Navigating 2024: Trends and Outlook in Commercial Construction

KasCon closely monitors trends and their impact on our business to ensure we can effectively serve as managers and advisors for our clients and their projects.

As we step into 2024, the commercial construction landscape has begun to stabilize in several areas and reached a new normal while other elements continue to evolve. In this blog post, we’ll highlight how we expect various factors to impact commercial construction, including: supply chain and materials pricing; interest rates; and labor and regulatory challenges.  In addition, we will discuss our thoughts on the direction of various market sectors within commercial construction.

  • Supply Chain and Materials Pricing: The stabilization of supply chain issues and materials pricing is noteworthy. Both are now more predictable compared to the years immediately after the pandemic, though lead times are still longer, and prices higher, than pre-pandemic levels. This poses challenges for the market in aligning construction costs with rental and real estate purchase rates.
  • Interest Rates and Real Estate: An anticipated downward trend in interest rates could drive increased investment in the real estate market. Though construction costs remain high, the shift in interest rates may influence deals and offer opportunities for both buyers and sellers. If short-term seller financing is an option, deals may have a greater likelihood of closing as there is optimism that a positive re-finance in the 4–5-year window is plausible.
  • Staffing and Labor: Finding talent continues to be a challenge and we expect ongoing pressure on salaries and overall compensation through 2024. As a result of the labor shortage, we see less experienced talent in areas of responsibility among many commercial real estate influencers. This can result in extended timelines, and a need for more collaboration to be certain that some experience is brought to an issue. The labor shortage trend appears to be slowing, and we expect to see at least a slight increase in talent availability by year’s end.
  • Processes and Regulations: Regulatory hurdles continue to impact construction timelines and costs. Energy efficiency and stormwater management regulations continue to significantly drive-up construction costs. There seem to be more disagreements between the code interpretations of plan reviewers and inspectors seemingly caused by labor shortages, and perhaps experience as discussed in the Staffing and Labor section above. This adds an additional layer of complexity to the approval process.

While commercial construction activity continues, the volume varies dramatically by market segment.

  • Office:  The Office market continues to be significantly affected by the reality that hybrid and remote work environments are here to stay. Class A spaces outperform other classes, and tenants not in large growth industries are downsizing at time of renewal. Construction costs seem to be extending lease durations.
  • Industrial: The industrial sector, which experienced highs during the pandemic, is cooling off, as it appears some as companies may have overbuilt. The sector nevertheless remains active, particularly for companies requiring complex logistics and transportation access.
  • Healthcare: The healthcare sector remains strong, driven by high demand and stable long-term occupancy. Consolidation within the industry is fueling deals as larger organizations tend to have the cash and wherewithal to forge ahead with projects despite budget challenges. We anticipate a robust market for healthcare-related construction projects will continue in 2024.
  • Retail: Despite the changing retail landscape, retailers still express a desire for more shelf space. Cash-rich chains with long-term leases are expected to dominate, emphasizing the importance of financial stability in navigating the retail sector.

Traversing the complex landscape of commercial construction in 2024 requires adaptability and strategic decision-making. Supply chain stabilization, fluctuating interest rates, evolving office dynamics, and sector-specific trends underscore the importance of working with partners who are agile, experienced, and understand the challenges all parties are facing in the ever-changing world of commercial construction.

Managing the High Costs of Construction Projects in Today’s Economic Environment

Anyone visiting Home Depot for a DIY project, large or small, has surely noticed the increased cost of building materials. Not surprisingly, the post pandemic impact on commercial construction projects has been significant.  In an environment of increasing material and labor costs, partnering with an experienced, trusted team is more important than ever.

Materials Costs

All signs and trends suggest that we are not going to see significant reductions in construction pricing. While cost increases seem to be stalling, nothing short of a very deep recession will create sufficient  downward pressure on construction prices to have a meaningful impact.  For that to occur, demand would need to plummet for a protracted period.  We would have a host of other problems perhaps far worse than the inflation we are experiencing now.

Here is snapshot of the prices of a few commodity construction items before and during the pandemic:

A 4’0 x 9’0 sheet of ½” Drywall

  • Pre-Pandemic:                   $8.28
  • Market High:                    $16.96
  • Current:                              $16.96

A 2×2 Piece of Armstrong Dune – Mid Grade Acoustical Ceiling Tile

  • Pre-Pandemic:                $4.72
  • Market High:                 $11.60
  • Current:                             $8.89

#12 AWG Solid Copper Wire per 1,000 lf

  • Pre-Pandemic:               $95.00
  • Market High:               $200.00
  • Current:                         $165.00

These are just a few items common to many commercial projects.  The impacts are similar across practically every element of every project.

Labor Costs

Material costs are only a portion of what goes into any commercial construction project. On average the ratio of labor to material is approximately 30-40% labor, 60-70% material.   There is no indication that labor costs may come down in the near future with construction job openings increasing nationally by 129,000 between January and February 2023.  If we assume no price reduction will come from labor, that means that  managing material costs is even more important.

Given increased material and labor costs, what can we do to make a construction project as cost-effective as possible?

The increased demands on getting prices down places increased importance on partnering with your contractor and design team.

Creativity & Experience

Perhaps one of the most overused terms in the industry is the famous VE, or value engineering. Delivering the “same” for less money takes creativity and experience with options available.   Getting contractor input early gives a creative partner a chance to steer  you to affordable solutions up front.   A good contractor can still value engineer a completed design, but there will be fewer opportunities for flexibility, and an owner may have fallen in love with an approach or specification without realizing the cost implications.

Adaptive Re-use

The high cost of new construction is pushing owners to consider adapting  buildings previously designed for a different purpose. We are seeing this in all facets and markets be it office, retail, industrial, healthcare and religious.  This approach can add some complexity but the value obtained from not building entirely new can be well worth it.  Working with a team that understands your goals and has experience with a wide variety of projects and the rules and restrictions around them will put your project in a better position.

Renovation

Those seeking real estate for commercial purposes will be more apt to find existing, vacant spaces that roughly satisfy their needs OR choose to stay put, reorganizing and renovating their existing space. The pitfalls of an occupied renovation are obvious.  Construction disruptions can take a toll on an organization if not properly  planned, staged and orchestrated. The increase in work-from-home options perfected during the pandemic can help create large work phases without needing swing space to temporarily house staff.  The key to a successful occupied renovation is a contractor partner that takes the time to work with you, build a plan, manage and meet expectations.

These current economic realities for both labor and materials require thoughtful approaches and a strong partnership between owners and their general contractors and design teams. Successfully keeping a project on-time and on-budget rely on managing the economic realities in a proactive and thoughtful manner.  So, be selective about your general contractor and look for a partnership that demonstrates creativity and experience that will help you navigate this current new reality of higher material and labor costs.

 

 

 

 

Avoiding the Dreaded Change Order

Change Order.  Perhaps the two dirtiest words in commercial real estate and construction. Everyone involved with a construction project wants to avoid them. 

  • Owners don’t want the additional costs added to already stressed construction budgets 
  • Architects don’t want to be seen as the cause of the additional costs 
  • Most General Contractors, contrary to popular belief, don’t want them because of the high administrative costs, the delays they cause, and the bad feelings they create.

While some change orders are inevitable, they can be significantly reduced by taking actions in advance. Change orders have different causes so they need to be combated in different ways. Owners and their teams can totally avoid or certainly minimize the impacts of most change orders.  

The “I Wish I Had X-Ray Vision Change Order” 

If you can’t see it, measure it or test it, it’s a mystery. In new construction this is limited to what happens from the ground down.  In renovation, alteration or adaptive re-use projects, information or access is often limited and assumptions must be made when pricing work. If those assumptions turn out to be incorrect, a change order ensues.  Try these steps to help take the mystery out of existing conditions.  

  • Find and Make Available Original Construction Documents. The original construction documents provide a wealth of information.  The time spent locating them is very often well worth it. 
  • Perform Exploratory.  Ensure your design or construction team is given the time and resources to expose hidden areas, perform demolition as needed, record video of pipes and difficult to access cavities, and take multiple soil borings. Eliminate as much mystery as possible. 
  • Test and Inspect. When applicable, ensure your project team is testing existing materials, inspecting their condition and that they know up front what will need to be modified or replaced. 

90% or more of hidden condition change orders can be eliminated by identifying the work before  contract values are established.  Sometimes this requires early engagement of the contractor and collaboration between contractor and design team.  It is a matter of pay now…or pay more later. 

The “This Is Hardly Up For Debate” Change Order 

The design team and contractor are not the only players in a project. There are multiple authorities that have jurisdiction (AHJs) over construction work and their decisions are often final, can have a significant impact and sometimes cause change orders. Inspectors, utility companies, health departments, and accrediting agencies can each unilaterally issue a directive or require a process that was unexpected. The key to eliminating or minimizing this type of change is to have the right design and construction team that will expect the unexpected and be proactive when something arises. Try these to eliminate surprise decisions from AHJs impacting the project. 

  • Hire the Right Team. There is no substitute for experience in your design team and contractor when it comes to knowing the way AHJ third parties typically act and how to react. Experience in the work sector and the jurisdiction is absolutely critical. 
  • Get Some Face Time. While not always the easiest thing to accomplish, with the right approach most third parties can and will meet and review plans and provide early feedback.  Make sure your GC makes this a priority.  Focus up front can save time and money later. 
  • Address Issues Early. Adopt a posture of bringing issues or concerns to the attention of the AHJ as soon as they are identified, instead of hoping they won’t have issue, or that they will entirely overlook it. There is only a fractional chance your team will be bringing up something that might not raise its head eventually and the proactive approach typically promotes goodwill and respect that positively influences the outcome. 

The “That’s Not What I Expected” Change Order 

Many change orders are initiated by owners who are either surprised by the information documented in construction drawings long after they are issued, or simply change their minds about the desired final product. At times this is understandable. Organizations requiring construction are dynamic. It makes sense that needs can change between the time drawings are created and actual construction occurs, so some changes are unavoidable. Many however are the result of a failure to fully understand what is being built or a failure to think through needs thoroughly and communicate them to the rest of the team. Try these to minimize the disconnect between what is desired and what is delivered. 

  • Don’t Shortcut at the Front End. Initial concept plans are developed with minimal information. Sometimes the process to advance them to final construction documents can be rushed with not enough time spent reviewing each and every aspect of the work. Instead, carve out the time to review as drawings are developed and less time and money will be spent correcting errors. Make sure all of your goals and requirements for the project are known so others on the team can help you achieve them. 
  • Get Guidance. Owners shouldn’t be expected to understand construction drawings any more than a lay person should know how to read an MRI. Either the design team or GC needs to be engaged to “walk” you through the drawings, explain, interpret and do whatever it takes to foster an understanding.  As the owner, you need to provide the focused time. 
  • Make Regular Site Visits. Construction drawings are two dimensional and our world has three dimensions. Some things are difficult to see on paper but come to life in person.  By regularly visiting the site and observing progress, expectations can be verified, and adjustments can be made before it is too late. Walk the project with the site supervisor or project manager and have them point out items and explain what is going on. 

Every participant is better off when change orders are avoided. It is the responsibility of the entire team to take a proactive approach and utilize suggestions like those offered to promote success. 

Succeeding in Today’s Challenging Commercial Real Estate & Construction Climate

Today’s commercial construction and real estate industry has been significantly changed by the post-pandemic economic realities. These realities require thoughtful new approaches to ensure success. Stronger partnerships between owners and their GCs are at the center of an important market shift occurring to manage this new commercial real estate reality. 

Today’s Challenges: 

  • Fluctuating Costs and Inflation – Historically, construction proposal costs were routinely held for 30, 60 even 90 days. Today, certain components of pricing are stale the day after presented. This has been magnified by inflation driven by supply shortages and high demand which are driving construction prices to record highs.  The price changes are large and unpredictable.
  • Lead-times for Basic Materials are Unpredictable – Lead times on materials (the time it takes to procure and arrive at the site) has always been an issue for specialty items incorporated into projects.  Now even basic commodity items such as insulation, drywall and fasteners are problematic.
  • Commercial Owners’ Focus on the Lowest Rent Costs is Increasing – Commercial rents, particularly in the office and retail sectors are not keeping pace with the cost of construction which demands owners drive to the lowest possible price. Increasing interest rates are placing further pressure on owners.
  • Construction Lenders Need Greater Contingencies – In reaction to price uncertainty lenders are looking for larger contingencies in contracts calculated into their numbers.

Owners’ clearly need the lowest possible construction prices to make their numbers work. Conventional wisdom seems to suggest that creating hard bidding competition can reduce prices, but the best approach to success is to engage a GC partner upfront. Partnering much earlier in the cycle, with a qualified contractor that provides enhanced services and adds value, while making a fair and reasonable profit is critical to succeeding in this difficult climate. 

How Partnership-Focused General Contractors Meet these New Challenges: 

Not all GCs are focused on the success of the project and the owner. Those that are take a partnership approach and meet the market challenges with extra effort and attention. For example:  

  • Staying informed on pricing trends on key construction components by establishing ties to industry indicators, manufacturers and suppliers rather than waiting until a new problem presents itself. 
  • Ramping up the analysis of even the most basic materials early in the pricing process so that realistic and reliable schedules can be developed rather than providing schedules that sound great but are impossible to meet. 
  • Properly identifying current price increase risks and trends and proposing purchasing strategies to ensure best value rather than simply waiting for the actual materials’ price and passing it onto the client. 
  • Timing the start of projects to ensure that the construction process works much like manufacturing’s “Just in Time” approach, rather than allowing job sites to sit idle while materials are on order. 

These new strategies place great stress on GC firms not accustomed to delivering these value-added services. At KasCon, we have always believed in careful planning, partnership and creative problem solving and have seamlessly added these services to our standard offerings to better serve our clients.  

The world has changed and with it, so has the commercial real estate and construction industry.  This new reality may be with us for a long time, possibly indefinitely. With these changes, success will depend upon innovating and reacting to the new challenges in a proactive and thoughtful manner. 

Why You Want Your Contractor to Tell You the Truth, Even When It’s Not What You Want to Hear

Today’s construction environment is nothing short of crazy. Inflation, supply chain problems, labor shortages. you name it.  But work still needs to go on and projects continue to move forward at a fever pace. Figuring out what a project will ultimately cost and how long it will take to design and construct has always been essential to clients during the early concept stages.  In today’s world, this is much more difficult, and not all contractors will take the time to do it right. Clients looking to hire a general contractor should use this initial process to evaluate their potential partner for overall approach, attention to detail and willingness to tell it like it is, even if it may be hard to hear.

Projecting a Realistic Cost 

No one wants their project’s cost to be more than their budget will allow.   An experienced contractor can take limited conceptual information available in a preliminary stage and use their knowledge to read between the lines and extrapolate to the eventual project.  The issue is most often not what is on the concept drawing or space plan, it’s what isn’t on the drawing. Owners should be able to rely on a general contractor’s expertise to think beyond what’s on paper, look for the pitfalls, price accordingly and then transparently share that information. Here are a few reasons to start with a real, well thought out value. 

  • Inflated values that cover any and every contingency can kill a deal unnecessarily.  Beware of round number $/sf estimates that show little or no thought.
  • Lenders are wary of price creep. They want to see detailed estimates and contractor credentials to build confidence and prevent the need to add large contingencies of their own.  With interest rates rising, this issue is compounded.
  • The amount and timing of cash outlay has become more critical.  Long lead-times mean purchasing as early as possible, sometimes spending well in advance of the project’s physical start to assure materials are on hand when needed.
  • Change orders are no one’s friend. A realistic price helps keep unexpected change orders in check.

Determining a Realistic Timeline 

The “how much” is only half the battle. When will it start and how long will it take are key factors that owners need their contractors to get right.  As with price, getting into the details and having experience with all of the project elements is essential to making accurate timing predictions. Everything is taking longer, from permitting to inspections to material acquisition and labor.  No one wants to hear how long it is taking to execute work these days, but banking on an unrealistic date has some negative consequences.  Here are a few reasons to start with the right schedule. 

  • The construction delivery schedule has a lot of other elements that wrap around it: moving; IT; product stocking; and other transitions that need to take place in conjunction with construction completion.
  • In rental situations many hold-over provisions can be punitive. These can often be negotiated in advance to the benefit of both landlord and tenant.
  • Knowing when a revenue stream will start is incredibly vital to any new venture or expansion.
  • Getting timing accurate will help owners manage the expectation so third parties like lenders, their clients and suppliers have a realistic expectation from the start.

Will your contractor take the time to come up with realistic answers or tell you what you want to hear? We believe that being informed and transparent, even if it includes bad news, is the best approach. This is a time for contractors to be fully disclosing information to clients, making them aware of the uncertainties and working together to solve the problems.  This fits well with KasCon’s approach as it’s always the way we behave.  We would rather lose an opportunity than win it and be unable to meet expectations. In our experience the successful client wants to hear it all, good, bad or indifferent and the relationship now more than ever requires us to be in the same boat rowing in the same direction.

Tips to Building a Successful Ambulatory Surgery Center Project

Whether it is simply pent-up demand or a shift in thinking, physicians and medical groups are showing greater interest in licensing and building private Ambulatory Surgery Centers as part of their practices. Ambulatory Surgery Centers, or ASCs, have been popular for some time as they offer a lower cost alternative to performing procedures and operations in hospital settings. Insurance companies often favor this approach. ASCs offer increased convenience for patients and the centers help generate revenue for physicians that may receive smaller reimbursements for routine services. The ASC licensing, certification and construction pose many challenges. The elements an ASC may need to contain tend to drive up construction costs in an already price inflated market.

Partner with a Surgical Consultant Specializing in ASCs

Before a single screw should be turned, or for that matter, a single line drawn, we recommend doctors contact a specialty surgical consultant like Tina DiMarino of Custom Surgical Consultants www.customsurgicalconsultants.com. Consultants are experienced at listening to the needs and desires of the physician and assessing the viability of the project quickly. These surgical consultants can handle tasks such as determining the proper level ASC, navigating the rules and regulations, obtaining accreditation, and in some instances, proving medical necessity (Certificate of Need). It’s hard to deal with such daunting tasks without a pro at your side. Engaging a surgical consultant is a vital first step towards a successful project.

Create a Comprehensive Design and Construction Team from the Beginning

KasCon uses a “Design-Build” approach, meaning that the design team (architect and engineer) are joined with the contractor at inception to insure a consistent value driven product with single point accountability. We lead the RFP process for design team selection and contract these services directly or simply facilitate and have the medical group hold the design contract. Whatever the preference, the key is to have architect, engineers and contractor work together up front. This group, in conjunction with the surgical consultant, will work to determine the best fit and most accurate preliminary construction cost so informed decisions can be made.

Prepare for ASC-Specific Complexities

The complexity of ASC construction doesn’t end at the licensing and certification issues. These facilities offer a number of building challenges that all must be considered. ASCs require additional space, not only for the operatory or procedure rooms, but for required ancillary functions like pre-op, post-op, and clean and dirty segregated areas. Access is important: can the facility be accessed at grade or will an elevator be needed? If an elevator, is it large enough? What about power? Will a battery back-up system suffice, or will a generator be required? An ASC has HVAC and plumbing demands that exceed those of a medical office. Also, the ability to sanitize floor and wall surfaces require products that may differ from a typical medical office. Other aspects such as fire separation, use of medical gases and the need for automatic doors – just to name a few – must be considered and accounted for in both design and pricing. There will be fewer surprises when you are working with an informed contractor and design team, experienced in ASC projects.

The private ASC offers some great advantages for both physician and patient. The key to making the build process pleasant and cost effective is to gather the right team and allow them to guide you through the challenges, as well as provide information and options for consideration, so the physician can focus on the medical practice.

Corporate Values Drive Success

In our role as commercial General Contractor, we have had the opportunity to see first-hand how strong corporate cultures with solid values drive success both internally and externally.

KasCon has developed a culture over our 20-year history which mirrors those values so vital to establishing and growing our client relationships.  The cornerstones of the KasCon culture include transparency, personal and timely communication, empathy, equity and respect.

Transparency

Transparency is a popular buzz word that captures the importance of playing it straight.  On the client side it means just that, providing complete information in a candid and timely way.  Within the organization, transparency comes with open and full disclosure regarding expectations, performance and compensation.  Open communication is the norm at KasCon, but it is supported by having two sit-down reviews per year with each employee.  Everyone knows exactly where they stand relative to expectations and there are no surprises.

Accessibility

Accessibility, timely communication and responsiveness are keys of our client service.  When questions or issues arise on a construction project, they are usually time-sensitive; clients need to know they can reach out on the moment and get answers.  Internally, our employees feel they can share openly any concerns or issues related to their work and lives.  If an employer wants its team to share what factors are affecting performance the firm’s managers need to be accessible and approachable.

Empathy & Equity

A sense of loyalty and respect is generated when communications between client and contractor include empathy.  Understanding the pressures the client faces is a key contributor to a successful relationship.  The same holds true inside the organization.   A climate of caring and understanding facilitates communication and good communication drives performance.

Fairness in the contracting relationship creates a backdrop for a successful project by reducing the need for parties to jockey for position and leverage each other.  The result is a win-win arrangement that assures less stress, so common in many construction projects and better collaboration.  Individuals within an organization will much more likely thrive in a climate of equitable compensation, merit based evaluations and opportunity.

Building a company culture rooted in values of transparency, accessibility, empathy and equity sets a foundation for success inside and outside the organization. Greater employee satisfaction and self-worth promotes both performance and employee retention. These same values in the marketplace fosters relationships and repeat business.  This allows the organization to sustain itself and assure that it will thrive.

How to Help Ensure a Successful Construction Project without Surprises

While the success of any construction project is based upon a variety of factors, one is that the final product meets the client’s needs and expectations. Obvious? There are some unique aspects of design and construction that don’t make that so simple. Focusing on a few things during the planning or pre-construction process can help ensure that after all of that work, you get what you need and want.

Construction has a language of its own that is further complicated by the use of acronyms and abbreviations that rival our Federal government. As a client, you should no more be expected to understand that language than someone stepping onto a sailboat for the first time should understand “starboard” and “port”.

While we possess the technology for virtual reality tours, the standard construction project is still documented on large format, two dimensional sheets (images) covered with layers of lines, symbols, shading and cross-referenced keys. A complete set of drawings can be daunting to a lay person. Despite this, the client is asked to “sign off” with their approval. Imagine, if you were asked to review your brain MRI and agree to the prescribed treatment without any translation or explanation of the image.

The importance of pre-construction, (getting it right on paper) has only been amplified in the post COVID-19 world as there are far fewer site visits and opportunities to see the product in progress “full scale”. Here are a few things that can be done to dramatically increase the likelihood that when you walk into your completed construction project there are no surprises.

  • Architects, Designers, Engineers and Contractors need to be careful about the language and abbreviations they use in client meetings and discussions, not take knowledge for granted and take the time to explain and confirm understanding. As a client, you should not be shy about asking questions or risk glossing over items hoping they will turn out right.
  • Everyone has different spatial abilities and talent to discern color and shape in concept. The pre-construction team needs to learn the extent of their client’s abilities and customize presentations to meet those needs. That could mean more samples, visits to other locations to see actual installations, renderings or even mock ups. Ask for more information if you’re not sure about any detail.
  • There is no substitute for time. The number one thing an end user can do to facilitate success is to provide the time needed for their input during the entire project, but especially at the onset. A few long and detailed review sessions during pre-construction will save days of anguish later.
  • When selecting a design team and contractor there are lots of criteria to consider. Place patience, empathy, insight and willingness to take the time to ensure understanding high on that list. When you check references, asks specifically about those qualities.

Getting what you want at the end of a construction project is possible and any decent construction professional wants to exceed your expectations. Make sure your construction team is presenting details in language you understand, willing to take the time to answer your questions and ensuring you understand the implications of your decisions.