Despite a confluence of factors that could challenge project timelines and pro formas, architecture and construction industry insiders remain confident that the fundamentals of the market will continue to drive new activity into the new year.
In particular, executives point to ongoing needs in the multifamily and industrial sectors as showing no signs of abating in the West Michigan market. Add in a significant dose of stimulus-backed projects, and they’re finding reason to be cautiously optimistic, if not bullish, that the industry will weather any economic hiccups in the coming months.
Even so, the executives MiBiz spoke with for this report are acutely aware of the hurdles that could derail projects. Namely, the industry continues to wrestle with labor availability and persistent turnover, while supply chain shortages have become a daily reality since the start of the pandemic. What’s more, interest rates have climbed to levels not seen for a generation, giving developers more excuses to pull the plug on projects already on the boards.
Ted Lott, founder of Grand Rapids-based Lott3Metz Architecture LLC, said most industry executives “are not freaking out about interest rates,” but they are helping clients be more strategic about their material selections and demonstrating how the choices they make today can affect the economics of completed projects in the future.
“Our rule of thumb is that 60 percent of the project cost is labor and the other 40 percent is materials,” Lott told MiBiz. “The cost of labor is not coming down, so we should be in a race to get these projects done as quickly as possible.”
The Associated General Contractors of America reported this month that growth in pay levels for the construction industry outpaced the overall private sector in November, with average wages for hourly craft workers climbing 6.1 percent nationally.
Contractors added 341,000 employees in October, but still had 377,000 job openings, which suggests that the industry wanted to hire twice as many workers as it was able to find, according to AGC Chief Economist Ken Simonson.
“Most nonresidential contractors report full order books but are having trouble hiring enough workers to keep projects on schedule,” Simonson said in a statement earlier this month.
He noted that higher interest rates and material costs “are likely to choke off some projects, but there will be plenty of infrastructure, manufacturing plants and renewable energy projects next year — if contractors can find enough workers to build them.”
Grand Rapids-based Rockford Construction Co. Inc. is among the firms forecasting a good backlog for 2023, with a strong pipeline of multifamily and industrial work, plus a number of K-12 school bond-funded projects.
Shane Napper, president of construction and COO at Rockford Construction, said the company has largely learned how to manage through the supply chain shortages since they initially emerged nearly three years ago, and has leaned into its procurement department to avoid delays and overpriced materials.
Labor challenges, higher material costs and rising interest rates could slow some projects, “but the demand is still high,” Napper said.
“Multifamily housing is going to continue, maybe under a little bit more creative cost model and ‘can you build it out of different materials.’ But at the end of the day, the housing market is still short, and that needs to be resolved. The housing market is going to find a way to work its way through,” he said. “And industrial is still doing great. They need the space, and they need to deliver stuff they’ve already got orders for. At some point, they’re just going to fight through.”
Curt Mulder, president of Kentwood-based Wolverine Building Group Inc., agrees that strong multifamily and industrial demand will continue to push the market forward in West Michigan.
“With that demand and the increased cost of construction that we’ve seen over the last five years, as well as the increased interest rates, obviously, it puts a new set of pressures on the overall pro forma of the project,” Mulder said. “When there’s the pinch on the overall pro forma, where contractors are really the biggest chunk of the overall cost, what we’re ending up having to do is just be a lot more creative on how we pursue projects.”
The dynamics have pushed Wolverine to focus on driving efficiencies at the job site and working closely with subcontractors to find ways to solve budget challenges, he said. Contractors need to be flexible to deal with challenges as they arise and must prioritize constant communication and transparency with their customers, Mulder added.
“Instead of two or three conversations around schedule, we’re having 10 or 20 conversations around schedule,” Mulder said. “Customers need to know what the challenges are that we’re facing that are a little bit more significant risk than what we’ve seen in the past.”
‘Bullish on housing’
While Napper remains confident in Rockford’s pipeline of work, he acknowledges that some of the market pressures have clouded the company’s visibility slightly.
“Traditionally, the pipeline in the construction industry at the scale Rockford is at, we’re normally somewhere between 16 and 18 months out in view. We have a pretty good indication because … there’s a lot of planning and pre-planning and process and financing,” Napper said. “Maybe that shortens a little bit to 14 to 16 months. Maybe we can’t see out quite as far.
“From an optimistic standpoint, are some jobs going to independently be delayed due to some challenges? Probably. But some have picked up pace. You hear the state talking about infrastructure. That was a focus of the state here in the midterm elections. That’s not slowing down, that’s picking up. There are segments picking up that are asking to go faster, faster, faster, and there’s some other segments that are like, ‘Well, let’s hold on a second.’”
The American Institute of Architects’ most recent Architecture Billings Index, which tracks work on the boards and offers a look into the upcoming construction pipeline, “softened considerably” in October, with contractions in billings and design contracts from the prior month.
The index marked the first dip in billings since January 2021, “with firms with multifamily residential and commercial/industrial specializations seeing more significant declines in billings.”
However, West Michigan executives say the activity they’re experiencing suggests that the region may be bucking the national trend.
“We have a busy first quarter, and that’s typically an uneven period for us,” said Lott, noting that the firm has continued to find new opportunities in the Detroit market following its partnership with Crutcher Studio in early 2020.
Most of Lott3Metz’s work in West Michigan and Detroit currently is tied to multifamily housing. Lott said the company expects construction to begin in 2023 on “hundreds” of units of housing projects it designed in Grand Rapids.
“Everything we’re bringing to the market right now is leasing immediately. We’re seeing significant demand across all price points,” Lott said. “As a city, we need to have an adult realization that there’s not any one solution to the housing shortage. We need all of it, and as soon as possible.”
Lott also is optimistic that a unified Democratic state government could take action to dismantle the “anti-urban pieces of legislation that have had our legs, feet and hands tied when it comes to building the kind of community we want to build.”
“Ultimately, I’m bullish on housing and I’m bullish on Grand Rapids,” Lott added.