What makes more sense – creating a shiny new office building for premium prices when construction prices are only expected to increase, or a cheaper renovation of existing space?

According to some industry experts, the answer is clear. Rising construction costs could keep some build-to-suit projects from moving forward this year, especially when there is ample existing product to go around.

While sources said it is still too early to accurately estimate the expected increase in dollar amounts, there are a few factors driving the anticipated uptick.

First, the nation’s inventory of construction materials has been severely depleted. Given limited new construction in recent years, there has been less demand for those materials and factories have closed as a result. Those companies looking to stay afloat then sold existing inventories to developing nations, especially China.

But now, with more confidence in the market, projects are actually starting to get off the ground and demand has surged. That’s creating serious pressure on the pricing of raw materials, according to John Moriarty, president of Winchester-based John Moriarty & Assoc.

“[Companies] won’t manufacture materials unless they expect to see a profit from it, so the lead time on getting materials is longer now,” Moriarty told Banker & Tradesman. “There’s little flexibility for things that don’t have an existing inventory.”

The annual rise in cost of labor must also be considered. Even though there’s “tremendous unemployment” as Moriarty said, the total compensation cost of union workers increases – on average – by roughly a dollar per hour each year.. While labor is only 20 to 25 percent of total job expenses, a dollar a year still adds up to the increase in total costs.

On top of that, Massachusetts has updated its building code to demand greater stiffness in frames to resist damage caused by earthquakes and high winds.

“Stiffer frames means you need more concrete and steel,” which translates into still higher costs, Moriarty offered.

And on top of all of that, subcontractors are being more selective regarding which projects they bid on, instead of putting a number on everything that came their way as their ranks thinned, according to Denise Marien, director of client development for BOND construction in Everett. That selectivity is also starting to push prices up as well, and it’s a serious concern given an increase in activity and calls for proposals over the past 30 to 45 days, Marien said.

Feeling The Effects

And with the rise anticipated rise in construction costs, tenants looking to begin build-to-suit projects could start to think again.

James Elcock, executive vice president for Colliers International in Boston, said any company considering a build-to-suit would have to look at what the potential rise in construction costs will do to the price basis of projects. That, in turn, will cause build-to-suit suitors to weigh those costs even more gravely against the costs of renovating existing properties to fit their needs.

“Pricing is the name of the game,” Elcock told Banker & Tradesman. “If your cost basis is good it makes everything work that much better. Companies will really have to look at construction costs versus existing product.”

Justin Krebs, principal for Normandy Real Estate Partners in Boston, agreed that companies would need to exercise “intelligent restraint” when considering building new properties from scratch. Even so, rising costs may still not deter cash-rich companies – high-tech and life science firms, especially – from ground-up construction if the numbers work, Krebs opined.

“Companies are richer than they’ve ever been from a cash-on-hand standpoint, and are putting that back into the work environment. And there’s almost nonexistent unemployment in life sciences,” he said. “They spend the money for LEED and state-of-the-art facilities.”

He did add, however, that as a result of the uptick in costs, there may be less hotel and office construction, especially among those considering building outside of the Route 128 belt. But it likely won’t stop multifamily projects from going forward.