This week we’re talking with Perlo’s Vice President of Preconstruction Services, Chris McLaughlin. A veteran of the construction industry for nearly 30 years, Chris is well known for his insights into construction trends and pricing and leads our preconstruction group in budgeting and estimating all of Perlo’s projects.
As we’ve reached the halfway point in 2021, we thought we’d take a look at how 2021 has shaped up so far, and what might be on the horizon.
What have you seen happening with construction in 2021?
Construction is extremely active across most market sectors, with industrial topping the list. It is as active as we’ve ever seen it. The design firms are tremendously busy – maybe even to the point of exhaustion. They are looking at new projects that are slated for the next year or two and are being very selective in the new work they take on. Design firms had a big slow down when COVID first hit, but over the wintertime and in recent months, work has really picked up. As a result, we’re expecting to see even more growth on the construction side of things when the projects in design hit the market. We have been fortunate to continue growing our team in the last year, so we’re well-poised to handle the increased demand.
As far as where the projects are located, we’re seeing more buildings in the outlying areas where land is more readily available. For this area, that means Vancouver and Ridgefield, the south end of Tualatin, Canby and Hillsboro. The available land is on the fringes, so that’s where we’re primarily building.
And the last big thing for the year is that prices are rising and there are significant constraints with the supply chain. Those factors are really impacting the market, even though it doesn’t seem to be slowing things down. We see all of these trends continuing for the rest of the year.
What has been unique about the year, so far?
One of the things that’s unique about this year is that projects are going to start later in the year than they normally would. Typically, a glut of new projects start in late spring/early summer. This year, the bulk of them will start late summer/early fall instead. So, the cycle has shifted a bit later into the dry weather window. I call it the ‘pandemic hangover.’ Because owners and developers paused for three months last year, it shoved building starts out this year. It’s really why we’re having supply chain problems too.
Another thing that’s unique is that real investment paused for a bit in 2020 as people waited for the pandemic to sort itself out. Because of that, the pool of money that’s available for investment has piled up and is now ready to be spent, contributing to the volume of projects. Those that held off on business growth or building expansions have now picked up that topic and many are racing to build now. In the meantime, their money was sitting and growing for an extra year.
How has the global health pandemic and the local wildfires impacted construction?
COVID shut things completely down for a few months on the supply side. We’ve seen minor impacts to productivity on construction projects because of distancing/masking/quarantining, and additional safety measures. However, those disruptions were minor in the grand scheme of things.
As for the wildfires, we had some minor shutdowns, but in the big picture that wasn’t huge. But we did have to deal with air quality issues for the first time, as that’s not normal for our geographical region. Similar to COVID, that challenge was new and required us to adapt and flex. The biggest impact from the fires will come in the form of new air quality regulations for workers, which we anticipate that OSHA will release this year.
We keep hearing about price volatility. Can you tell us more about what materials that’s affecting, specifically? And do you see that volatility continuing?
I actually don’t want to call it volatile. Volatility indicates that pricing is going up and down, but in the current climate, it’s not going down – it’s just going up. It’s a sharp rise. You might even say skyrocketing. Unfortunately, it’s not fluctuating, we are just watching to see a change in how steep the line is rising. At this point I’m hopeful that prices will be volatile, meaning they’ll come back down. We don’t want them to continue going up. I don’t think that prices are going to keep rising – I think they will level off. And I may be wrong…I don’t have a crystal ball. But I’ve never seen the market rise so fast and then just continue to rise. It needs to level off. I do not think we will ever see prices return to the levels they were 8 months ago.
In terms of specific materials that are causing this steep increase? It’s steel, steel joists, lumber and sheathing, primarily. Steel materials includes piping, tube steel, decking, rebar, etc. Many parts of buildings are made with steel. And that trickles through the system for all materials, so you’ll see those price increases on things like furniture that have steel handles, nails, etc.
Why is there such a fast increase in prices?
It’s really a response to the supply chain disruption combined with a huge demand for new buildings. Primarily that demand is in the industrial market, which has exploded across the United States. Amazon is buildings many facilities across the country and that has greatly increased the need for building components like steel, roof decking and sheathing. The housing market is the big driver behind lumber price increases with the huge demand for new homes across the country.
What should owners be thinking about if they’re discussing a building project right now, either new construction or a remodel?
Give yourself a bigger budget and a longer timeline than you think you need.
The impact of the cost spike is going to impact your project. And if you can deal with the cost spike, then you have to worry about delays in delivery. Designs might take longer, and permit approval times are longer, too.
The one thing I don’t see right now is a labor shortage. It’s tight, but not dire. At least not today. Subcontractors are still bidding on work, we’re getting great participation and interest in projects, and receiving competitive pricing. Meaning, we get multiple prices within a narrow range for each trade when we bid work, which are positives for anyone trying to build something right now.
What market sectors do you see either increasing or decreasing in construction activity this year?
Healthcare & Senior Living
My assumption is that the healthcare market will start to pick back up as money becomes available, and facilities start working on deferred maintenance work. Additionally, many healthcare projects were put on hold when the pandemic began and are now being resurrected. I believe senior living will also increase, for the same reasons as the healthcare market. Both of those were really affected by COVID.
Central business district or urban office projects are shifting, but not increasing, as people try to re-evaluate how remote work will affect real estate requirements in the central core. This is especially true in Portland, since we’ve had a lot of added political chaos. Across the country, every employer in every city is going to face the question of whether they should downsize their footprint.
Retail is being transformed. I don’t know what that means quite yet, but I don’t see us building any new Macy’s or Nordstrom stores any time soon. I doubt you’ll see retailers building out large spaces in the same way they’ve done before. Maybe there will be some near new residential subdivisions, but it’s going to be different and we don’t know what that means, yet.
I believe that public sector work will increase, whether that’s K-12, higher-education, libraries, or other work. I think that market will remain at a steady volume, based on bond measures and public funding.
Industrial will continue to be hot, based on re-configured retail operations and demand for e-commerce. That’s not slowing down anytime soon.
I think the manufacturers have probably relaxed demands for facility upgrades in light of COVID, so we’re unlikely to see those types of projects increase this year.
There is talk about a lot of federal funding for infrastructure work. Do you see that helping bolster the construction industry?
The thing with huge buckets of money from the federal government is that nothing happens fast. By the time those dollars hit the market, it might be four to five years down the road. So that’s going to be slow to impact the construction market. That said, it would be a good time for people to think about getting into the industry. There are going to be many great opportunities for excellent careers in the near and long-term future.
What lessons do you think we will take with us moving forward from the last year and a half?
You can never get complacent. That’s a big one. And second, there is value in having human contact and relationships. That’s a big part of what makes my job enjoyable. I hope we all remember that moving forward. I think construction is still exciting. We have to be nimble and adapt to whatever gets thrown at us, and we don’t know what that will be. We’ve learned to be increasingly flexible – and we have to be.
Some of the flexibility we’ve learned about comes from forced video conferencing and the technology that we’ve adapted to in the last year to stay connected with people and keep projects moving along. There are some really great benefits to those programs. It’s another tool that we’ve really improved our use of in the last year, and I think it’s going to continue to be a big part of our work moving forward.
Anything else you’d like to share with our readers about 2021 and construction?
The depletion of our workforce trade labor is looming. It’s not a huge problem today, but it’s close. It’s going to gradually get worse over the next 5 – 10 years.
More immediately, I think about how we survived a pandemic, severe wildfires, and ice storms in this last 16 – 18 months. Not to mention the riots. In February of 2020, I never would have thought any of those things were a possibility. So, I’m thinking we already took our 1-2-3 punch. I’m really hoping for an uneventful remainder of the year.