By Elise Franco – Staff Writer, Charlotte Business Journal
Like the rest of the commercial real estate industry, the construction sector has faced various challenges brought on by the pandemic. Even now, more than a year removed from its peak, the industry continues to adapt and adjust.
Tim Christman, Barringer project manager, said that while the vast majority of major metropolitan cities experienced a slowdown in construction throughout the pandemic, Charlotte seemed to push forward. But not without its challenges.
“The pandemic is over, but we’re still feeling the afterburn,” he said. “Pre-pandemic it was pretty gangbusters in Charlotte; it was wide open. Then during the pandemic, we had to figure out all kinds of things from safety protocols and how to clean and sanitize and how to be on site together, because construction was deemed critical.”
Christman said the most challenging aspect of commercial construction over the last three years has been long lead times for materials and increased costs across the board. During the pandemic, supply-chain issues increased lead times for construction materials ten-fold. And though Christman said the worst of it has passed, those lead times will likely never return to pre-Covid levels.
Currently, electrical gear like transformers, HVAC systems and light fixtures are the most difficult to get in a timely manner, he said. “We’re often getting lead time quotes of 50 weeks for these things, when it used to be more like eight weeks.”
Zach Pannier, DPR Construction’s Charlotte business unit leader, said it really is a mixed bag depending on the type of project and the developer’s willingness to problem solve more creatively than in the past.
“The exponential increase in lead times and costs that we’ve seen have started to flatten out, and I think what we’re trying to figure out now is whether that’s here to stay,” he said. “The more complex the product, the more that lead time impact has been compounded. We’ve had to look at being creative, whether that’s buying a used piece of gear or refurbishing gear. What we’re trying to do more of is partner early and release those materials early.”
Construction teams and developers have also had to adjust what drives a project’s start date, Christman said. Pre-pandemic, site work would likely start right after acquiring a permit knowing the needed materials would arrive on time. Now, he said, they have to work close with the developer in pre-construction to determine that start date based on the timing of materials’ delivery.
“Now, a lot of times we’ll have the building permit and still not start because we’ve gone through the entire procurement strategy analysis,” he said.
And, due to high benchmark interest rates from The Federal Reserve, some projects are now dead in the water before they even begin. As of mid-June, that rate, which is what banks and credit unions borrow from and lend to each other, was at about 5% and is expected to rise again to between 5.25% and 5.5%, according to the Federal Reserve Board.
Christman said it hasn’t been uncommon for a developer to go through pre-construction and realize they either can’t get financing or the rate of lease return won’t be profitable enough to move forward.
“Before when we were pricing projects, there was just this confidence that they were real, and we were pricing jobs that were going to take place,” he said. “Now, the sentiment is that we’re working with developers on their budget to see if this can even pencil out.”
It’s a combination of these factors, as well as continued population growth, that’s caused Charlotte and the entire Southern region to have the biggest construction backlog in the country. In the South, projects are backlogged 11.5 months, according to a Q1 market trend and insight report from Barringer. Comparatively, the Midwest and Northeast regions represent 8.1-month and 8.9-month backlogs, respectively. The Western region shows a backlog of 7.2 months.
Pannier said population growth breeds job growth, which naturally leads to an uptick in commercial construction. “There’s a significant increase in the number of tower cranes in the Charlotte metro compared to pre-pandemic, and I think that influx of population is driving a lot of that,” he said.
The other important piece of the puzzle is labor. Pannier said finding the necessary number of skilled laborers has posed a challenge of late.
“Even with ongoing construction and growth of people coming into the industry, there is lag time in terms of construction being a sexy market for people who want to go to work,” he said. “It’s a far more complex set of circumstances we deal with today.”