West Michigan construction firms are reporting dramatic increases in the cost of materials and project delays because of the COVID-19 pandemic, particularly in the restaurant, office and retail sectors.
The combination has created an environment of uncertainty for commercial construction firms. Norm Brady, CEO of Associated Builders & Contractors Western Michigan chapter, described a “cautiously optimistic” outlook among the group’s members, even though projects are increasingly delayed.
“They are happy to see the bid volume is relatively strong, although there have been some projects that have been pushed,” Brady said. “We’re going to see a real pullback in retail and hospitality, especially since we have built so many hotels over the past couple years, and office construction will be softer.”
Orion Construction Co. Inc. President Roger Rehkopf reports work has been “a little bit slower,” which he attributed in part to election uncertainty.
“I’m trying to be optimistic that things will get turned around as the election wraps up,” Rehkopf said. “Nobody really knows if taxes are going to change, so hopefully people will get their confidence back when this is over. We think there are some people that will wait it out a little bit.”
He noted hotels and a student housing project have been put on hold for the company. Orion also has multiple stalled commercial office projects as companies try to figure out how employees will work remotely into the future.
The third-quarter vacancy rate for downtown Grand Rapids office space is 9.73 percent and 6.89 percent for the suburban market in Grand Rapids, a slight increase from the second quarter, according to a recent Colliers International report.
In an October survey by Associated General Contractors of America (AGC), 75 percent of respondents reported a postponed or canceled project, up from 60 percent in August and 32 percent in June.
“The pandemic is suppressing demand for new office buildings, hotels and shopping centers even while it inspires many people to build bigger homes,” AGC CEO Stephen Sandherr said in a statement. “Without new federal investments in infrastructure and other needed relief measures, commercial firms will have a hard time retaining staff or investing in new equipment and supplies.”
High materials cost
Meanwhile, high and volatile construction materials costs are “just another deterrent” for developers trying to get projects off the ground this year, said Orion Construction Marketing Director Corey Bixby. Because of the lumber market’s uncertainty, suppliers are providing estimates that are only good for seven days when they would previously honor prices for a month or two, he said.
“Oriented Strand Board used to sheath walls, sub floor and roof decking is especially high right now, but our suppliers are telling us that the markets will begin to equalize over the coming months,” Bixby said. “It is pushing some of our new project start dates into the winter, so we will have to adjust and make considerations for winter conditions for projects that would have been going vertical earlier this year.”
Orion was seeing lumber prices spike from 24-40 percent, but the company expects to see prices trending down soon, said Rehkopf.
“The reason for the shortages is plant shutdowns, and even when they opened back up, they opened with a reduced staff,” Rehkopf said.
Hurricanes and wildfires across the U.S. this year have likely contributed to high lumber prices, Rehkopf said. These high and volatile materials costs for construction adds more uncertainty to projects.
“Lumber and copper has gone up and of course we’re concerned about it for a couple reasons,” Brady said. “Mostly because when construction gets more expensive, we have less of it.”
Project spending, design pipeline
Though total construction spending is growing slightly, the commercial sector continues to lag while architecture firms expect a drop in revenue in the last quarter of 2020.
Construction spending in September totaled $1.41 trillion at a seasonally adjusted annual rate, a 0.3-percent increase from August and 1.5-percent higher than in September 2019, according to an Associated General Contractors of America analysis released Nov. 2.
Private nonresidential construction spending declined for the third consecutive month, falling 1.5 percent from August to September. Public construction spending decreased 1.7 percent in September, the fourth monthly decline in a row.
The Architecture Billings Index for September 2020 was 47, up from 40 the month prior, according to the American Institute of Architects. Indicators of work in the pipeline were more encouraging in September than August, but architecture firms reported an expected dip in revenue by an average of 1.9 percent from the third quarter to the fourth quarter of 2020, according to the AIA.
Despite the setbacks, Brady still thinks commercial contractors will generally recover financially after gaining ground on project backlogs from 2019. A survey conducted by the national ABC organization indicated that in the fall of 2019, contractors had an average of nine months of work backlogged. The most recent backlog report is at about seven months.
News coverage in the real estate and development section of MiBiz is made possible by advertising support from Rockford Construction Co. Inc. Rockford is a nationally recognized construction, real estate development and property management provider, serving West Michigan and beyond for more than 30 years. This advertisement has no effect on editorial consideration in MiBiz.