If You Can't Find it... Build it?
In the world of commercial real estate, supply and demand of the various types of property go up and down like waves of the ocean. In recent years Industrial/Flex and Multifamily have been the “darlings” that are experiencing very high demand and therefore very short supply. For some they spend time looking and waiting for something to meet their needs and very little comes up and when it does it can be very competitive to be the winning buyer. The next natural question we get is, “Can we buy land and just build what we want?” Often the answer is yes, but there are some unique challenges in that scenario as well. Two words: Time and Money.
We want to share some interesting data that LGE recently shared in their 2022 Delivery Outlook. LGE is a Design/Build construction firm with vast experience in every step from concept to design to build commercial real estate. They are experts and so to learn the granular data behind some of the challenges in the construction industry right now was very informative. David Sellers, their CEO said “While 2021 saw demand for commercial construction and design continue to rise, unprecedented issues, like shortages of skilled labor, import bottlenecks, and material volatility, still lingered into Q2 of 2022. Those already existing issues were compounded by a number of natural disasters, creating conditions that were ripe for what could have been an ominous situation for the entire industry.”
Currently, Phoenix has approximately 2 million square feet of office space under construction with retail construction registering at about half that, coming in at just under 1 million square feet. These figures, however, pale in comparison to the 36.3 million square feet of industrial construction taking place in the Phoenix metro area, which is a record mark for the Valley. This places Phoenix second only to Dallas, which is looking at 38 million square feet of industrial space currently under construction. This all trickles down affecting everything from large municipal projects to the tenant trying to get their space finished out. There are two critical pieces of the puzzle are the materials and the labor to get it done.
Number one let’s talk materials. LGE reports that construction materials in general rose about 20% from the beginning of 2021 to the beginning of 2022. When you drill down to specific materials the increases can vary drastically. This chart illustrates the materials that are really going to cost you.
LGE Design Build, “Construction Deliver Outlook,” Q2 2022, May 17, 2022, p. 11
There are multiple factors affecting this rise, and they all point to the fact that we will not see any relief in the near future. Global supply chain has had obstacles such as natural disasters and logistical bottlenecks. Remember how we all dealt with the toilet paper hoarding during COVID? Well, many construction firms are not following “just in time ordering” like they have historically, instead they are hoarding materials to equip themselves for the demand. This is just causing further stress on availability.
That is the “money” of the time/money equation. The “time” element- 75% percent of construction firms experiencing project delays cite shortages of materials and delivery delays as the main reason. The chart below reflects increasing lead times in construction materials.
LGE Design Build, “Construction Deliver Outlook,” Q2 2022, May 17, 2022, p. 8
The other piece of the puzzle- Labor. When the country is basically at full employment finding skilled labor is a huge challenge. Nearly 90% of construction firms are encountering project delays, and more than 60 percent of those firms cite labor shortages as a reason for the delays. Typical lead times from subcontractors have tripled since 2019 and have become a major factor in project schedule delays.
Again, this poses a problem for owners building their project, but even tenants trying to build out a space are having challenges getting Tenant Improvements completed. Construction employment is at an all-time high, but the demand is still greater. These are the lead times on some of the basics for most projects:
LGE Design Build, “Construction Deliver Outlook,” Q2 2022, May 17, 2022, p. 6
Can you just build it instead of buying? The moral of the story is that there is no easy answer. You need to have the very best professionals helping you with every aspect of your project. Your Commercial Real Estate Broker should be equipped to be the early bird locating available property, land or improved real estate. If you decide to go the build it route, you must have a qualified contractor that can tell you the honest truth about what to expect.
