Increasing economic troubles drive up construction costs

With gas prices sitting at $3.51 a gallon nationwide, many people are finding it harder to get around. These same prices are making it more expensive for institutions like Penn to fund construction projects.

Recent economic troubles - especially rising fuel prices - are driving up construction costs, forcing universities and developers to plan ahead and take steps aimed at saving money.

The chief economist for the Associated General Contractors of America announced recently that the Producer Price Index - a measure of the price that producers charge for a product - of construction materials increased by 2.1 percent during the month of March.

A major factor in this price increase is the rising cost of diesel fuel, which is critical in transportation of heavy loads, steel manufacturing and heavy-machinery operation. Diesel fuel costs $4.14 per gallon nationwide, up $1.29 from a year ago.

Penn estimates that the cost of construction will increase by 7 percent each year, Vice President for Facilities and Real Estate Services Anne Papageorge wrote in an e-mail.

Papageorge said the University hopes green initiatives will reduce energy costs in the construction and maintenance of future structures.

Green projects can lessen the need for fossil fuel and electricity, which can lower energy costs.

Rising fuel prices and associated economic instability are expected to impact smaller developers much more heavily than larger institutions like Penn.

Robert Hoe, COO of Teres Holdings, the developer behind the Hub, said rising costs will make construction more expensive in the near future.

Hoe, whose company is planning a building adjacent to the Hub at 40th and Chestnut streets, said costs for the construction of that project have increased at least 5 percent over the past year.

He added that, as the economy slows, contractors are more willing to work for lower prices, since developers are less likely to be interested in construction.

Another area of concern for developers is the unstable loan market, which has made it increasingly difficult to obtain loans for construction.

Penn's Vice President of Finance Steven Golding said in an e-mail that Penn "must be judicious in using the debt market to fund capital projects." Most projects are funded through "gifts, grants and University funds," he said, but some, such as the School of Medicine's Translational Science Building, will be partially funded through loans.

More stringent requirements from lenders, who are less eager to give out loans, increase the time required to secure financing, Hoe said.

Because obtaining loans is becoming more difficult, he said, "some projects may not get off the ground."

Penn does not need to seek loans to cover construction costs, but some say the ailing economy could lead to fewer alumni donations to the University.

"The uncertainty in the economy has caused some caution, discussions as to commitment," said John Zeller, associate vice president for development and alumni relations, but "it doesn't appear to have affected the fundraising efforts."

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