August 2015 — Property Management Quarterly —
Page 15
and 40 percent of the construction
workforce was displaced during that
two-and-a-half year period.”
Those who remained employed
saw their businesses cutting costs
to stay afloat. Many businesses were
unprepared to deal with the recession
and therefore kept costs from rising
for the following couple of years, said
Scott W. Farrell, vice president, i2 Con-
struction.
The same thing happened to the
material suppliers, most of which
were selling at or below cost for mul-
tiple years to stay in business, Hordin-
ski said.
By 2013, the industry was back to
where it was prerecession, said Far-
rell. “The issue that we started to deal
with for the first time was the lack of
labor force as they transitioned to the
oil fields in North Dakota as well as
large Davis Bacon projects within the
market,” he said.
While the market struggled to find
labor, which lost skilled tradesmen of
all types, the demand for new projects
escalated.
“The final result of the recession
was shortage of skilled labor and
unsustainable material costs, com-
bined with pent-up demand because
many customers were slow to invest
in needed capital improvements while
the macro market was so uncertain,”
said Hordinski. “The market anomaly
of costs going down for multiple years
continued for over three years. So
when the market finally got to a point
where we started seeing growth, the
contractors and suppliers first had
to catch back up to where they were
before the start of the recession.”
With the market doing well again,
vendors and manufactures began to
put a premium on their products and
people. “They are making up for lost
time,” said Farrell.
An example of this premium is
the cost of concrete. Three years ago,
Provident Construction paid in the
low $80s for a yard of concrete, said
Hordinski. After jumping almost 10
percent each year, prices were in the
mid- to high-$80s in 2013, the mid-
$90s in 2014, and now are over $100
a yard. “You can do that same anal-
ogy on a sheet of drywall, wire for an
electrician, or any type of major com-
modity that you use in the construc-
tion industry,” he said.
This year, while the market
remains strong and costs continue to
rise, contractors are reporting a slight
decrease in inflation.
“The most important concept that
I hope you can communicate is that
the costs the real estate community
and property owners were seeing five
years ago were numbers that were
not sustainable,” Hordinski said. “The
costs were driven down to a point
where virtually everyone was operat-
ing at or below cost for over multiple
years, and this current pricing is
just normalization to get back to a
sustainable market condition were
contractors and suppliers can suc-
cessfully operate over time.”
While a 3 percent increase to costs
every year is the 30-year norm, it
would be foolish not to assume a
little higher inflation throughout
the market for the next year or two,
Miller said.
Advice for Property Managers
With that in mind, when budget-
ing for tenant improvement projects,
property managers should budget as
much as 15 to 20 percent more than
they would have budgeted for the
same project in 2013, said Miller.
“It is very difficult to make general-
izations about interior construction
costs, as every project is different
in numerous ways, whether it be
materials, schedule or even payment
terms,” said Farrell. “In the past year,
I would estimate that a space that we
would have built out in May of 2014
for $45 per square foot would now
cost between $55 and $60 per square
foot.”
However, the biggest shift for
property managers may be how
they approach a project, rather than
how they budget it. There is now an
emphasis on an integrated process
that brings the contractor into the
discussion early, rather than complet-
ing a general bid process.
Prerecession, about 65 percent of
Provident’s projects were secured in
a straight negotiated fashion, 20 per-
cent were negotiated as design-assist
projects and 15 percent were hard
bids. Today those numbers have been
reversed, with 65 percent now design-
assist projects and 20 percent are
straight negotiated, Hordinski said.
“Contracting on a design-assist
method has become a lot more popu-
lar,” he said. “The primary function
for doing that is to control costs, so as
the plans are developed we’re giving
input and helping create a working
budgets to keep a project financially
on track. That has been a big change
in the marketplace.”
A good contractor can be most
helpful before a deal is finalized to
provide real time numbers and advise
as to availability of labor to complete
a project, said Farrell.
Managers will get a better deal if
they pick a contractor partner and
develop the project’s scope and price
together, rather than if the manager
goes out and tries to get 10 different
bids, Miller said. This is because the
current market demands keep a lot
of those companies from bidding for
new projects. Miller estimates that a
manager would be lucky to get bids
from half to a quarter of the general
contractors called. Most of Alliance’s
current clients use this integrated
approach rather than hard-bid
approach, he said.
If the market was still in a reces-
sion, Miller would advise differently.
When many businesses are just try-
ing to keep the doors open and a
manger solicits bids, he would prob-
ably get 11 out of 12 companies con-
tacted to bid the project, Miller said.
Additionally, property managers
should be aware of the increased
time required to receive permits
because of staffing issues in many
municipalities as well as the signifi-
cant amount of construction activity,
said Farrell.
“Finally, I would note that labor
truly needs to be treated like a long-
lead item,” said Farrell. “You can no
longer bid a project on Friday and
expect them to be up and running
the following week.”
s
Management
Property managers are advised to bring a contractor into the discussion early for best results for tenant improvement projects.
Photo courtesy Provident Construction
While the market struggles to find skilled labor, the demand for new projects continues to escalate.
