Relaxing Market Leading to Competitive Construction Pricing

Over the past two years, the commercial and residential real estate markets have navigated unprecedented circumstances with material pricing, labor, and lead times. The design-bid-build process was turned on its head as everyone from suppliers to general contractors re-evaluated their processes and contracts while maintaining a competitive edge. As one of the leading cities in industrial, residential, single-home, and multi-family development, Phoenix’s real estate market felt the strain as international companies chose their area to develop billion-dollar semi-conductor projects and master plan communities. As they progressed, each project absorbed various trades causing strain on everyone vying for materials and labor.  In reaction, many subcontractors and contractors desperately doubled or tripled their employment to meet market demands while also risking the purchase of long lead items in anticipation of their pipeline. Entering 2023, many questioned if this demand would persist as they saw the rise in interest rates and economic slowdown. Would they experience relief or enter a whole new challenge remaining competitive filling their pipeline and retaining their current workforce.

Renaissance entered 2023 predicting and informing their clients that we will see the historical rise in construction costs at 2% – 4% this year opposed to the past two-year unprecedented double-digit percent increase. This is all due to the rise in interest rates and economic slowdown. Clients are experiencing difficulties in attaining capital and current construction costs are adding to this strain.  For the first time in the past two years, Renaissance is experiencing a decrease in ground-up demand and a dramatic increase in tenant improvement work. Fortunately, this is contributing to the stabilization of construction pricing due to subcontractors becoming more competitive as they develop strategies to maintain their growth over the past two years. The following are key trends that Renaissance’s preconstruction team has identified for their clients as we enter Q3 2023:

1. Electrical:
   • The stress in electrical panel lead times is due to the panel size, AIC rating, components, and configuration. Therefore, the power needs for a project need to be defined in the very early stages of the design process. Continue to expect SES lead times up to 52 weeks.
2. Mechanical:
   • Rooftop AC units have a 30 – 32 week lead time.
3. Supply Chain:
   • California exports decline again; labor dispute at West coast ports casting long, dark shadow. So far there has been the withholding of labor but there is the potential for strike. Beacon Economics states that “Nearly a year has passed since the July 1, 2022, expiration of the union’s last contract with the Pacific Maritime Association, the bargaining agent representing shipping lines and terminal operators. Past failures to reach an agreement have led to serious disruptions in the operations of West Coast seaports. ​​​​​​No one should discount the long-term implications of the failure of the two sides to reach common ground.”
4. Roof Structure:
   • Renaissance saw a design shift to castellated beam and metal deck in the past year and a half. They continue to see this trend, but some are now specifying castellated beam with panelized roof deck. This design continues to not only be competitive in price but also has a competitive lead time.
5. Skilled Labor:
   • CBRE published a study in December of 2022 on the tradesmen labor market and determined two positive trends. First, they saw a dramatic increase in trade school enrollment and number of certificates awarded in 2023. Second, as the single-family home building decreases, there will be less competition for labor and materials in the commercial market sectors.

Overall, as the market has softened in 2023, there has been a stabilization in construction pricing and gentle decrease in lead times for electrical, mechanical, and structural material components. Renaissance anticipates this trend to continue and not revert to a 10%+ construction price increase seen over the past two years. They are also positive with the shift in the labor pool showing a dramatic increase in trade school certificates in 2023. This will lead to a stabilization in labor costs as new talent enters the market.