West End Yards commercial building in Portsmouth, being built by Eckman Construction. (Courtesy photo)
Significant demand for industrial, warehouse and distribution space, combined with a strong housing market, will keep construction companies busy in 2022, but supply chain disruptions, labor shortages and inflation loom large.
Josh Reap, president and CEO of Associated Builders and Contractors NH/Vermont Chapter, says the demand for multi-family housing and single-family homes is robust in NH as people look to work from home and people moved to get away from population-dense cities to enjoy NH’s more rural lifestyle. Reap says supply chain disruptions due to COVID-19 and extreme weather events are prompting an increase in demand for warehouse space and bringing manufacturing closer to home.
“We also see a lot of construction happening in the health care sector as well as with logistics and data centers. An aging population is driving demand for more access to health care, and online retailers, like Amazon, are expanding their footprint here,” says Reap. “The demand for construction ought to remain strong in these sectors for the foreseeable future, but talk of an increase in the federal interest rate has entered the conversation.”
Jewett Construction in Fremont says the firm has been around for almost 50 years, and for the past 30 has worked mainly in high-demand sectors of manufacturing, warehousing, industrial, automotive, cold storage and food processing. “These are the markets we know and trust and excel at,” says Dan Ray, vice president of preconstruction and design at Jewett Construction. “Recently, we have made some strategic ventures into mixed-use and multi-family, meanwhile, manufacturing and industrial have remained very strong for the past 18 to 24 months.”
Eckman Construction in Bedford has a healthy pipeline of potential projects, says Preston Hunter, vice president. “We have about 15 projects in the pre-construction/design phase; some will start later this year, some in 2023 and some will die on the vine. The big question is, of those projects, how many are real and will get to construction? Our hunch is that we are going to see some attrition.”
Keith McBey, president of Bonnette, Page & Stone Corp, (BPS) a commercial and municipal construction company in Laconia, says their pipeline is also strong, and he is cautiously optimistic. “We are always trying to pile it on, and the phone keeps ringing,” he says. “We are in a bit of a sweet spot working with a local developer who is doing a lot of projects.”
BPS specializes in public projects, says McBey, with some dependent on approval of a bond at town meetings in March. “We have some town offices, police departments and are always chasing the school work. For a few larger projects in the works, the voters will let us know, which is always a guess.”
Bonnette, Page & Stone employees renovating the Colonial Theatre in Laconia. (Courtesy of Bonnette, Page & Stone)
At PROCON in Hooksett, the 2022 pipeline is much stronger than it was in 2021, says Managing Director John Stebbins. “When the pandemic hit, we were heavily hospitality-focused at about 40% to 50%, so we had to pivot pretty quickly,” he says. “We are a design-build firm with the largest architecture and engineering company in the state. Because of that pivot from hospitality to other sectors, we are really just coming out of the recession caused by the pandemic, and we should have a really nice year.”
Stebbins says PROCON’s hottest sectors are industrial warehouse and logistics, “and we are working on quite a few aviation-related projects. We are building one big hotel with 158-guest rooms for Joe Faro at Tuscan Village. It also has 95 apartments attached and a Tuscan Kitchen in the center with a rooftop bar.”
Tuscan Village, a mixed-use development in Salem, designed by PROCON is currently under construction. (Courtesy of PROCON)
Stebbins says he expects housing to be a large part of the mix in 2023 with four to five large complexes in the works. “We have a project, 105 Bartlett Street [in Portsmouth], that just received a very favorable ruling before the HAB, [Housing Appeals Board]. We are hopeful to start the design/development process this spring.”
Amanda Savage, business development manager at North Branch Construction in Concord, says the firm has a healthy backlog for 2022, driven by medical health sciences, multi-unit housing, private and public schools and universities, and manufacturing.
Like every industry, construction is feeling the pressure of the workforce shortage in NH. With many in the industry nearing retirement age and not enough new workers entering the field to replace them, some construction companies are taking a multi-pronged approach to recruitment and retention. Joseph Campbell, president at North Branch Construction, says with a backlog of work, the firm needs to hire more carpenters.
Savage says North Branch is tapping into new talent with more online recruiting, radio ads and social media. “Since 2008, this industry has struggled with the trades and recruiting people,” she says. “It is also really important to hold onto existing talent. We don’t want anyone to leave because they think the pasture is greener on the other side. We implemented incentives for new and existing staff. We are seeing people coming from hospitality, in that way, COVID may have helped, with people looking for better options.”
North Branch Construction is building Red Oak multi-unit housing on Elm Street in Manchester. (Courtesy of North Branch Construction)
North Branch increased mentoring to help workers from other industries. “I find it interesting the number of people who are changing industries,” adds Campbell. “Hospitality was already a stressful job, and the pandemic added a lot of uncertainty early on wondering whether they would even have a job as the CDC rules changed on what seemed like a weekly basis.”
Hunter at Eckman says it is a highly competitive market for hiring talent, particularly for project managers and superintendents. “We certainly wish we had more senior people, but we are very picky, making sure the men and women we entrust to manage projects for our clients have the right skills. It’s more important than ever with all the risks in the industry to have the right people to navigate those challenges,” he says.
BPS has tapped into local high school graduates who went into the food service industry. McBey says, “They hit a bubble where they had bought a house, got married, had a kid, and food service didn’t fit,” he says. “We were able to reach out, hired a few and they talked to friends who came on board, and now, we have a dozen. They were green and needed to learn the carpentry trade, and some are geared for management and could help fill our pipeline.”
Stebbins credits PROCON’s collaborative culture with helping the firm to retain employees. “There hasn’t been much outflow, and we had a lot of inflow. The mixture of compensation, flexibility and environment means our employees like working here; when that happens, they’re not likely to go someplace else,” he says.
Competition for Subcontractors
Many subcontractors are already booked six months out but are experiencing similar challenges that may prevent them from taking additional jobs, including workforce issues, supply chain disruptions and price increases.
“When projects have an aggressive schedule, it is harder and harder to get subs. If you only get one or two bidders, chances are you’ll pay more—that is the case across all divisions,” Hunter says. “There is a breaking point for every project. We haven’t found any clients that have an unlimited checking account. If one thing makes us nervous, it is that we continue to be surprised at how high some of the bids are coming in.”
Construction managers must assemble a group of subcontractors, which supplement or even represent the largest part of the workforce, but most are having a hard time doing so. “We are seeing problems in all the trades,” says McBey.
Stebbins says the subcontractors no longer have flexibility to hire 10% more for a big job and have to pass. “In many cases, we are lucky to make the typical coverage of three bids. It’s hard to explain that to the owner,” he says.
As a construction management firm without its own crews, Jewett reinforces its strategic partnerships with subcontractors. “Rather than work with a half dozen, we partner up with key outfits to make sure we are negotiating a fair price, bringing value to our client and maintaining a consistent relationship so we can get the manpower we need when we need it,” says Ray.
Jewett Construction employees working on the EcoMaine recycling plant in Portland. (Courtesy of Jewett Construction)
To address the workforce challenge, Associated Builders and Contractors NH/VT has partnered with the NH Home Builders, ApprenticeshipNH and Manchester Community College to create a registered carpentry apprenticeship program approved by the U.S. Department of Labor.
“Our program includes modules of plumbing, HVAC, electrical, masonry and estimating,” says Reap. “The apprenticeship connects job seekers looking to learn carpentry skills with employers looking for qualified workers.”
He says the apprentices receive 6,000 hours of on-the-job learning and 455 hours of classroom training at Manchester Community College over three years, all while being paid. Program graduates will be full U.S. Dept. of Labor recognized Journeypersons and employed.
“There is nothing more rewarding than being part of a team that builds a project, a building that will be there for 100 years or more,” says Hunter. “You’re able to stand back and look at it and know that you had a hand in building it; that’s rare.”
Supply Chain Challenges
Hunter says this year, more than ever, it is the cost of construction that is the biggest risk to derailing projects. And supply chain disruptions are adding to those costs. “We’ve seen a dramatic increase in cost in every division, which makes it challenging to estimate the cost of a project six to 12 months in advance,” he says.
Hunter says he is hopeful the effects of COVID on manufacturers will wane and provide relief in the supply chain. “I have to think that some of these increases are driven just by the scarcity of labor and materials. If we can catch up on the backlog of materials, hopefully pricing will stabilize and the industry will get to a more normal way of business,” says Hunter. He says roofing materials can take eight months to ship, and the price is not locked in until that shipment happens. “How does a contractor lock in a price when the roofer can’t even lock in the price of materials?”
Supply chain problems persist and will take time to recover, says Reap. “Upward pressure on material pricing has led many designers and builders to consider using alternative designs, materials and inputs. That kind of innovative thinking helps to get the job done, but it can come with a learning curve for all parties. We anticipate that the global supply chain will experience disruptions throughout the rest of this year but may begin to ease in 2023.”
“We have to start thinking about procurement very early on,” says Stebbins. “Before we even have subcontractors on board, we have to have some of these long lead items, whether it’s air handling equipment, storefront framing or roofing, it’s a real challenge. Establishing pricing used to take place over a period of a few months. Now it’s compressed and happening all at once…. If the project gets delayed, you lose pricing and you lose subcontractors.”
Campbell says the supply chain is unpredictable. “I am almost afraid to answer my phone, that it will be something we had on order six months ago, and they will tell me not only is it not coming but they can’t tell me when it is coming,” he says.
North Branch has projects where the components for the electrical panels are on back order without any ETA, which has a domino effect on other work, such as elevator installation, Campbell says. “Early on, it was steel bar joists, then it was mechanical equipment. Where we would typically have an eight- to 10-week lead time that now extends to 30 to 40 weeks,” he says. “To combat this, we are working with our owners and design teams to order much sooner and store offsite in warehouses.”
Savage adds that developers are reaching out earlier. “They want to know how this will impact the scheduling of their project, which is a positive thing that we would encourage. We are aware and can help early on in the process.”
Ray says all the players that make a project move forward are being brought in earlier in the preconstruction process. “At Jewett, 80% to 90% of our work is design-build. We are managing the architecture, the structural engineering, the mechanical, electrical and plumbing,” says Ray.
He says in the last 18 months, Jewett has structured delivery models around the shortage and has strategic ways to get materials released sooner. “In particular, we have been getting out ahead of primary and secondary steel systems and roofing. The polyisocyanurate and polystyrene roof insulation components have been bottlenecked really badly,” he says.
“We’ve been hamstrung to the point that we had to design a temporary roofing system that allowed us to be weatherproof, signed off by the inspector so that electrical work and the trades can continue in the building envelope.”
The supply chain issues have created a challenging environment for construction companies. “It is a really strange time right now,” Hunter says. “Our chief estimator has been with us for 35 years and says he has never seen anything like it. There have been a lot of ups and downs in the economy in the past 35 years, but the volatility and scheduling challenges are like nothing we have seen before.”
Interest Rates and Inflation Fears
Low interest rates have been spurring the construction boom during the pandemic. The question is what affect rising interest rates will have on the robust project pipeline. “Cheap money helps fuel investment,” says Reap. “And traditionally when the Federal Reserve raises interest rates, it will cool plans on development, but if there’s one thing this pandemic has taught us, it’s that those traditional ways of thinking do not always prove true.”
Reap says rates have been so low for so long that people are braced for the inevitability of an increase. “Worker shortages and inflation have strained but not broken the ability of contractors to meet expectations. If a rise in interest rates can ease the pressures on material costs, then we may just see a leveling out in building costs. That could provide certainty in planning, which is a luxury few builders have right now.”
Stebbins of PROCON agrees but says he is hoping it’s not a sharp rise. “If it tempers inflation, that’s a good thing. When interest rates go up, we’ve seen shifts from condo projects to apartments, but I don’t think it will materially affect the industrial and warehouse space because it is so hot right now. I also don’t think it will impact hospitality, as we are starting to see some big projects coming back, and with interest rates rising, the hotel rates will rise as well and hopefully offset each other.”
Ray says clients and trade partners are all having the same conversation. If and when interest rates go up, what does it do to the market? “Things are so hot right now that it is hard to believe a small rate hike will change things. But I can tell you aggressive rates are keeping things going right now. People are eager to borrow right now because money is cheap. The cost of materials and the escalation rates we’ve seen the past few years have been steeper than usual. But the industry has been resilient to that because the rates are so low.”
Hunter of Eckman says it will take a big correction to reset the system. “If demand continues for large projects, the challenges will persist, but if demand drops because projects become infeasible from a cost standpoint, or interest rates and financing start to challenge the economics, we may see a drop in demand. It may result in the correction we all think is coming. The way it is now, it is not sustainable,” he says.
Campbell says if interest rates are raised, there may be some projects where the proforma doesn’t work, and they will either be put on hold or cancelled. However, he adds, “Everything I have read and seen, and in talking to peers, we don’t see any sign of decline. I think supply chain issues are going to continue into 2023. With how busy the industry is, it would almost take a downturn for suppliers to catch up.”
The nonprofit sector is struggling most with the inflation of construction costs, according to Savage of North Branch, “They have a funding source, whether they raise money or have been awarded grants, and it takes time to get there. They have priced a project out, and inflation happens and they have to go back for more. We have a couple of nonprofit projects, and we are doing the best we can to keep the budget in line and be advocates for them and their money,” she says.
The bigger uncertainty, says Reap, is the effect federal infrastructure spending will have on a strained construction sector. “We are under a lot of pressure now to meet expectations and finish backlogged projects. A worker shortage, high material prices and interest rates rising are challenging but being managed. No one knows what may happen when a trillion dollars of government-backed construction goes out to bid.”