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.
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.
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.
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.
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.
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.
KasCon Inc. is a general contracting and management firm that offers commercial construction services to companies and organizations in Baltimore, Columbia, and nearby communities. Its portfolio includes interiors, adaptive reuse, new building construction, full-building renovation and occupied renovations across a wide range of industries.
Implementing tenant improvement projects follow the same philosophy. In expanding, renovating, and improving Sparksoft’s headquarters in Columbia, KasCon balanced functionality and efficiency with aesthetics and technology. The firm used a mix of earth tones and striking colors to grab customers’ attention as soon as they enter. The laser-cut tiles that form Sparksoft’s logo on the lobby create a remarkable image of the company’s superiority in its line of work. The headquarters feature open spaces that foster collaboration, conference rooms for team and client meetings, and private rooms for more intimate and confidential discussions. The overall design of the 35,000-square-foot space reflects Sparksoft’s image as a leading IT solutions firm that can solve any tech-related problem.