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.
- 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.