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Will Soaring Inflation Impact San Antonio’s $1.2B Bond Plans?

The city approved $1.2 billion in bond money for street repairs, affordable housing developments, a new police station and other projects. But some officials wonder if increasing inflation will force the city to revise its plans.

(TNS) — Skyrocketing inflation is hitting construction projects around San Antonio. As the city prepares to spend $1.2 billion in bond money, street repairs, affordable housing developments and a new police station are just some of the projects that now come with higher price tags.

"We've never seen anything to the extent that it is right now," said Blaine Beckman, president of F.A. Nunnelly, a San Antonio-based general contractor. "You just have so many things compounding."

It's unclear if or how city officials will adjust planned bond projects to bring them in line with fast-rising costs.

The city has budgeted 5 percent for inflation over the life of its five-year bond cycles, including 2017 and the new voter-approved 2022 bond program, according to Paul Berry, a spokesperson with the Public Works Department. The city also included a 10 percent contingency in each bond project's estimated cost.

The inflation and contingency budgets would be enough in normal times, but some contractors worry that they can't keep pace with spiraling inflation.

City staff developed the cost estimates for the 2022 bond program late last summer.

South Side Councilwoman Adriana Rocha Garcia said the city should have budgeted more than the typical 5 percent for inflation.

"We have to get every bond right because that means either people will believe in us and allow us to have a future bond, or they won't," Rocha Garcia said.

The city doesn't expect to spend more than the $850 million that voters passed for the 2017 bond program as it wraps up the last of the projects. About 92 percent of 2017 bond projects are completed or under construction, with the remaining 8 percent in the design or pre-design phase.

Still, some future projects may look different than initially planned.

"If necessary, Public Works may scale back the scope or limits of the project to keep a project within budget," Berry said.

Councilman Clayton Perry thinks inflation will eat into how many projects San Antonio can get done.

"The gains that we're trying to make are all being swallowed up by this inflation," Perry said.

He wants the city to focus on infrastructure, even if that means cutting back in other areas or canceling projects he thinks aren't high priorities. He said officials also need to communicate with voters and manage the public's expectations.

Adjustments Seem Likely

Strong demand and low supply, brought on partly by factory closures in China and other COVID-19-related lockdowns, are contributing to higher prices of construction materials. Russia's war in Ukraine and resulting sanctions have also exacerbated the high cost of oil, pushing up shipping costs.

On top of supply chain problems, construction companies don't have enough workers, and many are raising wages to attract more. Schedules for new construction are tighter with fewer people on the job.

One veteran-focused affordable housing project on the South Side already hit the brakes because of inflation.

Patriot's Pointe faced a $4.5 million funding gap and a swiftly approaching deadline to come up with financing, said Pete Alanis, executive director of the San Antonio Housing Trust.

Developers plan to reapply, but the gap sets the project back at least a year. Alanis said they hope inflation stablizes by then.

The Federal Reserve has raised interest rates in an effort to slow runaway inflation.

Rocha Garcia said the Patriot's Pointe delay is painful.

"People are in need of homes," Rocha Garcia said. "So the housing component really scares me if we have to hold off on any of it, because we're already way behind on housing."

She also is concerned about the city's ability to get bond projects done on budget and on time — goals the city has emphasized as it has implemented past bond programs. City Council will need to prioritize and determine its most significant needs.

General contractors such as F.A. Nunnelly are making difficult decisions about which subcontractors to work with, Beckman said, choosing owners that will share some of the extra burden and work on mitigation strategies with them — so the contractors don't have to take on the risk of rising costs alone.

Sundt Construction, another San Antonio general contractor, is taking the same approach, said John Carlson, vice president and strategic business director. Sundt has several contracts with the city.

City officials recognize the problem, Carlson said. Even with money set aside to handle increased costs, prices now are extreme.

"They have to find enough contingency money to help cover the cost or cancel it," Carlson said. "That's what they're up against."

Ongoing work to upgrade San Antonio International Airport and add a new terminal — already one of the city's costliest capital projects in decades — could also feel the strain of inflation.

Like the bond, the city's planned airport budget anticipates rising costs, said airport director Jesus Saenz.

But ultimately, the city doesn't know how inflation and supply chain problems will affect pricing, said City Manager Erik Walsh.

"We don't know. Those are estimates. We're using experts to help us with that," Walsh said. "We understand that we'll have to make adjustments."

San Antonio could reach a point where officials have to decide to spend extra money to complete the 17 new gates in the airport's Terminal C as planned or build fewer gates. But Walsh thinks San Antonio will need all the new gates as the city grows.

Surging inflation means federal infrastructure dollars are even more critical for a project such as the airport, Walsh added.

More Spending for Bond Project, Affordable Housing on Agenda

It may be too soon to tell how inflation will affect the 2022 bond program. It will depend on when projects begin, whether rising costs have slowed or accelerated and how the city prepares.

"Anticipating what construction bids may look like in two to four years can be challenging," Berry said. "It is key to monitor the estimated costs for each project as design develops, which allows staff to anticipate if construction bids may exceed the budget."

Berry said projects from 2017 that are already completed or are in construction have managed to stay within budget. But others left over from 2017 are being squeezed by inflation.

This month, City Council approved an extra $3.5 million for a design and build contract with F.A. Nunnelly for a new police station near the St. Mary's Strip. A portion of the extra money came from the fiscal year 2021 general fund and the rest from a reserve for capital projects, according to a city memo.

Materials such as concrete, steel, glass, framing and drywall increased from two to four times what the costs were in April 2021, the memo states. The city and contractor worked together to find changes to the project's design that would help move it along.

Construction on the new police station is expected to begin in December and wrap up by January 2024. It brings the total amount for the contract to about $14 million.

"Finalizing the design within the current budget could result in the completion of only a portion of the facility," the memo reads.

Beckman hopes the community understands that the construction industry can't control the skyrocketing prices and that it is in uncharted territory — that contractors are trying to complete the best project without altering it too much.

"We're all working very hard right now to make sure that taxpayer dollars are spent efficiently," Beckman said. "It's just very hard to navigate."

No one can predict when the price increases will stabilize, Beckman said.

City staff last week presented a budget amendment for two affordable housing developments they said need extra funds to get over the finish line.

The planned 138-unit Cattleman Square Lofts near downtown would get an additional $1.27 million in Community Development Block Grant funds, federal money awarded to the city. The project also would get an additional $350,000 from the city's inner-city incentive fund — money from San Antonio's general fund budget.

Country Club Village, a 270-unit affordable housing project for seniors in City Council District 7, is slated for an extra $2 million in Community Development Block Grant funds. Last week, a council committee approved sending the additions to the full council for a vote.

"I don't like having to tell a neighborhood they're going to have to wait, or they're going to possibly see some changes because there are things that are beyond our control," Rocha Garcia said. "It's unfortunately probably going to have to happen, though."

(c)2022 the San Antonio Express-News. Distributed by Tribune Content Agency, LLC.
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