While there is some good news on the materials’ pricing front, rising labor costs due to COVID safety mandates and owner and lender uneasiness over the pandemic’s future spread are creating an uncertain future for commercial development.
Earlier this month, the Associated General Contractors Association (AGC) reported mixed results in terms of activity and employment. AGC Chief Economist Ken Simonson said that gains in construction employment in June as compared to May were concentrated in home building and in some areas of non-residential building, but the heavy highway and other infrastructure-related sectors saw a nearly 10,000 job decline.
“Unfortunately, those infrastructure-related jobs are likely to keep declining as state and local governments postpone or cancel projects in order to cover the huge budget deficits they are facing in the fiscal year that began for many agencies on July 1st,” he said.
Simonson noted in its survey, conducted June 9-17, almost one out of three contractors reported a project that was scheduled to start in June or later had been canceled. He added only one-fifth of firms reported winning new or expanded projects, a share that had held steady since April. It should be noted that New York State added the most construction jobs from May to June (42,000 jobs or 14.2 %). However, New York lost the most construction jobs over the year (68,300 jobs, -16.8%).
Simonson, in a LoopNet report entitled “Commercial Construction Costs, Demands Changing,” noted that the work stoppages are more linked to owner concerns over the loss of net worth, revenues or decreased access to funding, rather than government edicts.
Among the developers' concerns include availability of materials and labor, as well as government inspectors who are critical to allowing projects to move forward as scheduled.
“There are so many categories of uncertainty that either didn't exist before or were a minor consideration," Simonson said.
COVID safety precautions are also impacting a builder’s bottom line, according to Paraic Morrissey, resident manager of the New York office of Rider Levett Bucknall, an international construction consultancy firm.
“A lot of clients are looking for labor costs to come down because of the market becoming more saturated," Morrissey said in the LoopNet report.
However, subcontractors are taking a lot longer to get into buildings because of COVID-19 safety precautions, which has resulted in longer work days.
“If you're trying to get 100 workers on to a floor, and you can only put three of them into an elevator at a time—and they also have to line up and have their temperature taken—it can create a bit of a panic trying to get into the building," he said. “So, you're going to be charged for maybe a 10-hour day per construction worker, rather than your usual 8-hour day, which will drive costs up significantly."
Morrissey said that while material costs should be flat this year, the cost of shipping (freight) is rising daily.
“There's such a backlog of materials coming in that it's hard to get a freight plan," Morrissey said. “So, people are trying to book a designated freight plan of their own, which is obviously driving costs up."
Another prevailing trend going forward will be adaptive workspace construction in order to facilitate suitable work environments post pandemic. Morrissey states that he expects that a growing market in the coming years will be clients reorganizing their office space to incorporate COVID safety requirements.
“It can be a huge selling point to produce an efficient space where it's safe for workers to go every day," he said. “There are big opportunities for investors to get on board with firms that are trying to figure out how a successful change is going to be made to the commercial sector."
