few years. Rachel Parham, president of development and vice president of construction for The Parham Group Companies in San Antonio, mentions one of the keys to navigating these types of price increases is ensuring that developers have done their due diligence in their proformas and feasibility studies. “They have to have a pretty good range projecting the cost per square foot because the majority of the cost is in concrete and steel,” says Parham.

Most of Parham’s projects already under construction have increased to $55 to $60 per square foot, up from their ideal range of $50 to $55 per square foot. For future projects, she is calculating proformas and feasibility studies to see if it works. “We are putting in the worst-case scenario to see if it still works,” says Parham.

Ted Culbreth, vice president of sales at SBS Construction and Development, with offices in Boerne, Texas, and Baton Rouge, La., states that some of the price increases put in effect after the tariff announcement came after some of their steel was already delivered. “Those projects were completed with no price increases,” says Culbreth.

One reason for this for Culbreth’s company is that steel price increases haven’t been as much for the types of steel they use in their projects.

However, for the remaining projects now under construction, they will either incur a small or larger increase, “depending on when the price increases were applied”. One of the customers who incurred a large price increase took it in stride. “Our steel supplier works closely with us on what to expect and, hopefully, not too many were surprised about what was coming,” says Culbreth.

Because of this relationship and communication from their supplier, not too many of Culbreth’s customers have or will bear the full brunt of the price increases. “Everything has been negotiated out to what’s happened so far,” says Culbreth, adding that he estimates the full cost of increases has been 1.75 to two percent. “When people see steel has gone up 30 percent, it makes people panic.”

The Future Of Steel Prices

Industry experts predict the effect that these steel prices have on the industry may start to taper off this fall, but it may go all the way to 24 months out. Some say that it will have no overall effect on the industry as a whole, while others think it’s possible self-storage development will begin to slow.

“We’ve seen much more in increases due to design changes over the past few years,” says Culbreth. “I think this is just one component of the self-storage industry. If it does slow down, some will blame it on the steel crisis; others will say it’s because so much has been built over the past five or six years.”

A commodities expert with experience procuring and trading building materials, who didn’t want to be identified for this article, states that no matter what happens or when, the most important thing is working with companies with experience in the self-storage industry. “They’ve accounted for any potential supply issues because they have more buying power and diversified sources,” says the expert. “I’d say, when in doubt, work with companies you know and don’t necessarily buy on price alone. Smaller companies or ones not focused on sectors other than storage may not always be able to meet your production needs.”

Kerri Fivecoat-Campbell is a freelance journalist based in the Ozark Mountains. She is a regular contributor to MiniCo’s publications. Her business articles have also appeared in Entrepreneur, Aol.com, MSN.com, and The Kansas City Star.