Construction on Phase II of Soaring Ranch, which consists of 178 housing units, including 28 that are deed-restricted affordable housing, was supposed to begin this spring. But if you drive past the development on your way to Raley’s or the Truckee Tahoe Airport, it’s obvious that no work has begun. The reason? The high cost of construction.
“We intend to build it, but we can’t build it right now, we have to wait until interest rates go down and construction costs moderate,” said Art Chapman, founder and chairman of JMA Ventures, the developer behind Soaring Ranch. “What we thought was very high in 2022 is probably 20% higher today per square foot. It’s not only the case of what it costs per square foot but availability of product.”
Since the pandemic, the cost of construction has been rising across the entire country. Many local contractors say that it costs them almost double to build a house than it did in 2019. But Tahoe/Truckee’s building industry is facing an additional problem that is contributing to escalating constructions costs — a labor shortage. Given the lack of affordable housing in our region coupled with the higher cost of living, wage increases have been the number one contributor to increased construction costs in Tahoe/Truckee. So far, this has not seemed to have a major impact on building, but some contractors worry it’s only a matter of time if overall costs don’t come down.
I don’t think I have ever seen prices as high as they are. Some contractors are bidding $1,200
a square foot when 10 years ago they were bidding $500 a square foot.”
~ Andrew Cross, Truckee Tahoe Lumber president and CEO
Fees and labor
Edward Vento, executive director of the Contractors Association of Truckee Tahoe (CATT), conservatively estimates that a new build has increased $20,000 to $60,000 depending on the type of construction, an increase of 30% to 40% since 2019.
He attributes the growing costs to multiple factors, including the price of land, rising costs of materials since Covid, supply issues around the world, increased fuel costs to transport materials, regulatory fees, and the workforce.
As an example, he said a basic home in Truckee could be built for $500 to $600 a square foot, while in Reno that would cost $300 a square foot.
“The difference is very significant,” Vento said. “A lot is regulation.”
One such regulation is the one that went into effect this year in California that encourages electric heat pumps for space and water heating, which drives up the price of homes.
“Heat pumps are more expensive,” Vento explained. “They are not out there as much and don’t have the volume, and a limited amount of people know how to install them.”
But local fees, like those for the fire district, school district, and parks and recreation, also contribute to the increasing costs of new construction. Vento cited a study conducted by Patrick Flora, a retired local contractor and former CATT president, that found that local government fees raise the cost of a new home by 6% to 8%.
“Every utility, every district, gets a piece of a home build,” he said. “And fees continue to creep up.”
Another significant local aspect affecting costs is the employee shortage. “There are not enough people in the trades,” Vento said. “To hire and retain someone, the per-hour wage is much higher than in other areas.”
The low end
Mitch Clarin, a contractor and real estate agent in Truckee, says that labor is the number one driving force behind the high costs of construction.
“It’s a national problem — people were trained as children not to get into the trades, so we have a shortage of people who can work with their hands,” he said, noting that a contributing factor locally is the high price of goods. “It’s not just housing. It’s also $5.50 for gas or $24 for laundry detergent when it costs $17 in Reno.”
Clarin builds 2,000-square-feet, entry-level spec homes in Tahoe Donner. Before the pandemic, his homes sold for $800,000. In the last three years, his home prices have doubled to $1.6 million, a reflection of his costs increasing 50% since the first year of Covid.
Despite the higher prices, he does not see a slowdown in the building industry.
“I use my spec homes as a gauge for the market,” he said, noting that even at over $1 million, his homes are still considered entry level in the current market. “Most of my clients come from bigger metropolises. They sell their houses down there and take the cash and buy up here.”
While Clarin said he is concerned about continually rising construction costs, he doesn’t lose sleep over it. “I’m careful, but I won’t stop building,” he said.
The high end
On the other side of the home building market is Heslin Construction in Truckee. Heslin builds high-end, custom homes in Martis Camp and Lahontan. President Matt Heslin has been amazed at how prices have continued to rise since the onset of the pandemic.
“Costs have been rising ever since Covid, very rapidly actually, and [are] continuing to rise rapidly,” he said. “The news says inflation is down, but I’m not seeing it. The only relief we are seeing across the board is lumber. Being a commodity, it’s a roller coaster. It’s gone way up and down. Right now it’s down-ish, but nothing is pre-Covid right now.”
According to Heslin, drywall alone has gone up 50% over the last three years, and steel now costs 30% to 40% more than it did before Covid. But what’s really pushing up construction prices is labor, he said. Heslin had to give his roughly 15 employees a 20% to 30% raise due to inflation and the high cost of living in Tahoe/Truckee.
“We had to give everyone massive pay increases, and every one of my subcontractors did the exact same thing,” he said. “This just increases costs. It’s out of control.”
And unlike lumber or steel, which can drop in price, wages rarely go back down.
“We might get relief from material costs [once those go down], but once you give someone a raise, that’s it,” Heslin said. “It’s not going back down again.”
As a result of mounting material and labor costs, a home that Heslin could once build for $700 a square foot is now costing $1,200 a square foot, almost double. Some of his clients are balking at the increased costs. One customer for whom Heslin had built one home in Martis Camp in 2010 and another in Lahontan in 2017 wanted to build a third home in Lahontan this year. But what cost that client $724 per square foot in 2017 was now $1,200 a square foot.
“He said he can’t do it, that it doesn’t make sense,” Heslin said. “They are not dumb people.”
Heslin is concerned that at some point the construction industry in the region will reach a breaking point.
“We are all worried that we are going to hit a threshold where people stop building homes,” he said. “At some point, people will say the numbers don’t work, and things will slow down, labor will come down, maybe we will have a little bit of a correction. We just can’t continue the way it is. It’s not sustainable.”
Heslin said his business is down a little, but that he is okay with it after the frenzy of new construction during the pandemic. Yet the current situation is frustrating for everyone.
“It’s really hard to do our jobs,” he said. “Four- or 5,000-square-foot homes used to take us 14 or 16 months, now it’s taking us over two years. Lead times with subcontractors, materials, everything is impacted by rising costs and the lack of labor. Clients say they are understanding but are they really?”
Chapman of JMA agrees. He cited labor as big contributor to rising costs.
“The area is particularly acute because of the scarcity of labor,” he said. “It is very, very expensive to employ people to build anything when there is no place to house them.”
Like Heslin, Chapman also acknowledges the difficulty in obtaining materials as another factor. As an example, he noted that electrical switchgears, which are used in transformers, used to take several months to be delivered. Now it takes over a year.
In order to minimize the financial risk, Chapman is proposing to the Town of Truckee that JMA build the second phase of Soaring Ranch in stages, rather than all at once.
“We are not giving up and we are not going to stop,” he said. “We are looking at alternatives.”
Construction still going strong — for now
The one bright spot in the construction industry, as Heslin noted, is the price of lumber. After soaring during the pandemic to unprecedented levels, lumber prices have come down to about half of what they were during the height of the pandemic from 2021 to mid-2022, according to Andrew Cross, president and CEO of Truckee Tahoe Lumber. Douglas fir, for example, got up to $1,600 per thousand board feet during the peak of Covid, but is now down to $800 per thousand board feet.
But Cross is shocked by how the price of other materials has continued to go up so drastically.
“I can’t believe costs are still rising the way they are,” he said. “I thought for sure they were going to come down, but it seems like they just got jammed up even more with all the snow we got.”
Cross said building materials, from windows to lighting to refrigerators, have gone up 20% from last spring.
“I don’t think I have ever seen prices as high as they are,” he said. “Some contractors are bidding $1,200 a square foot when 10 years ago they were bidding $500 a square foot.”
In just the last 10 years, since after the end of the Great Recession, Cross notes that construction costs have gone up threefold. But he isn’t worried.
“A lot of people have delayed projects, but we are still busy,” he said. “The construction industry is still very strong.”
While the peak for recent new construction in the North Tahoe portion of Placer County was last fiscal year, with permits issued for 192 single-family homes, fiscal year 2022/23 saw 115 single-family homes, a 40% reduction, according to the county.
Gabe Armstrong, the building services manager for Placer County’s Tahoe office, attributes the decline more to the massive winter than construction costs.
“This relates a lot to winter more than anything,” he said. “This winter, builders couldn’t work. They are still finishing up projects they thought would be finished by now.”
The Town of Truckee has a similar analysis to Placer County’s. Truckee issued 136 building permits for single-family homes in 2022 compared to only 18 from January to May of this year.
“Although there has been a decline in 2023 construction permits issued to date, those planning to build in the area have been getting a late start compared to previous years due to the amount of snow received last winter,” wrote Matt Ross, Town of Truckee chief building official, in an email. “Therefore, it’s a bit too early to speculate on the cause of the slow start to the building season.”
Ross notes that starting in March, there has been an upward trend in the number of permits being issued.
Cross believes soaring construction costs are impacting the low-end market, and says the region needs to build more high-density housing to get back to $500 per square foot to make housing affordable again. And while Armstrong believes construction costs are definitely affecting building in some way, he is not seeing a slowdown in construction.
“It just costs more to build,” he said.