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Jan. 15, 2008 ― Cost Escalation Reports Spread; Renewal Energy Advances

January 15, 2008
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Reports of escalating construction costs are proliferating. Commodity prices have hammered the…budget” for FasTracks, a massive Denver regional rail project due to break ground late in 2008, the Denver Business Journal reported on Jan. 11. “Originally billed at $4.7 billion when voters approved the project in 2004, it’s ballooned to $6.1 billion-driven largely by annual, double-digit increases in the price of raw materials needed to build the rail lines and cars.”

On Jan. 6, the Associated Press reported that the “ballooning $1.8 billion cost” of FutureGen, a “groundbreaking power plant in central Illinois” that would trap greenhouse gases and store them underground, “has the government so uneasy it wants the project’s consortium of corporate backers to rework the design to get the price down….In southern Illinois, officials who in October 2001 announced plans for a coal-fired, 1,600 megawatt power plant about 50 miles southeast of St. Louis estimated the project would cost $2 billion. But…the price tag swelled to $2.9 billion by the time ground finally was broken in October.”

The Baltimore Business Journal reported on Dec. 21, “A billion-dollar plan to build two new clinical towers and renovate Johns Hopkins Hospital’s East Baltimore medical campus, one of the nation’s largest health construction projects, is $252 million over budget and two years behind schedule.”

One contributor to rising construction costs is diesel fuel. On Jan. 14, the Energy Information Administration reported that the national average retail price of on-highway diesel was $3.33 per gallon, down 5 cents from last Monday but up 86 cents (35%) from a year ago. In its latest “Short-Term Energy Outlook,” released on Tuesday, the agency wrote, “Both motor gasoline and diesel prices are projected to average over $3 per gallon in 2008 and 2009, with monthly average gasoline prices peaking near $3.50 per gallon this spring.”

“For the first time in four years, the national vacancy rate for office buildings rose in the fourth quarter, as an unusually large amount of new space came on the market and tenants shied way from signing new leases,” the Wall Street Journal reported on Jan. 7. “Demand for commercial buildings has begun to slow and vacancy rates to climb in several markets…that have been particularly hard hit by the nation's housing slump and turmoil in the residential mortgage market….

“Nationally, the office vacancy rate-as measured by 79 metropolitan markets-rose to 12.6% at the end of the fourth quarter from 12.5% at the end of the third quarter, according to Reis Inc., a New York real-estate research firm….Even as tenants began to pull back on leasing in the fourth quarter, developers added more space to the market. More than 19 million square feet of new office space was completed-the most since the fourth quarter of 2000, at the height of the last boom….This year, about 75 million square feet of new office space is scheduled to come online in the 79 markets Reis tracks, up from about 53 million square feet finished in 2007….

“Not all markets are showing signs of suffering….Boston saw average effective rents-or the price tenants pay after concessions-jump 4.9% in the fourth quarter, and New York City's average rose 3.9%. Denver and Houston showed similar gains.”

Markets with the largest increases in vacancy rates were San Bernardino/Riverside, California, 1.9 percentage points; Orange County, Calif., and Fort Lauderdale, 1.7; and Las Vegas, 1.6. “Those numbers don't reflect sublease space available due in part to mortgage companies going out of business.” A chart with the article showed smaller increases in vacancy rates in Salt Lake City, Tacoma, Austin, Hartford, Phoenix and the Maryland suburbs of Washington.

“General Electric Co.’s energy investment business, buoyed by rising demand for alternative power, said Monday it will increase its investment in renewable energy by 50 percent, to $6 billion by 2010,” the Associated Press reported today. “The most active investment in renewable energy for GE Energy Financial Services is wind, representing about two-thirds of its portfolio….The company is also invested in landfill gas-to-energy projects, solar power projects in California, a solar power plant in Portugal and other deals. GE Energy Financial Services also said Monday it is investing in [four] wind farm projects owned by Horizon Wind Energy LLC, a Houston-based developer that is a subsidiary of Energias de Portugal SA. The wind farms are in Illinois, Minnesota, Oregon and Texas.”

The Peoria, Illinois, County Board on Thursday approved rezoning of 33 acres in Mapleton, 10 miles southwest of Peoria, to build a “biodiesel manufacturing plant that would…produce 45 million gallons of fuel annually, equivalent to 10 percent of all the biodiesel fuel produced in the United States last year,” the Peoria Journal Star reported. “If built, the Mapleton biodiesel plant would be one of five in Illinois, with two already in production…and two under construction. Plans already are in place to expand the proposed plant's capacity to 120 million gallons within its fourth year of operation….For comparisons, U.S. production of biodiesel topped 250 million gallons in 2006, according the National Biodiesel Board. Estimates for biodiesel production in 2007 are at about 450 million gallons.” The developers have not committed to build the plant, however.

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