An excavator scooted through a Harbor East parking lot Monday, clawing up slabs of asphalt as work started on one of Baltimore's biggest new real estate projects, a massive development that promises to fill the last gap in the Lancaster Street waterfront.
The site is slated to become a large Whole Foods store topped by 282 apartments and about 35 condominiums, which the developers — majority owner Harbor East Management Group and the Bozzuto Group — are pitching as a top-of-the-market building.
That's reflected in the cost — about $170 million, well above the roughly $100 million estimate quoted when the 711 S. Central Ave. project was announced almost two years ago.
The developers wanted to construct a high-end property, despite construction costs that may be rising faster than rental rates, said Toby Bozzuto, president of Bozzuto, which is leading the project's construction and will manage the property when it is complete.
"We're willing to make a very large investment in what we believe will be a very successful project, and we're not afraid to raise the bar," he said. "It's an expensive building intentionally, and it's designed for permanence and grandeur."
Bozzuto said the costs at the Whole Foods project have not increased more than expected, pointing to changes in the number of units, a more extended timeline and other tweaks that he said made the initial estimate not comparable. The firm, which does billions of dollars of construction each year, also benefits from long-term relationships with its subcontractors, he said.
"We're getting all the subs we need and all the labor we need, it's just that they have so many opportunities that they are able to dictate what the market is, more so than in a softer market," he said.
Construction costs have been increasing around the country. An index prepared by Turner Construction estimates that construction costs rose by more than 4 percent in 2015, driven by labor costs, following similar increases in the previous two years.
Merritt Construction Services, a division of the Merritt Cos., has seen similar cost increases locally, said Director Gary Swatko. He attributed the rise to wage hikes for skilled workers, who he and others said are in short supply amid a flood of new public and private projects such as National Harbor and school construction.
Though employment in construction remains about 10 percent off the 2008 peak, that's not for lack of openings, Swatko said.
"There's been a real jump in the amount of jobs and not enough people," he said. "If the people were available and skilled, hiring would increase."
As work picks up, firms also have been able to adjust their bids to allow for more generous profit margins than the break-even days of the Great Recession, when they kept prices low in order to survive, said economist Anirban Basu, who advises the Construction Management Association.
At a July meeting of the Maryland Stadium Authority, which is overseeing the $1 billion Baltimore City public schools construction plan, officials said they were trying to space out projects to avoid a situation where their own projects compete against one another for subcontractors.
For WorkShop Development, which has several projects in the pipeline in Southeast Baltimore, including the redevelopment of the prominently placed Della Notte restaurant on Eastern Avenue into apartments, the cost pressure has meant fine-tuning design.
"Although the vacancies are low and the rents are up, there's still a lot of focus that, with the rise in construction costs, the projects work," said Doug Schmidt, a principal at the firm.
The Whole Foods property, which will extend high-density Harbor East toward Fells Point, is one of three that Harbor East Management has in the works. The firm recently started an expansion of the H&S Bakery operation in Fells Point and is eyeing redevelopment of the block north of the new Whole Foods project.
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The firm is looking at one or two floors of retail, with offices or apartments for the northern site, said Tim O'Donald, president at Harbor East Management Group, which is owned by the Paterakis family. He declined to specify a timeline, saying it depends on what use ends up going there.
The firm hopes to complete the Whole Foods project by the end of 2018.
The 22-story building, designed by Hickok Cole Architects, is slated to include a 50,000-square-foot, two-story Whole Foods that is roughly double the size of the grocer's existing Harbor East store, an elevated courtyard, yoga studio, library, fitness center and a pool, as well as 575 parking spaces.
The firms have branded the property Liberty Harbor East, a name meant to evoke World War II-era cargo ships constructed at the Bethlehem Steel plant as well as the late Liberty Paterakis, sister to John Paterakis and wife of Harry Tsakalos, one of the co-founders of H&S Bakery, where she was treasurer.
O'Donald said he expects that the architecture and finishes of the building will make it a "crown jewel" for the Harbor East development.
"We're very, very excited for this project," he said. He added that growth throughout the area "gives us a lot of confidence that we can build a project of this scope and scale and be able to do very well in it, but at the same time deliver something that's really iconic to the city."