Rising costs price some in Twin Cities out of the new construction market

The surge of construction activity in the Twin Cities is naturally viewed as a good thing by most, from workers finally finding good-paying jobs after a long recession to political leaders who can point to a humming development scene as evidence of a successful recovery.

But there is also a down side to this hot pace that is being keenly felt by those contemplating constructing new commercial buildings: The uptick is stretching the local labor and building materials markets to their limits, resulting in quickly rising construction costs.

Those price jumps are proving too much to handle for some would-be builders and are reason behind why the Minnesota Farmers Union — the venerable farmers advocacy organization and State Capitol lobbying group — ditched its plans to build a headquarters in Roseville and instead purchased an existing office building in Maplewood.

Gary Wertish, vice president of the 14,000-member farmers group, says he's happy about how the process eventually turned out this spring, with the purchase of the so-called Minnesota Hospitality Building at the intersection of Interstate 35E and Roselawn Avenue for about $1.2 million. The 15,500-square-foot structure, built in 1989, boasts high visibility from the freeway and will benefit from extensive reconstruction work now ongoing on the freeway.

But, he added, "everyone was disappointed" that earlier plans to build a shiny new HQ of its own in a redevelopment play at the corner of Larpenteur Avenue and Dale Street in Roseville didn't work out.

"Construction costs went up so fast in the year between when we purchased the lot and when we were actually ready to go that we just had to reconsider," Wertish said. "Prices had gone up at least 30 percent from what he had been projecting in 2013, when we first seriously considered the idea."

Labor costs, reflecting a shortage in qualified workers in a booming market, and skyrocketing materials prices all played significant roles in the Farmers Union's decision, Wertish said.

"When prices got to that point, we reconsidered the Minnesota Hospitality Building, which we knew was still on the market," he said. "We were interested in it before but couldn't agree on a price, so we took another look and the second time were able to make the deal work."

The Farmers Union's decision to abandon the new-build plans also disappointed the city of Roseville. It was hoping to land a redevelopment deal for parcel at 621 W. Larpenteur Av., where an old commercial building at the "city gateway" corner had fallen into foreclosure and become an eyesore. For the Farmers Union, it was a chance to place a new building close to the State Capitol.

The Farmers Union razed the old building and prepared the lot for construction. But the process of obtaining clear title to the repossessed property proved so lengthy that construction prices shot up to prohibitively high levels in the meantime.

After significant jumps in 2014, construction costs are expected to rise another 6 percent in the Twin Cities market this year, according to analysis performed in February by Mortenson Construction. If that prediction holds true, it would put Minneapolis-St. Paul above the national average for the first time since 2009.

Don Jacobson is a freelance writer in St. Paul. He is the former editor of the Minneapolis/St. Paul Real Estate Journal.