Posted on February 27, 2023
6 Trends in Construction CRE Stakeholders Should be Watching
Reports of an impending recession may have been slightly exaggerated.
However, the fact remains that rising interest rates are cooling some sectors of the economy. Many industries associated with the built environment are still recovering from the turmoil of the last three years. These challenges — from the increasing frequency of severe weather events to red-hot inflation — have accelerated the pace of change already underway in architecture and design, commercial real estate (CRE), and construction.
What are these changes? What opportunities for evolution and growth are these changes creating, and how are construction leaders seizing them? How will these changes shape CRE’s short- and long-term future?
In this article, we’ll discuss six construction trends that all CRE stakeholders should be monitoring and explain why.
1) Backlogs
According to an Associated Builders and Contractors report, material and labor shortages have created the highest construction backlog seen in three years. Meanwhile, 2022 ended with total construction starts increasing by 27 percent. Nowhere was this bump more evident than in multifamily. How that sector is coping with construction backlogs offers widely applicable cautions and lessons.
Some apartment industry observers believe that developers will deliver close to 500,00 new units before the end of 2023. Other experts, such as Greg Willett, First Vice President, National Director of the Research, Institutional Property Advisors (IPA) Division of Marcus & Millichap, are less certain. “Influencing that expected completion volume, developers already have been using available resources to build as fast as possible, and 2020-2022 annual deliveries held steady right around the 350,000-unit mark,” he recently told GlobeSt.com. “Completing another 150,000 to 200,000 units on an annual basis without a sizable expansion of the labor pool seems like it simply can’t happen.”
Overall, this situation represents a win-win for contractors and some landlords but a challenge for anyone ready to break ground on a new project. Until contractors clear their backlogs, even shovel-ready projects may have to be postponed. Or, as Greg Willett summarizes the situation in multifamily: “Holding 2023’s completion total below the scheduled volume will yield slightly better results for vacancy stats as well as pricing power. Still, in many instances, it’s going to be tough to get the new projects through the initial lease-up process.”
2) Digital Building Materials
Supply chain disruptions caused by the pandemic created shortages of lumber, steel, concrete, and other building materials. These shortages persist today as the war in Ukraine, continuing COVID restrictions, and labor shortages in the shipping industry continue to strain supply chains.
Cody Nix, Managing Partner at 8th & Main in Midlothian, TX, explains that contractors are holding a mixed bag. “Concrete continues to increase. Lumber supplies have rebounded, and prices have retreated. In 2022, the lumber packs we purchased would be in the low to mid-$20s/SF. Now our lumber packs are around $15-16/SF.”
But the limited availability of another material may be holding back builders. The global semiconductor shortage is delaying commercial projects too, and the construction industry is now competing with the auto industry for these necessary components.
Modern building infrastructure requires microchips for connectivity, HVAC, and security systems. Additionally, as Cody observes, “Some appliance brands are still difficult to procure.”
Luckily, relief is on the way. The Chips and Science Act of 2022 offers semiconductor research, development, and production incentives to American manufacturers. Global Foundries, Intel, and Texas Instruments are among the companies breaking ground on new fabrication plants or expanding the capacity of their current facilities. However, that help won’t be arriving any time soon. It will be at least three years before a significant number of American-made chips hit the market.
3) Modular and Manufactured Construction
The Modular Building Institute reports that in 2020, permanent modular construction claimed only a 5.5 percent market share in North American commercial starts. Yet off-site construction would seem to be the solution to addressing labor shortages, eliminating waste, and meeting the growing demand for “green” buildings.
Why haven’t builders embraced manufactured construction? Given the current labor shortage, it wouldn’t be unreasonable for stakeholders to recognize the advantages of leveraging assembly lines operated by a few skilled laborers. But that means modular building requires that contractors and subcontractors learn new ways of plying their trade. As it stands, modular production methods help feed a perception that “stick-built” buildings are superior in quality to manufactured alternatives.
A change to modular construction also requires an upfront investment. To erect factory-built units, construction companies must invest in — or lease — new assembly and transportation equipment. Nevertheless, this investment should show a positive return, as off-site construction can lower costs and speed up project timelines.
Off-site construction can compress schedules by as much as 50 percent, according to a 2019 McKinsey report. Manufacturers can achieve such efficiencies because both design and fabrication benefit from modular technology. Design firms build libraries of modules to be reused, and construction proceeds more quickly because workers can work in multiple shifts in an enclosed, safe, and climate-controlled manufacturing environment. Also, manufacturing can proceed parallel to foundation construction.
Given the current labor and materials shortages, the commercial building industry may be poised to rethink its negative perceptions of factory-built buildings. But that hinges, in part, on trends in CRE. 2022 was a record-breaking year for adaptive reuse. If this trend continues, modular interior construction solutions may prompt stakeholders to be more open to building entirely manufactured structures.
4) An Aging Workforce
Baby Boomer retirements have been the big story in the labor market for the past decade, as the oldest members of the post-war generation began to reach retirement age in 2012. Since then, the percentage of Boomers retiring has increased each year. That trend only accelerated during the pandemic. According to a U.S. Chamber of Commerce report, the share of construction workers aged 55 and older has risen from 11 percent to 19 percent in just five years.
These skilled workers are taking their expertise with them when they leave the labor force — and many of them aren’t being replaced. This is a challenge for recruiters across all industries, but particularly in construction. Compounding the difficulty are changing technology and consumer demands.
The industry is evolving to streamline processes, reduce waste, and eliminate inefficiencies by utilizing new technologies such as automated construction equipment, 3D Printing, drone technology, data collection applications, building information modeling (BIM), and virtual and augmented reality programs. Simply put, construction needs younger talent whose training differs significantly from what their senior counterparts received.
The skilled trades are not disappearing, but new hires must also become adept at using the latest construction tools. Meanwhile, the federal government is getting behind digital technology in construction, with funding for workforce and technology development included in infrastructure spending. It’s not hard to imagine a near future in which a combination of this innovative technology and manufactured construction results in a leaner, more efficient workforce.
5) The Need for More Affordable Housing
Three years ago, available housing inventory had still not fully recovered from the caution developers exercised after the 2008 economic crash. But the onset of the pandemic in 2020 prompted urban dwellers to flee megacities like New York and San Francisco to resettle in smaller metros, suburban towns, and rural areas. The resulting surge in demand for single-family housing, coupled with pandemic-created construction delays, pushed the cost of single-family homes up as much as 70 percent in some markets. On average, rents across the country rose 15 percent.
Stimulus payments and eviction moratoriums helped reduce homelessness during the pandemic. Still, the current mix of low inventory and soaring housing costs threatens a spike in homelessness this year. The U.S. Department of Housing and Urban Renewal (HUD) has awarded $315 million in grants to address the crisis. Investors can also expect states, cities, and NGOs to inject funds into the multifamily market.
The demand for single-family homes has cooled slightly with rising mortgage rates, putting more pressure on the multifamily market. As always, investors will want to follow the money. The migration during the pandemic away from coastal centers of commerce to Sunbelt cities such as Dallas, Phoenix, Salt Lake City, and Florida’s Cape Coral may be part of a permanent population shift. That jibes with Cody Nix’s recent experience. “Our deal traffic has started to increase as the market appears to be digesting the new rates with more optimism for the rest of 2023,” he says. “We feel the DFW market will outperform the widely reported macroeconomic data.”
6) ESG
Societal forces always play a role in how industries operate. The increase in severe weather events has raised public awareness of climate issues. Inefficient systems whose carbon emissions measure in the tons are now considered dinosaurs. And both businesses and individual consumers are shopping for sustainable, earth-friendly building solutions.
Engineering and construction firms are responding to this demand by adopting Environmental, Social, and Governance (ESG) standards, a multi-pronged approach to sustainable and socially responsible industry practices. The challenge for developers and builders is how to maintain these standards across projects that involve an at-times mind-boggling array of subcontractors. Managers will need to adopt BIM technologies to achieve the visibility required to monitor such projects.
This brings us back to the need for construction teams that understand the new equipment and software. The U.S. Department of Energy is funding training and assessment centers focused on energy-efficient construction. It has awarded grants to nonprofit organizations that collaborate with employers to deliver training in energy efficiency and renewable energy. Clearly, stakeholders who understand that ESG is not a passing fad will be better positioned to build assets that will command a premium on the market now and hold their value for years to come.
By engaging in thoughtful conversations with their colleagues in adjacent industries and monitoring trends that affect property values in real time, our commercial appraisers can better understand what’s happening in some of the nation’s hottest — and most rapidly expanding — CRE markets. Keeping their ear to the ground and their eyes on the horizon also allows them to be nimble and deliver their insights on time, every time, if or when construction challenges affect any given project.
Contact us today to connect with any of the valuation experts at any of our 8 Texas locations: Dallas, Fort Worth, Austin, Houston, San Antonio, El Paso, Lubbock, and Corpus Christi.
