Construction Labor Shortages Imminent?

While Chicago remains a stronger union town than New York City or San Francisco, increases in pricing and project diversity could spur labor shortages both in the field and in the office.

“Talent management” is a new concept for construction, according to panelists yesterday at Bisnow’s 2nd Annual Construction & Development Summit. It’s getting harder to attract and retain great construction talent, and with today’s long lead times a flexible, astute team of contractors is more important than ever. More than 250 of you joined us at the Jenner & Block Conference Center, where our construction panel said they make client education a priority in this fluctuating market. And there’s a new focus on quality: Value engineering no longer means getting project numbers down to the raw minimum, they say. 

Sterling Bay principal Patrick O’Connor (right) says his firm has been on the receiving end of a major uptick in creative office, now favored by many Fortune 500 firms (like Google at 1K Fulton). The trend has been propelled by downtown migration, as companies (like Hillshire and Gogo) look to attract young talent. Construction on Sterling Bay’s unique projects takes a lot of due diligence up front and putting a technical team together very early, Patrick says. (For 1K Fulton it took a year, though that building needed to thaw.) That means you need an accommodating team that can predict potential issues long before they’re a problem.

Pepper Construction chairman Dave Pepper says he’s noticed a pullback in healthcare projects given the asset class’s uncertain future and move to outpatient settings, along with a ramp-up in interiors and high-end retail. Pepper’s seeing much more negotiated work than lump sum work, he says, and every market Pepper works in is open shop besides Chicago. Quality of labor isn’t easy to come by with open shops, which is why it’s crucial to bring on a contractor and their resources early on. "Unions bring a strong quality talent to the market and certainly the best trained talent," Dave says. The difficult part for a GC is knowing how much talent to bring on in an uncertain economy, since committing to high-end talent is never cheap.

Partner Engineering and Science (Partner) principal Bob Geiger (center), who will be spending the holidays in Wisconsin, says he’s seeing growth in “businessman hotels.” And, major market city hotel’s resurgence (especially in Chicago) involves Sterling Bay-style creative renovation and adaptive resuse, he says. Construction loans will continue to be impacted by additional Dodd Frank-induced rules on Jan. 1, 2015. Deals not meeting specific criteria will often bump the borrower’s costs by an anticipated 60 bps, Bob says. Despite downward risk management pressures, Partner’s construction lender practice is on fire and doubled in 2014. Bob says an increasing trend is the alternative to performance bonds where a third-party engineer evaluates contractors and controls funds as part of loan due diligence. 

Leopardo Construction SVP Rick DuPraw (left) is looking forward to visiting his brother in Vietnam in February. Leopardo is busy with interiors ranging from small to over 100k SF, he says, in sectors like advertising, tech and banking. “The earlier we can get in the better,” Rick says, emphasizing the value of pre-construction to determine the scope of work and the quickest, most cost effective way to get it done. Procurement has become a big issue now that national demand is up and materials are made to order (light fixtures aren’t sitting on the shelf anymore), which means delays are typical no matter how early you start, he says.

Sonoma Construction president and moderator Jon Runquist II (left) agreed that material delays are up, adding that it’s important to be aware of similar projects around the country. If you're competing in the market with a larger project that has the same light fixtures you have, you're going to lose out because suppliers don't stock materials on the shelves any longer, Jon says. His outlook on the interiors market is bullish, since people still need offices, creative or otherwise. And when things tighten up, just get creative with construction and assemble a savvy project team to help you roll with the punches.

During the schmooze hour, we caught up with event sponsor Stewart Title. Snapped: Tom Gray, Josh Hurd and Ron Babos. Ron tells us Stewart Title’s Chicago office is handling a $2B closing in the Boston market, the largest new development in the Boston area, and they’ll have more announcements to come soon.

Did we mention this unbelievable view from Jenner & Block’s 45th floor offices? No wonder Heitman is paying $700M-plus for the office tower. Check back Monday for continued event coverage!