December 2020 — Office & Industrial Quarterly — Page 35 INDUSTRIAL — CONSTRUCTION W henever there is major economic disruption like we’ve seen in 2020, one of the main questions inside the construction industry is “What will happen to pricing?” For industrial buildings, no single factor drives construction pricing. However, there are several econom- ic forces that have varying degrees of influence. Here are five that pack the biggest punch: n Supply and demand. Construc- tion pricing is highly sensitive to the forces of supply and demand. Cutting pricing is inherently risky and can equate to a lot of work for little or no reward. Thus, when demand is high, construction pric- ing increases to reduce this risk. When demand decreases, however, contractors are willing to pursue riskier projects at reduced pricing to keep their businesses moving forward. There is roughly 7 million square feet of industrial product currently under construction in the Denver area, with a healthy number of planned projects in the works. This is to say, construction demand in the market is high and it would take a significant gap in planned development over the next several quarters to affect pricing. n Backlog. Backlog is the amount of construction work currently on the books. When the economy is strong, backlog and pricing increase, creating a buffer. This buffer causes a lag in how construction is impact- ed and how it reacts to current economic conditions. Currently, the backlog in the Denver area extends into the next several quarters, resulting in stable pricing for the near future. n Labor costs. Construction is labor intensive. It’s difficult to pour con- crete, hang pipe or lay block with- out skilled labor. Because of this, a large portion of construction costs are determined by labor expenses. Wages increase as available skilled resources decrease in relation to demand. You also need to factor in cost of living. This explains why the cost of construc- tion is higher in New York City, Northern Califor- nia and other regions with a higher cost of living and high demand. In Denver, construction unemploy- ment experienced a slight rise over the summer but remains very low. As such, skilled and unskilled labor still is in short supply, so labor costs have not compressed. n Commodity pricing. Commodity pricing also plays a role in deter- mining construction costs. When oil prices go down, so do petroleum- based products such as insulation, asphalt and roofing materials. When steel prices increase due to new tariffs, the cost of joists, metal panels and pipe increases accord- ingly. While certain commodity prices have been on the rise, there haven’t been any dramatic swings affecting typical Class A industrial construction and commodity pric- ing has remained steady for this product type. n Local market disruption. Rapidly growing markets often have a short- age of skilled construction teams and the depth of labor to keep pace. This creates a false security of demand for local resources that often then drive pricing to position their capacity. Without expanded supply chains and national vendors, the local market pricing can signifi- cantly impact the typical cost of a project compared to national aver- ages. Denver currently is seeing a boom in e-commerce that is absorb- ing a great deal of industrial work. This influx has injected more build- to-suit projects into the market and has created a decrease in specula- tive warehouse builds. This shift, however, has not had an impact on the way Class A shells are con- structed or on their pricing. Because the construction industry typically lags the economy, an eco- nomic inflection does not equate to an immediate reaction. Instead, prices hold steady while the indus- try works through its backlog and assesses the economic situation. Then, as backlog levels begin to deplete, contractors are willing to take more risk and lower their pric- ing to secure additional work. Once the forces of supply and demand, backlog, labor costs and commodity pricing reach a new equilibrium, construction pricing will level off, maintaining a new baseline until demand begins to increase once again. Typically, it takes six to 18 months for costs to react and start coming down. Then, specific commodities impacted by the recession will fur- ther drive pricing and schedule. In the case of COVID-19, we expect to see the cost impacts from supply/ demand, backlog and labor come to fruition in 2021. In the end though, project success ultimately is determined by working with a proven national design-build partner that can minimize risk and maximize returns by defining clear- ly the scope of work and dollar- izing your decisions early, disrupt- ing local market pricing through national pricing and vendors, lock- ing in firm pricing and transferring risk, developing creative solutions, condensing the overall project time- line, and consolidating responsibil- ity to keep clients focused on run- ning their business. s 5 factors that impact industrial construction prices Charlie McLean Director, business development, ARCO/Murray, cmclean@ The Denver metro also has seen a lot of industrial construction, with almost 3 million sf of new construc- tion breaking ground in the third quarter (1.4 million sf on spec). As Jones Lang LaSalle’s third-quarter report found, “Builder optimism seems undeterred, even as preleas- ing activity is nearly nonexistent: only 3.8% of spec projects under development are currently leased. Supply is likely to continue to out- pace demand in the short-term as product delivers at a record pace.” n What’s driving Colorado’s current industrial development boom? Several factors. First, increased demand for last-mile fulfillment and distribu- tion. E-commerce continues to change the game. Many facilities that delivered to brick-and-mortar retailers now are offering last-mile servicing. Some brick-and-mortars are building their own last-mile infrastructure. Consumer adoption of e-commerce has helped drive industrial develop- ment for many years. That’s not new. What’s new is how COVID-19 has accelerated the trend, and how last- mile demand is driving real estate decisions and property usage. For example, store aisles formerly used for in-person customers may now provide better returns as last-mile storage space. This also is why there’s been a spike in demand for flex space. More businesses are looking for property that can be used for office space, industrial activity, manufacturing or some combination of the three. Industrial space is often the best option for that flexibility. For example, many companies require offices, but also manufac- ture or sell a product. These users are finding that they can reduce their square footage by racking in their warehouse areas. Others sell products and need a showroom, but also need to store their product. We are building a facility for Carrier West, a heating, ventilation and air- conditioning distributor, which has that exact requirement. Although large distributors are pushing more than 40-foot clear heights, the local distributors need more than the 12- to 16-foot clear that is typical in the older industrial space. Beyond last-mile and flex space demand, two industries in particular are driving the demand in Colorado: aerospace and construction. These industries have been resilient despite the pandemic. According to the Colorado Office of Economic Development & Inter- national Trade, Colorado is home to the nation’s second-largest aero- space economy, with more than 400 companies working in the sector. Peterson Air Force Base in Colorado Springs is the provisional headquar- ters of the U.S. Space Command (aka Space Force). As the Denver Post recently reported, both large and small aerospace companies (e.g., Lockheed Martin, Raytheon Technolo- gies, Sierra Nevada Corp., Ball Aero- space, Blue Canyon, Astroscale U.S.) are hiring and either expanding or building facilities. Construction has continued to have a strong book of business, but its future is unsure. COVID-19 shut down many manufacturing and wood mills, constraining supply and increasing prices. On the posi- tive side, industrial and multifamily construction continues to be strong. While there may be a few months of slowdown so contractors can catch their breath, the market will come back in 2021 in Colorado. All of this is why I’m investing in industrial development. In fact, it’s 100% of my focus right now. So how am I choosing my investments? I’m keeping a close eye on these trends and making decisions based on what I see. Of course, I’m also focusing on location and on understanding how industrial users’ needs and goals continue to evolve. Two of my most recent industrial investments help showcase this plan. 950 Vapor Trail at Aerotech Com- merce Center pairs an ideal loca- tion with advantageous zoning and access to low-cost housing. It’s only minutes away from Peterson Air Force Base, the Colorado Springs Air- port and Interstate 25. It’s also one of the last lots left in the better-located northern airport area, so it wasn’t rocket science to identify it as a great investment. When you also consider that giants like Amazon, FedEx, Swire Coca-Cola, Rocky Mountain Coors and Ace Hardware have all built or leased facilities in the area, you can see why I’m confident other tenants will choose the location. We also have been building out the 62-acre Encompass Business Park since 2017. Located in Centennial, the location offers tenants and their employees access to a range of qual- ity of life benefits. The business park also offers tenants flexibility. In our latest building, we maintained a bay depth of 200 feet to allow for tenants as small as 15,000 sf while still being able to deliver 171,000 sf to any one tenant. As a 28-foot clear concrete tilt wall industrial warehouse, the build- ing was designed to have both drive- ins and dock-high loading. The flex- ibility, a great location for a range of industries and last-mile distribution needs, and quality of life have been a formula for success, allowing us to sign multiyear leases with Amazon, Room and Board, Brakes Plus and others. All this to say, I’m one of the inves- tors excited about industrial. It truly is one of the better bets in today’s market. Demand for last-mile dis- tribution and flex space will only increase. Aerospace and construction have proven resilient. That’s why I’ll continue to make investments that serve these needs and trends. It’s the smartest bet I can make against an otherwise uncertain future. s Records Continued from Page 29 A recently completed 163,000-square-foot spec warehouse in Aurora