Ask just about any contractor in the Valley about the state of their current business and projects and they’ll tell you this: Business is booming! But, as fruitful as the Arizona construction and development market is throughout Metro Phoenix, it’s not without its challenges.
Right now, Arizona’s contractors are like a little brother who just got a major score of LEGO kits — build your own Death Star, T-Rex and Batmobile. But, the little brother discovers a catch — his older sibling wants all projects completed in the usual allotted amount of time, yet several essential LEGO pieces are on back order for double the price as normal and his two best friends are working on their own projects. Another buddy is able to help build, but he’s charging 30% more for his labor than the best buds would have.
Currently, LEGO pieces are much easier to come by than the construction materials needed to complete an abundance of development, particularly for such a diverse mix of projects. Despite the ensuing fallout of rising inflation, contractors are relying upon their resourcefulness and adaptability to face supply chain and labor issues, rising costs and time delays.
Demand (and cost) doubles
With an influx of projects and a host of missing essentials, how are Arizona’s builders adapting?
“2022 is projected to be DP Electric’s highest volume year,” says Danielle Puente, CFO of DP Electric. “There continues to be plenty of opportunities today for projects that will be completed in 2023 and 2024.”
Adds James Murphy, CEO of Willmeng Construction, “The pace of project opportunities we’re seeing has not slowed down at all and may actually be increasing as we hit the midway point in 2022. This could be because more out-of-state developers are seeing the value of building in this market and see the natural opportunity Arizona affords for corporate location, industrial competitiveness and a pro-business climate.”
Data collected by the Greater Phoenix Economic Council (GPEC) corroborates Murphy’s insight regarding locates from out of state. According to information collected by GPEC from January 2021 to June 2022, 73 companies have relocated to Arizona from across the nation and globe, with the highest percentage (26%) attached to international businesses.
But, despite the migration and further interest of companies from global destinations such as Canada, Taiwan and Germany (the top-three international locates) to nationally-based businesses in California, New York and Washington (as top-three stateside examples), multiple challenges are in play. And one very real and prevalent conundrum the construction sector faces in bringing these projects to fruition is time.
“Rarely does the phone just ring with a project, but that is what is happening in today’s market,” says Grenee Celuch, CEO of Concord General Contracting. “We have repeat clients calling us to start projects and we ask the timeline they have set for construction. If it doesn’t fit within our manpower availability, we are declining or discussing the possibility of delaying the project by a few months to ensure we are able to complete the project successfully.”
Inflation cascade challenges
Time adjustment has been a major factor for both clients and contractors in the current market. Labor shortages and supply chain problems have significantly extended the lifecycle of projects. To counter these inflationary-prompted outcomes and account for longer delays, many projects between businesses and builders are booking out far in advance.
“The whiplash to that is that owners and developers are trying to be proactive in a hedge against inflation and get their project locked in pricing-wise wherever they can, to help fight the rising cost of inflation and what’s happening to their project performance,” says Derek Wright, president of Suntec Concrete. “That being the case, they’re trying to lock in pricing earlier than we’ve ever seen on projects — 8 to 12 months in advance.”
According to Wright, projects before the current rise in inflation booked out between three and six months.
Tethered to time-related challenges are exponential rises in materials’ costs. In June, the Associated General Contractors of America (AGC) published a report revealing double-digit increases in industry-wide price indexes: diesel fuel up by 84.9%; liquid asphalt rising up 80.5%; steel mill products and aluminum mill shapes climbing to 32.9%, and architectural coatings (such as paint) going up to as much at 31.6%.
“The pipeline of new work has been very robust and it translates to the strain on the supply chain, while the supply chain hasn’t necessarily been able to keep up with the expanding demand of the market,” says Tom Dunn, president of Arizona Builders Alliance (ABA). “Supply chain, not only being materials, but also transcending into the labor and equipment side of things as well.”
The soaring prices of materials, freight and transportation, combined with labor deficits place contractors in a precarious situation.
“We have seen upwards of 19-21% increase in costs in the past two years and it is having an impact on how far our client’s dollars can go to building their future project,” Celuch says. “Additionally, lead times on certain materials are forcing us to look at our building process differently through multiple guarantee maximum prices (GMPs) that allow us to order materials early to ensure they are onsite when needed.”
Adds Murphy, “Materials are a major challenge and early procurement is a must if you want to keep your project on schedule and on budget. We’re fortunate to have a strong pre-construction team that anticipates trouble spots and moves early to seal those materials contracts. You do have to collaborate throughout the design process to find alternatives to the materials issues.”
Contractors’ creative solutions
Two words that Celuch and her industry colleagues are employing — and finding to be critical throughout the current construction climate are “creative” and “communication.” “We can’t build the way we used to in terms of budget or schedule,” she says, “and it takes the entire team to accept we are navigating a different world than ever before, and it takes open communication and creativity when building a project.”
Justin Dent, senior vice president of McCarthy Building Companies Southwest, has observed creativity manifesting as a shift in owners’ interest and willingness in collaborative project delivery methods. Doing so, he explains, enables early engagement with the general contractor during the planning phase, which allows for the purchase of materials early in the project. In turn, lead times and budgets are managed more effectively.
Dunn explains that one such collaborative option for owners is to order materials in advance of a project start date and store them. While storage obviously incurs an additional cost, it may be worth it in the long run. “Securing a price early is a known variable, waiting until later in the process runs the risk of the unknown,” he says. And waiting in a volatile, fluctuating market could invite the possibility of both sky-high costs and significant time delays.
“Those who are going this route also benefit from innovation and collaboration between the design team, the contractor and owner, which results in a better project,” Dent notes. “Many who have gone this route are sticking with it on future projects because of the good results.”
In terms of communication, Wright explains that transparency is crucial. “Shared risk and transparency with the owners on where things really are is essential,” he says. “‘Here’s what we can do, here’s what we can’t do.’ This is not an equation where one guy gets to win; you’re going to have to share the risk and win or lose together.”
Even amidst the inflation bubble, there are visible rays of hope to be found.
“When you look at the diversity of projects that are going to come to Phoenix or are already under construction, that diversity of projects and the employer base that’s coming with it are a completely different shift in dynamic than Arizona has historically known,” Wright says, “and that is a very positive silver lining.”
Going into 2023, Wright predicts that continued expansion of the technology, manufacturing and eCommerce distribution sectors will contribute to the diverse activity to which he refers.
California-based Viasat, a satellite communications company, is one such example entering the Arizona technology sector. Its first phase — as part of a 300,000-square-feet-project — involves the development of 135,000 square feet near the middle of ASU Research Park, slated for completion in June 2024. Bespoke Manufacturing Company (BMC), also from California, added its ranks to the Phoenix Metro manufacturing sector. And, musical instrument and pro audio gear provider, Sweetwater, joins the eCommerce market in Glendale with its fulfillment center slated for full operation by October 2022.
Additionally, Dent points to numerous infrastructure projects on the horizon. “We’ve seen a steady increase related to critical infrastructure projects, including water/wastewater, renewable energy, healthcare, schools, data centers, airports and transportation projects. And, with the anticipated funding coming in to support these and other infrastructure projects,” he says, “we expect these projects will continue to be the most common types to be planned and built.”
Transportation, in particular, has boomed and will continue to do so with investments like the $400 million Gov. Doug Ducey allocated for widening of Interstate 10 (Wild Horse Pass Corridor) between Chandler and Casa Grande. And, if Proposition 400 passes, the dedicated half-cent sales tax funding for transportation investments will bolster projects like State Route 30, as well as the ongoing progress of the Loop 303 (taking place under the original Prop 400 program).
While transportation and infrastructure projects are certainly in need, especially in rapidly expanding population pockets, the mix of private and municipal projects places added stress and competition on the already lean supply chain.
“All the aggregate, all these supplies, they’ve got to come from somewhere,” Dunn says. “Everyone is chasing after the same thing — especially when you’re competing with the government at the Federal level, at the State level. But when the private development market is competing with the government market, it’s difficult; prices go up.”
Until the market equalizes, owners, developers and contractors are doing the best they can to navigate a landscape of limited proverbial LEGOS and master builders. And it may be a while until the climate adjusts to a more balanced baseline.
In closing, Puente notes, “Global economic indicators are starting to show signs of a recession or slowdown in the next five years. However, we believe Arizona may fare better due to population growth from surrounding states and growing manufacturing and industrial sectors.”