CREJ - Healthcare Properties - April 2017
Q: In what ways are rising construction costs impacting the development of new senior housing and care properties in Colorado? Tony Burke Construction manager, Pinkard Construction Co. While rising construction costs in Colorado are certainly having a downstream impact on costs to residents and consumers, construction is still on a strong pace – partially because local home values have risen drastically. As a result, resident candidates can sell their homes at a premium in order to move into senior housing, even though the costs are rising. While developers and health care providers coming from other markets may see Colorado’s economy as daunting when trying to enter our market, developers and general contractors in weak out-of-state home markets seem attracted to Colorado’s economy. Regardless, developers are seeking to save money by finding lower-cost land in suburbs and nonpremium locales; and some may choose to pursue tax credits to provide desperately needed affordable senior housing, which also allows developers to build a more economical product. The tight local labor market is a major contributor to rising costs: Busy subcontractors are charging more, and if a too-busy subcontractor fails to perform, schedules extend and costs rise. Responsible contractors don’t take on more work than they can handle and are careful not to overload subs. Careful vetting of subcontractors is also recommended. Locally fabricated materials influence costs in much the same ways as the local labor market. Responsible contractors are constantly exploring materials and labor markets to find reasonable options for owners and developers to mitigate costs. The recent trend of modular construction has entered the conversation for senior housing in premium markets. If interest rates rise, it is likely that fewer projects will be built, regardless of construction costs. Shawn Donohoe Business development, Catamount Constructors Inc. The biggest issue affecting the construction industry today is finding and retaining qualified talent. Now more than ever construction firms are faced with the challenge of finding qualified workers due to an aging workforce and the loss of skilled workers during the recession. A recent Bureau of Labor Statistics Job Openings and Labor Turnover Survey shows that nearly 200,000 construction industry jobs are unfilled across the country, a jump of 81 percent in just two years. Lack of a skilled workforce is a problem for various reasons, but fundamentally there are just not enough people to build the projects we will need in the future. This squeeze in the labor market is increasing the cost of wages which in turn makes projects costlier and, potentially, unviable for development. The construction sector must get more young people interested in working in the industry. Research shows that the construction sector has an image problem that deters people from entering the industry. This is especially true amongst millennials, who tend to view the industry as old fashioned and not very dynamic. For the last 50 years, the belief has been that college was the route to fulfilling careers and financial success: College equates to high wages; trade skills equate to low wages. Enrollment in technical colleges is dwindling and there has been a significant decline in apprenticeships. As new technologies emerge and the population continues to grow, the need for more workers increases. The talent crisis will reach critical levels regardless of the type of project being built, senior housing or otherwise. The viability of a strong construction outlook depends on the industry’s ability to dispel stereotypes of the construction industry in order to attract talent and remain competitive. Larry Smith President, Bethesda Senior Living Rising construction costs are making it more difficult for smaller, independent private owners to be competitive. Even in markets where need has been identified, rising construction costs make pro formas on new construction or expansion difficult to work out. We recently had an experience where we were planning an expansion to one of our campuses in a market that had identified a definite need and we used traditional costs to work the pro forma. When construction bids came in 30 percent higher, it essentially killed the expansion. While higher construction costs don’t seem to have the same impact on larger, for-profit (usually publicly traded) companies, they definitely have an impact on smaller, nonprofit owners’ ability to be competitive with new product, expansion and even upkeep of their properties. We have seen a 25 to 30 percent increase in just the cost to remodel apartments. Ultimately, higher construction costs translate to higher rent rates that, in the end, makes senior housing less affordable to those in need. Tom Kooiman Director of business development – Western Region, Brinkmann Constructors The higher costs for vertical construction are affecting all of our senior care community clients. Sometimes higher-end facilities have more room to maneuver with their pro formas, but it is very consistent across the board that we need to be more involved early in the design process to ensure the budget aligns with our client’s requirements. The development community still has an opportunity to improve the process of general contractor selection, which will make the biggest impact on their final project cost and delivery. The selection should be based on the strength of the team. Who will bring you the best solutions and value engineering ideas and, ultimately, who will do the best job managing the design, the budget process and deliver the building your client wants? Our firm wants to be involved early, working closely with the client’s architectural and engineering teams to evaluate site costs and building design options from Day One. There are a lot of dollars to be saved as the developer, architect and general contractor together look at site layout options, infrastructure design, building structural design, MEP systems, finishes, etc. In this way, the senior housing being developed has the most cost-effective design when the general contractor goes out for bids from the trades. Controlled budget review at each stage of the design process eliminates the potential for a cost surprise at the end. It is never good for a new assisted living or independent living building to consider changes to key components of their building finishes to make a budget.