Brice O’Connor / May 27, 2021
Whether you are working on a multi-million dollar commercial development, an office buildout, or simply remodeling your home, you have likely experienced the increasing costs and challenges of the construction process in 2021. Material and labor costs rose sharply through 2020 and continue to climb early in 2021. A report published by Verisk Analytics showed that from April 2020 to April 2021, the nation saw an 84% increase in lumber costs. Similar stories can be seen for most primary material markets. These spikes were caused by a combination of factors including unforeseen demand through Covid-19, limited supply due to pandemic-induced mill and manufacturer shutdowns, and tariffs imposed on imported materials. In addition to increased pricing, we are also seeing limited product availability and increased lead times to receive materials. Given this volatility in pricing and material availability, suppliers are holding their material quotes for less time – leaving general contractors and decision-makers with shorter windows to evaluate and commit to projects.
Owners and tenants are also straining to find contractors that have the bandwidth to take on the work. Whether it is regarding turnaround time on quotes or project commencement dates, timelines are getting pushed farther and farther out. Many contractors and construction firms are booked with projects deep into the year. This is partially due to steady construction demand, particularly in the multi-family and industrial markets. In combination with unprecedented demand for industrial space and housing outside of metropolitan areas, the demand can largely be attributed to low interest rates across the board. Whether it is a ground-up development or a tenant renovation, many decision-makers see the low cost of capital as an opportunity to improve their real estate position. In addition to strong demand in the market, general contractors are also facing the challenges of a limited workforce. This has long been the case for Maine; however, with the increased unemployment benefits stemming from Covid-19 support, contractors are finding it harder than ever to recruit and retain skilled workers. This results in increased labor costs to retain the workers who are in the market while pushing out project timelines when construction firms are unable to fully staff. As construction companies focus on meeting demand and managing resources, they have become more selective about the projects that they take on. Smaller tenant fit-ups are sometimes turned down to focus on larger-scale, more robust (and profitable) projects.
For active tenants in the market, it is important to understand the state of the construction industry to adequately plan for your future space needs. If you are evaluating properties that will require fit-up, you will want to start the process earlier than you may have otherwise. Additional time may be needed to obtain quotes, finalize negotiations, receive materials, and complete construction. You will also want to have accurate expectations going into negotiations with landlords and be able to strategize around your needs. If an additional month is needed for construction, will the landlord abate rent or will you being paying while you cannot occupy the space? Additionally, tenant improvement allowance (TIA) will not cover the same amount of work that it did a year ago. Have you planned for those additional costs and how they will be allocated or is your landlord willing to cover the difference? Connecting with a contractor, space planner, and real estate broker early in the process can help you to navigate these obstacles so that all parties involved have a clear understanding of the costs of the project and the timeline needed to make it happen. Working with experienced landlords and developers who have strong relationships with contractors can also help to streamline this process.
The increased volatility in the construction industry is creating additional risk for buyers and developers and affecting the feasibility of some projects. Let us say that you put a parcel of land under contract and then work to get permits and approvals for your desired construction. This process could take 6 to 12 months. By the end of this, construction costs may look drastically different compared to when you first evaluated the project. From a developer’s perspective, if the project requires additional time and additional costs, will the market support the necessary lease rates or disposition price at the time of project completion? As an owner-user, have you adequately planned your business operations around the appropriate costs and time needed for a construction project? Understanding the realistic timeline and accurately budgeting for a project will help mitigate unforeseen complications. Experienced professionals such as contractors, architects, and real estate brokers can help address these concerns and make sure that you understand every aspect of your project, how long the project will take, and your position upon completion. A developer’s representative who works as a liaison between vendors and the owner can also be a great resource.
As we look ahead to the balance of 2021, we are not seeing signs of a plateau for this volatility. With that said, we are seeing remarkable projects come to life, even during these challenging times. Whether it is targeted returns for developers or new energized and efficient spaces to support business operations for owners & tenants, there is plenty of opportunity to meet stakeholders’ goals.
For questions regarding your next commercial construction/development project, contact Brice today:
Brice O’Connor – Associate Broker