FORT COLLINS — Supply-chain issues, the cost of building materials, labor shortages, soaring water costs and other factors have caused pain for large and small construction contractors alike — but some opportunities as well, panelists said Wednesday at BizWest’s 2023 Northern Colorado Real Estate Summit.
“COVID sparked all this, where supply was depressed and demand increased rapidly,” said Jeff Meissner, vice president and principal of ARCO/Murray Colorado. Part of that spike in demand, added Matt Betts, vice president of J.E. Dunn Construction, was because homeowners during the pandemic “wanted to finish their basement, build a shed in their backyard, do all kinds of projects with the time that they had when they were working from home. Lumber prices went up, and single-family residential was going crazy.”
Meissner said the Ukraine conflict and general shortages of materials also contributed.
“Some products went up 40% in a two-year period,” he noted, “but some good news is on the way. Since the middle of last year, those costs have flattened out substantially, and some costs have come down a little bit. Stability is a little more clear.
“Lumber had two gigantic spikes in 2021 and 2022. That’s obviously affected every construction project, whether single family or multi-family,” he said. “But that’s also gone down recently, which is great. Structural steel had a pretty steep cliff the past couple years, but that’s softened out a little bit, and that’s helping right now.”
The bad news, he said, is that “some other things are getting a little bit worse. HVAC and electrical equipment have super-long lead times, upwards of 52 weeks at times, and those have increased dramatically. Diesel fuel is down, steel’s down, lumber’s down, but everything else is still up on a year-to-year basis.”
The largest driver of cost increases is the workforce, he said.
“Labor continues to rise. Unemployment is still low in the construction industry, and there’s a shortage of skilled labor. That’s really washing out any commodity decrease.”
Betts attributed a 7% year-over-year rise in construction wages to an aging workforce.
“A lot of people coming out of high school are not interested in learning a trade and working in the trades,” he said. “That means that, first of all, there’s not much labor, and the skilled labor that’s there is extremely valuable. Some of that labor that’s out there is not as qualified and productive as the labor that’s aging out of the industry. That lack of production is being priced into the numbers that we’re seeing.”
Another force keeping construction costs high is that demand has remained strong, Meissner said.
“Prices go up because of either less supply or more demand. One of the reasons prices keep going up is that people keep paying for it,” he said. “The demand is extreme, and some of the things that support that are high rents and general economic growth, so it’s not a terrible thing.”
Shawn Sullivan, vice president for development at the Neenan Co., agreed.
““We have not seen an overall slowdown in opportunities and conversations we’re having with our clients,” he said. “Nothing’s been put on hold because of costs and interest rates. A lot of it has to do with the opportunity costs that our clients are trying to achieve.”
Acting early is a key to keeping prices in check, they said.
“There’s no elimination of the cost-escalation risk,” Meissner said. “The best way is to partner early, with a design team, with a construction team or both. That’s a little bit counterintuitive. The old-school way of doing business if you’re a real-estate developer was to go create a set of drawings, get it on the street to three or four general contractors to bid on it. That playbook might not yield the best competitive price.”
Don’t wait, Sullivan added.
“If you’re planning a project, go through the design process,” he said. “If you’re not prepared to pull the trigger when the time is right, you’re going to miss out on an opportunity. Don’/t want and think you’re going to catch a potential price flattening.”
“One of the worst things people can do is wait until the end when the design’s all completed and then get the price and realize it’s 30% over their budget and they don’t know what to do,” said Gregg Meisinger, president of Coe Construction. “It’s really better for folks to pick a team and start to understand what is the realistic budget in today’s marketplace so they can start to get their ducks in a row a year, a year and a half out, in order to make the project move along.”
He also advised ordering equipment far in advance. “That’s a difficult conversation to have with an owner: ‘OK, we’re ready to spend $10 million but we’re ordering stuff today and we’ll start work in about 9 months.’ But it is very real,” he said. “It can take up to a year to get some of the pieces and parts necessary.”
“It’s been a rough couple of years of always being wrong; 2021 was extremely rough for the construction industry,” Betts said. “We’ve got a better understanding of it now, though. Things are settling down. It’s a little more predictable. If any of us had the crystal ball, we wouldn’t be sitting here; we’d be on a beach somewhere.”
Sullivan concluded that the best forecasting advice might have come from baseball sage Yogi Berra: “It’s hard to make predictions, especially about the future.”