• This article is part of a larger story on upcoming infrastructure projects in Palo Alto. Read the article here.

---

Palo Alto's big push on infrastructure comes at a time of economic prosperity, with sales-tax receipts on the rise and new hotels bringing with them the promise of growing tax revenues in the years to come.

Yet when it comes to costs, the timing for the city could hardly be worse.

Today, the Bay Area is booming, with commercial construction leading the way. According to the 2017 Silicon Valley Index, produced by the nonprofit Joint Venture Silicon Valley, the region produced more than 5 million square feet of office space in 2016, more than in any other year since 2001.

Nationwide, construction costs have escalated by about 3.3 percent over the past year, according to an index compiled by Engineering News-Record, an industry publication. Locally, the climate is considerably hotter. Over the past year, San Francisco has been among the nation's leaders in construction inflation, according to the 2017 International Construction Market Survey by the firm Turner and Townsend. In 2016, San Francisco experienced cost inflation of 4.2 percent, second only to Seattle's 5 percent (New York City was third, with 3.5 percent). The report's forecast showed San Francisco catching up to Seattle in 2017, with each experiencing a cost inflation of 5 percent.

The escalation in cost is driven by a confluence of large projects, public and private, that have created a labor shortage, said Bill Russell, preconstruction manager with Vance Brown Builders, a Palo Alto construction company that in last year completed the new Palo Alto High School gym and is now working on the Junior Museum and Zoo renovation and the reconstruction of the nonprofit senior-services agency Avenidas on Bryant Street.

On the private-project side, Russell said, are companies like Google and Apple adding or expanding their campuses. On the public side are giant regional projects such as the city and county of San Francisco's new wastewater treatment plant; the ongoing renovation of San Francisco International Airport, where a new United terminal is under construction; and upgrades to BART.

Add up all the demand, Russell said, and there's just not enough labor to go around.

"Generally, the labor side of construction is going to go wherever there's work available," Russell said. "I think you have a situation where both the public and the private side are busy, and they're probably reaching the limit of what's available."

Public projects are particularly vulnerable to the fluctuations of the economic cycle, Russell said. A company like Google, he said, can cancel a project within a few months through an internal decision. But public entities like the city of Palo Alto, the county of Santa Clara or the state of California generally have a far longer planning process, from the time they go out to sell bonds or raise taxes to the time the project seeks bids.

"There is more risk in the public side that you're going to hit the wrong part of the cycle," Russell said.

As costs have gone up, the imperative to "value engineer" projects has risen. Russell pointed to the substantial redesign of the Junior Museum and Zoo project, which was downsized from a two- to a one-story building. That, Russell said, was a direct response to the overall cost of the building.

"If something the developer thought was going to cost $10 million now costs $15 million, they may choose not to move forward or to wait until they have a tenant signed up, so a lot of our (construction) business gets more difficult because timing is less certain."

That's not to say, however, that builders are complaining about the current market conditions.

"We would rather be in this market than in 2008," Russell said.

• Watch Weekly journalists will discuss this issue in an episode of "Behind the Headlines."