OIQ_091521

Page 14 — Office & Industrial Quarterly — September 2021 www.crej.com OFFICE — CONSTRUCTION M omentum in Denver’s office market may face some unforeseen barriers, at least in the short term. Inflated construction costs and new pandemic fears are the culprits, neither of which could be predicted in the market’s midyear fundamentals, and both of which could cause significant delays along the path to stability. Second-quarter metrics in the mar- ket have again indicated guarded optimism.Vacancy metrowide stood at just over 14%, according to CoStar’s analysis of the quarter. Net absorption is still in the red at negative 512,000 square feet, a startling number for sure, but down from the over 1 million sf registered in each of the previous three quarters. Average asking rates hover at around $30 per sf, not an alarming change from first quarter, but enough to prompt landlords to accelerate nonrent concessions in this tenant- leaning market. Another key indicator is office-using employment. Those are professional service, information, financial and gov- ernment jobs, among others, clearly on the rebound. This type of employ- ment recovered almost 33,000 jobs since the low in July 2020, according to the U.S. Bureau of Labor statistics. Still, companies both large and small seek ways to minimize their real estate footprints, a clear sign that the over- all market is experiencing continued volatility from COVID-19 fallout. One factor not widely accounted for in midyear fundamentals is the spike in construction materials cost on the rise as supply chains struggle to catch up to pre- pandemic levels. While increases have ticked up since last year’s shutdown, it is only recently that devel- opers, landlords and end users have been clamoring for ways to mitigate the sting of cost increases in lumber, steel, dry- wall, cement, insula- tion and dozens of other products. Input costs for construction rose to 24.3% fromMay 2020, according to a “Construction Inflation Alert” posted on the Associated General Contractor of America website in June, a star- tling indication that the construction industry is experiencing a more jagged recovery than expected. “If you look back on modern his- tory, 2008 was a year of extreme price increases and that high was roughly 12%, so we’re double the previous high,” said Michael Gifford, president of ACG Colorado. “This is predicted to last a couple of years versus the six months we saw in 2008, and it’s not easy for contractors to pass those costs along to an owner for existing contracts already signed for a fixed cost.” Indeed, general contracts have to grapple with how much of those costs to pass on, when and with which cli- ents. For some contractors, the next six months to a year will be a struggle for survival. “Small to midsize firms are a bit nimbler than larger contractors with extensive overhead and projects in process,” saidTom Newman, senior property manager with Denver’s 1st Commercial Realty Group. “Those guys can shave some dollars and help us perform value engineering much more quickly if that is necessary.” Newman noted that creativity is key when con- tractors work with landlords and their representatives. “It’s increasingly competitive out there,” he said. “Deals are getting done, but with these inflated costs, there has to be more give and take when increases come so quickly.” Savings for landlords might come from repurposing materials fromwith- in building stock, like doors, frames, blinds, lighting and electrical items, Newman said. Some contractors can stockpile materials. “General contractors are problem solvers,” Gifford said. “Nine out of 10 issues get resolved by contractors before a conversation with an owner becomes necessary. That’s the value proposition they bring to the table.” But no contractor can pass along a 24% cost increase to an owner. Many firms will include a “price escalation clause” in their contracts as a method of self-preservation for just this type of eventuality. Although these clauses can be structured in many different ways, the gist is that owners would pay the difference between a price Rising costs, delta variant may stall return to office Peter Brumley Project manager, Aberdeen Construction Aberdeen Construction Sharp increases in construction materials include lumber, steel, drywall, cement and dozens of other products. Costs are expected to stabilize in 2022. Please see Brumley, Page 18