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May 11, 2018

Seattle braces for metal tariff fallout

  • As tariffs further increase local construction costs, developers will either scale back their investments or turn to alternative designs.
    Rider Levett Bucknall


    When the federal government first announced its intent to impose tariffs on imported steel and aluminum, reaction from AEC industries was swift and to the point.

    Most decried the plan.

    The American Institute of Architects stated: “Any move that increases building costs will jeopardize domestic design and the construction industry, which is responsible for billions in U.S. Gross Domestic Product, jobs growth, and job creation.”

    The Associated General Contractors of America’s response: “Higher steel and aluminum prices will make the kind of infrastructure work President Trump supports more expensive, forcing federal, state, and local officials to cut back on projects they can fund. And the likely trade wars these new tariffs prompt will diminish demand for private investment in infrastructure, as well as construction demand for manufacturing, shipping, and distribution facilities.”

    In response to such lobbying, many countries — including South Korea, whose exports comprise a significant portion of the $2.5 billion of steel and aluminum that entered the country through the Northwest Seaport Alliance and Sea-Tac Airport last year — were exempted from the fees.

    While exemptions for the European Union, Canada and Mexico were extended, it was only for an additional month, and so the need to renegotiate the North American Free Trade Agreement remains urgent.

    Looking at the demand side of the equation, there’s been a considerable amount of pushback, as well. To date, the Commerce Department has received more than 1,200 applications from American companies that are seeking relief from paying the steel tariffs, and 125 manufacturers have filed to have the surcharge on aluminum waived.

    In short, at this point the porous policy has been a boon to bureaucrats, if no one else.

    Seattle snapshot

    With its red-hot construction market, in large part propelled by the ongoing success of the tech industry, Seattle is certain to feel effects of the tariffs. The city’s three big construction sectors — high-rise residential, high-rise office and civic buildings (including schools and convention centers) — are all reliant on steel, be it structural steel or rebar, and will feel the pinch of the 25 percent tariff.

    Buildings featuring curtain walls and storefront assemblies will also be affected by the 10 percent charge on aluminum.

    Even before the tariffs were levied, Seattle was an expensive market in which to build. From January 2017 to January 2018, construction costs in the city rose 5.1 percent, almost 1 percentage point above the national average of 4.2 percent. The advent of the tariffs is having a ripple effect on the scene. As they further increase local construction costs, developers will sour on new projects, and either scale back their investments or investigate alternative design strategies.

    One telling gauge of the local construction activity is the Rider Levett Bucknall Crane Index, which tallies the number of tall cranes in use at construction sites. According to the most recent index, Seattle has 45 cranes in the sky; a strong number, and the most of the major metropolitan areas on the West Coast. It’s the first time the city’s crane count has dropped below 50 since 2015. Developers can interpret this as a cautionary sign, as well.

    A trigger for innovation?

    Anticipating that the tariffs will spark price increases and/or inventory shortages of the metals, the construction industry is exploring other materials and methods to save money while maintaining growth. These three choices are viable:

    • Concrete. Since most steel is used in the frame of a building, concrete is a suitable structural (and economic) material alternative. Even if a steel-framed building is in the early stages of design, it can be re-engineered to use concrete.

    • Prefab. Modular elements, such as bathroom pods, are already gaining traction in student housing and hospitality sectors — buildings that have typically relied on steel. The units are fully assembled at the factory, trucked to the jobsite, and craned into place. While using them requires a longer lead time, they ultimately eliminate the protracted sequence-of-trades process, reduce reliance on a tight labor pool, and quicken the build-speed of projects. In Seattle, the new Embassy Suites by Hilton is taking advantage of this technology in its 282 guest rooms.

    • Wood. Mass-timber construction is also getting a closer look as designers and builders investigate alternatives to structural metals. More environmentally friendly than steel, cross-laminated timber and nail-laminated timber can be used in buildings up to around 20 stories. These buildings have a similar life expectancy to concrete-framed structures.

    Workers, end-users

    In February, the city’s employment level for the construction trades was 123,900. With fewer development projects in the pipeline, the current shortage in the labor market is expected to ease up. If the tariff program pushes up the price of steel too much, it will slow down the labor shortage of steel workers but may exacerbate the shortage of concrete workers and carpenters.

    In the long run, even condo owners and apartment dwellers may experience a change in lifestyle stemming from the tariffs. Under such conditions, owners and developers can decide to reduce the square footage of residential units to maintain their profit margins — or break even. Squeezing two full units out of what once was allocated for a single three-bedroom is a proven survival tactic.

    The story for Seattle’s construction prospects continues to unfold as the tariff situation evolves. For the foreseeable future, things will be in flux — a condition no one in the industry finds comfortable. From suppliers and developers to builders and laborers, stakeholders are grappling not only with real-time effects, but are trying to plan for the unknown events of the future.

    Julian Anderson is president of the North American region of Rider Levett Bucknall, which provides project management, construction cost consulting, and related property and construction advisory services.

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