Creative Solutions for Rippling Pandemic Impacts on Construction Materials and Labor

The major disruptions to the labor market and supply chain because of the Covid-19 pandemic have had impacts across the business spectrum and the construction industry is no different. In some ways, the characteristics of commercial real estate have made the industry more susceptible to disruption. When it comes to real estate construction, where the margins for builders are continuously being squeezed, and much of the cost control is dependent on how quickly you can build the product, sustained impacts to labor and supplies have major consequences.

So, let’s consider how we got here, what the state of play is and how general contractors and developers can mitigate the impacts.

The impacts of the pandemic on construction labor

In the early days of the pandemic, the immediate impacts to the construction labor market were immense. In just the first two months following Covid-19’s arrival in the US, 1.1 million construction jobs were lost. Compare that to the around 2 million jobs lost in the great recession of 2008, where the impacts were spread across 5 years, the impact was much more acute in 2020. The construction labor market dropped off the proverbial cliff and then stayed there for nearly 14 months.

With vaccines came higher demand. By late 2021 firms were desperate for workers to come back but they were running into problems. According to November 2021 data from the Bureau of Labor Statistics, “there were 70,000 more separations in the construction industry than the 347,000 hires” and “in the same period, 307,000 jobs were open and unfilled.” (Engineering News Record)

It’s no surprise that in a survey by the Associated General Contractors of America, that 83 percent (of construction firms) report they are having a hard time filling some or all salaried or hourly craft positions.

Not only was the labor gap in construction large from the beginning, but it continues to grow. One reason the construction industry’s recovery may be lagging the rest of the labor market might be due to other pandemic related employment shifts like wage increases and added flexibility. Take for instance that historically, the pay for non-supervisory roles in construction averaged 20-23% more than the private sector. By the fall of 2021, that pay premium had shrunk to less than 18% (Engineering News Record). That shrinking premium may no longer be enough to attract workers who may weigh added benefits like work from home against the increased pay.

Material delays and supply chain disruptions

Not only are labor shortages having impacts onsite, but supply chain disruptions are also having an effect. According to the Associated General Contractors of America, prices of construction materials jumped nearly 20 percent in 2021. Pandemic related shutdowns cause rippling effects across the supply chain. For instance, when factories in China aren’t able to produce cement due to a Covid-19 lockdown, prices of the materials soar. When absorbing that cost is no longer an option, contractors start to look for alternative solutions, hence a booming lumber market.

These undulations have far reaching effects. "Over the past four months, lumber prices have nearly tripled," according to NAHB standard estimates of lumber, “This lumber price hike has also added nearly $7,300 to the market value of the average new multifamily home, which translates into households paying $67 a month more to rent a new apartment."

Creative construction solutions for unpredictable

In an industry where the margins were already very thin, added volatility may prove to be insurmountable for CRE developers. According to a survey by the Associated General Contractors of America, over 75% of contractors surveyed, had owners postpone or cancel projects scheduled to start in 2021or 2022 and for 40% of those projects, rising costs were cited as the cause.

As an integrated developer and general contractor, Focus has a unique understanding of the challenges facing owners due to the Covid-19 pandemic and as a result, have implemented unique construction solutions to help move projects forward.

Take for example the 808 Cleveland project in Chicago’s River North, where Senior Project Manager, Joe Vartanian and his team have developed an expedited approval and buy-out schedule to mitigate the risks of cost escalations and material delays. In the case of two of the most delayed construction materials, precast concrete and window walls, teams decided to purchase and ship in advance. All the precast used for the podium’s façade was fabricated 2 months before the project started and the window wall was built and shipped 6 months ahead of groundbreaking.

Buying materials in advance can lock in prices but it also requires teams coordinate the storage of those materials. Additionally, due to the added upfront cost to store materials, some lenders cap the level of storage allowed and so the project must be very strategic in managing stored materials. At Focus, Senior Project Managers Wade Giorno and Kirk McLawhorn are working with trade partners who can warehouse material to reduce and eliminate storage costs where they can. At the Domaine at Hawthorn Row project, the doors and door frame materials are all being warehoused by the manufacturer to avoid burdening the project.

Sometimes, no matter how early you confirm supply or how strategically materials are purchased, certain items won’t be available and if teams don’t have an acceptable replacement the project can stall. At Focus, project teams are creating lists of multiple alternates for most materials as everything from shower basins and lighting fixtures to door hardware and roof adhesives have been delayed. By maintaining a record of acceptable alternates and creating healthy relationships with those trade partners and suppliers, Focus can relieve the burdens on some manufacturers without impacting the quality of the product while simultaneously moving the project forward.

When it comes to labor, the market is just as tight. In a story by Marketplace job openings in construction are at record highs partly because more people are quitting but also because there is rising demand. “You have employers that will walk on to a jobsite, ask the construction workers what they’re making, and so okay I can pay you $2 more an hour is you come with me,” said Ali Wolf, Chief Economist at Zonda during the interview with Marketplace’s Amy Scott.

This level of competition is impacting Focus’ jobsites as well. On the mall redevelopment project, Lumen at Fox Valley teams are seeing this type of poaching in real time. Through proactive mitigation by our trade partners, with strategies like increased pay and added benefits, teams have remained fully staffed.

For now, it’s unclear when market conditions may become more predictable and so project teams will continue their diligent pursuit of efficiency. Indeed, many of the strategies developed in response to the evolving impact of the Covid-19 pandemic have made the construction professionals at Focus, and across the industry, more advanced in their approaches to project management.

To learn more about Focus’ approach to construction during uncertain times or to discuss a project of your own, please reach out today.