By Tasha Anderson for AZBEX
The 2021 BEX Private Development Summit dove into the most relevant topics in the A/E/C and CRE industries last week. The virtual event spanned three mornings from Tuesday, May 11th to Thursday, May 13th, and attendees heard an outlook on future development, panels discussing hot Housing and Industrial markets, and gained insight on the rising construction costs in Arizona.
BEX Outlook on Future Development
BEX President and Founder, Rebekah Morris, kicked off the event on May 11th with an outlook on future private development in Arizona, which includes Hospitality, Healthcare, Office, Retail and Industrial markets.
There was a 31.5 percent year-over-year decline in Hospitality construction activity and 2021 is likely to remain steady at the reduced level in anticipation of 2022 demand, according to Morris. More sport and entertainment projects are being planned and are expected to come back stronger than ever.
2020 Healthcare construction activity was about equal to 2019’s numbers, coming in at $1.217B. With the hit of COVID-19, there was an anticipation that there would be a higher demand for new healthcare facilities, but it did not materialize. Morris noted that healthcare providers are looking ahead at where they want to invest their money. “Healthcare does follow residents,” Morris explained. “So, as we talk about a lot of new houses being built, there will be healthcare facilities to follow.”
While Retail seems to be holding steady, the Office market saw a 23.3 percent decline in YOY construction activity. Vacancies are continuing to rise as the demand for office space cools, and less speculative offices are being built due to lack of absorption.
Industrial is the “darling” of the industry. Industrial construction activity increased by 43.52 percent in 2020. There is a large demand for data center and warehouse facilities as more large companies move to Arizona, and speculative development is being absorbed quickly.
A takeaway from this segment was that the market is volatile. Industrial, single-family and multifamily sectors have surged, prices are increasing rapidly, and supply chain complexity and fragility is becoming more apparent.
The housing panel consisted of Shelby Duplessis, President of Land development for the Empire Group of Companies; Eric Jaegers, Head of Construction for Katerra; Dan Klocke, Development Project Manager for Gorman & Company; Clay Richardson, Managing Director for Wood Partners; Bret Rinehart, Residential Land and Lot Advisor for Land Advisors Organization; and Samantha Pinkal, Project Manager for the City of Surprise, who moderated the panel discussion.
The panelists began by listing some projects currently in their pipeline, including some that have not yet started construction. Duplessis described the “Village” single-family product that the Empire Group is working on, including the Village at the BLVD and the Village at Schnepf Farms. Jaegers listed high-rise projects including Skye on 6th, a 25-story, 309-unit luxury tower, which Katerra intends to break ground on either later this month or early June, and Palmcourt Tower, a 29-story high-rise which is currently in the pricing/budget stage and is anticipated to break ground in Q3 or Q4.
Klocke talked about a seven-phased project near 20th Street and Roosevelt in downtown Phoenix that will convert a public housing development into more affordable housing with 20 percent market-rate housing. “Two of them are currently under construction, one is expected to break ground in June, and other phases that will break ground late this year into 2023,” Klocke said.
Richardson noted the “Alta” multifamily projects that Wood Partners is developing, including Alta Bluewater, Alta 99 and Alta Chandler at the Park, which will start construction this year, and Alta Surprise, which will start construction in 2022.
Reinhart talked about the demand for new single-family and multifamily housing as the population continues to grow. He noted that between 2020-2040 there will be approximately 1.765M new residents which equates to about 630K new single-family and multifamily housing units that will need to be built to accommodate that growth. He also noted a massive push toward the west valley for immediate and future single-family demand, with 50 percent of the single-family permits in the last year coming from the west valley.
The panelists went on to discuss some of the obstacles the housing market faces including the amount of available land, a fatigue towards multifamily projects, and of course, construction costs. The panelists agreed that municipalities are pushing back more on the multifamily product and the use of social media apps like Nextdoor can spread misinformation, causing fear about certain developments. They also agreed that the industry needs to do better about providing more information to reduce the public’s fear of those projects.
To remain cost effective, Jaegers noted that Katerra tries to commit to subcontractors early on in the process and leans towards larger ones with a strong labor force to keep the project going, and Duplessis talked about meeting with municipalities earlier on to discuss their requirements.
On Wednesday, May 12th, the industrial panel took the virtual stage and consisted of Jackob Andersen, President & CEO) of Saint Holdings, LLC; Kevin Evernham, Principal with Ware Malcomb; Jeff Foster, Vice President, Market Officer for Prologis; Riley Gilbert, Executive Vice President with JLL; Daniel J. Slack, Principal with Baker Development Corporation; Cathy Thuringer, Managing Director with Trammel Crow Company; and Brock Grayson, Vice President of Layton Construction Company, who moderated the discussion.
The panelists discussed many driving factors of industrial demand in Arizona, e-commerce being one of the main forces. With the success of e-commerce giants like Amazon in the Valley, it is putting more pressure on competitors to play catch up which drives demand for more space, Foster noted. And as e-commerce rises, the demand for reverse logistics facilities will also inevitably grow as the popularity of the “click and buy” continues.
While the panelists do not see industrial slowing down post-pandemic as more people leave their homes to shop, Slack and Thuringer both expressed that it could slow down if people do not return to work, and that demand will go where the people are.
The panelists also believe there is no fear of overbuilding anytime soon as materials pricing and timing of deliverability are currently preventing that from happening. Foster noted that Prologis is adjusting on the fly and that construction is schedule based as it takes longer for materials to ship and prices increase. Evernham noted that companies need to take aggressive moves, like ordering specific parts way before designs are finished, that way materials come in a reasonable timeframe.
The Construction Costs panel discussion was on Thursday, May 13th and consisted of Bradford Blissit, President of Integrated Structural Concepts; James Carusone, Senior Vice President of Sales for Salt River Materials Group, Jason Mikkelson, Associate Vice President and Managing Principal for HDR; Todd Nessler, Vice President of Preconstruction for Sun Valley Masonry; Ben Rathke, General Manager for Ferguson Waterworks. Also joining them were Chandra Reilly, Project Executive for Sundt Construction, Todd Stanfield, Vice President of Construction Sales at Comfort Systems USA; Mike Thomas, President of Kinney Construction Services; and co-moderators Scott Macpherson, Executive Vice President for Rider Levett Bucknall, and Rebekah Morris, President and Founder of BEX.
One of the key takeaways from the construction costs panel is that all commodities are being affected, but lumber is the most volatile in the world right now due to the full pipeline of housing projects, the lack of new lumber mill construction since pre-recession and the international demand for wood. According to Blissit, dimensional lumber is up 291 percent and lumber futures is up 381 percent just since 2020.
The consensus with the panelists, which also mimicked the Industrial panel, is that materials are much harder to get because of transportation availability and lack of local markets. Nessler noted that materials that used to take 4-6 weeks now take about 16 weeks.
It is also more difficult to determine the price of materials on specific projects because of timing. Reilly and Stanfield expressed that suppliers are holding their pricing for maybe 30 days, yet the project funding cycle has not changed, taking several months or longer.
And while construction costs rise, the labor shortage problem has not lessened. Stanfield talked about the aging population leaving the workforce, either by retiring or moving on to other jobs after the pandemic, leaving a gap the younger generation will not fill due to the lingering stigma of the skilled trades. He noted that they have seen a 10 percent rise in labor rates. The panelists all believed that it is important to provide apprenticeships and go to schools earlier on to talk to younger generations about the benefits of the skilled trades as a profession.
Regardless of the rise in construction costs, all the panelists are still noticing healthy competition, are still busy and are being more selective with the projects they take on. The panelists ended the presentation by sharing the best mitigation strategies they think can help the industry ride out the rollercoaster, including moving toward an integrated project delivery method. Rathke touched on bringing suppliers into the process earlier and encourages earlier procurement.
The other big strategy discussed was communication and planning, keeping a dialogue with owners about cost changes and planning ahead with realistic timelines.
The next virtual BEX event is the June 2nd Leading Market Series, and the topic will be on Hospitality construction in Arizona. To register for this event, visit https://bex-events.com/lms/lms-hospitality-2021/.