With light emerging at the end of the COVID-19 tunnel thanks to the rollout of a vaccine, general contractors are confident of an uptick in business activity in 2021 following a year in which many projects were put on hold. But that optimism is clouded slightly by the high cost of materials, particularly lumber.
Michael Sullivan Jr., CEO and founder of Des Plaines, Illinois-based Peak Construction Corp., says his company is prepared to absorb more of the rising costs this year than it did in 2020.
Last year, many developers that Peak worked with were willing to take on the increased costs simply because they wanted to continue operating during the pandemic.
“It appears that 2021 will change from that pattern, and we expect to see significant increased costs for many materials, subcontractors, insurance premiums and costs attributable to modified operating practices in the field,” says Sullivan.
These cost escalations will erode profit margins despite increased revenues, he predicts.
Adam Miller, president of Summit Design + Build LLC in Chicago, says lumber prices are nearly double what they were in September 2019. The reason is threefold: fires in the lumber source forests of the Northwest U.S.; disruptions and delays at the Canadian border due to COVID-19; and Americans’ increased interest in home improvements due to more time spent at home.
As of December, the producer price index (PPI) for lumber and plywood rose 36 percent on a year-over-year basis, according to the Associated General Contractors. The PPI measures the average change over time in the selling prices received by domestic producers of goods and services, according to the U.S. Bureau of Labor Statistics.
Mat Dougherty, president of Rosemont, Illinois-based McShane Construction Co., says the cost of lumber soared more than 130 percent during the fall. “Ultimately, we’ve seen the year-over-year cost of construction increase, and the supplier updates we’re currently receiving suggest there will be continued increases, at least in the near term.”
Due to its high volume of business and deep-rooted relationships with trade partners and vendors, McShane is “often able to dampen the effects of these cost increases,” says Dougherty.
In a competitive industry like construction, where companies bid on projects, being able to guarantee pricing is a huge advantage, say industry experts.
“We are paid to manage risk, and how well we do that determines how our clients will measure us against our peers,” explains Mike Eveler, president of Kadean Construction in metro St. Louis. “We must be creative and seek out alternatives and different options to provide value in a situation that initially appears to be dire.”
It’s not just lumber prices that are on the rise. Eveler says that steel prices have also jumped dramatically in recent months, and many manufacturers are offering pricing proposals to contractors that expire after just one to three days. Production in the industry slowed as a result of social distancing requirements, thereby limiting the number of workers.
Many material manufacturers are still managing a “surge” in orders, says Matthew Mabie, president of Chesterfield, Missouri-based Knoebel Construction Inc. This rush, coupled with a reduced production rate, has caused delays in deliveries of available products. “We’ve experienced delays in steel, masonry products and HVAC equipment on several projects that have required us to manipulate our schedules in order to maintain turnover [completion] dates,” says Mabie.
As a result of the building materials shortage, the pricing of materials has been “rather volatile,” says Anthony Johnson, president of the industrial business unit for Chicago-based Clayco. Given today’s supply chain issues, Clayco is working carefully with its suppliers to negotiate the length of proposals and communicate any limitations to customers in an effort to mitigate their risk as well.
Lessons learned
Reflecting on the events of 2020, general contractors say one of the biggest lessons learned was the importance of adaptability and agility. “Our business really learned to adapt, and we found creative ways to save clients time and money on their projects,” says Brian Satterthwaite, president of Chesterfield, Missouri-based Brinkmann Constructors.
The pandemic required Brinkmann and other contractors to come up with creative solutions in order to complete projects on time, given the social distancing requirements and other hurdles. Additionally, companies adjusted to employees working remotely. Sullivan of Peak Construction says that some remote operating practices will likely remain in place even after the COVID-19 vaccine is widely distributed.
McShane’s Dougherty says that the pandemic gave his company an ideal opportunity to test some of its Internet technology and operations systems that had been in place but were seldom used. Despite being further apart, the new tools enabled the company culture to stay intact, says Dougherty.
By leveraging technology, communication across McShane’s five regional offices and two affiliated companies has become easier and more common than prior to COVID-19, Dougherty points out.
While restricted travel and remote working were some of Knoebel’s biggest adjustments in 2020, Mabie says that his company was prepared for a smooth transition to a virtual workplace. One tool that has proven to be extremely valuable is the 360-degree camera, which helps general contractors keep close tabs on a project and share updates with clients.
Beyond using Zoom and Microsoft Teams for meetings, Clayco began implementing live video feeds from its jobsites as well as Power BI, a data visualization and business analytics service from Microsoft. This way, leadership and project teams could effectively communicate and collaborate on initiatives.
But Clayco’s Johnson is quick to add that one of the takeaways from 2020 is that construction is a “people business.” He doesn’t believe technology can replace the value of in-person mentoring or relationship building.
Backlogs fuel growth
General contractors are largely optimistic about the prospects for business growth in 2021. Mabie anticipates that Knoebel Construction will complete in excess of $100 million in projects in fiscal 2021, with “above-average” first and second quarters. (Knoebel’s fiscal year runs from Oct. 1 through Sept. 30.) Knoebel has a significant backlog of work since several projects that were put on hold as a result of COVID-19 are now moving forward, according to Mabie.
Across the Midwest, Knoebel expects to build approximately 15 automotive service and retail projects, eight veterinary centers, three gyms, four dental offices, 16 quick-service restaurants and four fast-casual restaurants. In Mabie’s words, “retail construction is on the rebound.”
Clayco’s backlog of work is nearly 30 percent higher than a year ago, according to Johnson. “Coupled with our targeted sales forecast increase, which is also up 30 percent from last year, we anticipate strong tailwinds and our projected backlog carrying us into 2022, 2023 and beyond,” he says.
Clayco recently wrapped up construction of 100 Above the Park, a 36-story, 316-unit apartment tower in the Central West End of St. Louis.
Kadean’s annual revenues increased sharply from $85 million in 2019 to approximately $150 million in 2020. Much of that growth can be attributed to Kadean’s “involvement in the light industrial market, where developers are extremely bullish due to the high demand for warehouse space,” says Eveler.
Dougherty says that McShane’s core markets of multifamily, senior living and big-box distribution “remain strong performers.” Although the firm experienced a slowdown in new project assignments in mid-2020, Dougherty says that a lot of those projects have recently gotten the green light, which gives him reason to believe 2021 will be a prosperous year.
McShane recently broke ground on The Trotta Apartments in Middleton, Wisconsin near Madison. The four-story, 126-unit project is slated for completion in April 2022.
Summit’s Miller says his firm’s 2021 project pipeline will be dominated by the industrial and multifamily property types. Summit is the contractor for 1400 Monroe, a boutique condominium building with 42 units in Chicago’s West Loop.
“We are looking forward to an uptick in new-construction projects, and we have already noticed an increase in bidding in the new year and are bidding on more projects ourselves,” says Miller. “We speculate there is a large backlog of projects that will commence, thus creating a possible tsunami of projects in the marketplace.”
— Kristin Hiller
This article originally appeared in the January 2021 issue of Heartland Real Estate Business magazine.