SUPPLY CHAIN Market Update Bulletin December 2023
Lead Author: David Hamilton, Vice President, Dir. of Strategic Sourcing Introduction The construction outlook continues to be positive with a steady pipeline of RFPs for significant sized projects. Interestingly, while competition to win can be stiff, the mid- and smaller-size projects are numerous. As outlined in more detail below, reshoring of manufacturing and significant growth in the mission critical sector have strengthened the construction market. This uptick is most welcome from a workload point of view, but it has extended the lead times of HVAC and electrical gear and has kept costs from dropping—and in some sectors and trades, only ensured they increase. Differing drivers in the marketplace have reinforced the need to be nimble across regions and sectors, something the STO Building Group has nurtured in our multi-region and multi-sector approach through our nearly 50 offices.
Economic Outlook • While there continues to be evident volatility in the geopolitical sphere, our outlook continues to be pretty bullish. The concept of a "soft landing" is increasingly gaining traction in the media and among investors. • Continued implementation of mandatory return-to-work policies by numerous corporations suggests not only a possible growth in the commercial interiors market, but also a redefinition of common and amenity spaces offered to building tenants. • The elevated cost of electrical gear will remain stubborn due to the scarcity of raw material supplies well into next year. This has been and will continue to be driven by the rapid and sustained growth of green energy and “net zero” requirements, both inside and external to the construction industry.
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Subcontractor Impacts
• Availability – An uptick in retirements, aging workforce, acquisitions by PE firms, and mergers have affected the construction subcontractor landscape significantly. Careful monitoring is required to alleviate financial and labor risk. • Insurance costs – Due to increases in the number of claims, premiums cost hikes have been burdensome for subcontractors. This has been a major factor in some subcontractors deciding to wind down or entirely close their business. • Defaults – Overburdened subcontractors with high borrowing and a hardening around debt structures and terms have increased defaults across the industry. No single trade or geography seems to stand out. • Prequal – Comprehensive assessments of both bids and bidders, emphasizing thorough prequalification from multiple perspectives, to achieve a well-rounded evaluation is more necessary than ever. • Cashflow – Cash management to efficiently acquire materials and sustain an appropriate labor force is a balancing dilemma. • SDI – The importance of Subcontractor Default Insurance (SDI) has increased significantly, as it plays a key role in minimizing project delays in the event of a subcontractor default.
SECTORS / REGIONS • Life Sciences – Advances in drug discovery/R&D and therapeutics are accelerating. Decarbonization and sustainability initiatives, reshoring in manufacturing, high potency, cold storage, and clean room environment opportunities are all leading to increases in demand. Early release of MEP equipment, lab casework, hoods, clean rooms and specialty equipment is essential due to client schedule desires.
• Healthcare – Recent indications show that healthcare will remain a strong sector for growth. Using much the same equipment and materials as in Life Sciences only serves to underline the need for extra lead time scrutiny and potential early purchase and/or stockpiling to mitigate lead time strains. Awards of major healthcare projects in the Northeast have bolstered our belief that this sector will continue to trend positive.
• Hospitality – Significant investment in recent months has led to number of high-profile projects coupled with the more typical aspect of refurbishment of many hotel chains. Increases in the amount of travel, conferences, etc. all contribute to this sector remaining robust.
• Manufacturing Tech – Construction of “tech” facilities remains very robust. Evolving technology sectors that are being “reshored” in North America are gathering pace and have not yet fully gained full cadence. Demand shows no signs of slowing down, particularly in manufacturing electric vehicles, components, and microchips. Continued expansion not only contributes to meeting high demand but also helps stabilize the volatility of chip-containing components, potentially leading to better lead times. Major activity is concentrated in Texas, Michigan, Indiana, Ohio, Kentucky, the Carolinas, and Georgia.
• Mission Critical – With projected growth of 10%/year until 2030, the data center market is the most active. Lead times of well over 1 year for most large equipment are expected. Materials such as concrete and steel are in great demand and show no signs of softening. Significant strain in the subcontractor environment for this sector is of great concern, and we are monitoring closely.
NOTABLE COST CHANGES • General – Regional cost fluctuations display considerable variation. In areas experiencing diminished activity, heightened competition is evident, effectively mitigating material cost escalations. Bidders are absorbing these increases. For the most part, material costs do also seem to be stabilizing. Potential for volatility still exists due to ongoing tensions in Russia, Ukraine, and the Middle East. • HVAC & Electrical Equipment – Continued high demand due to mission critical construction means prices remain elevated for the foreseeable future. • Piping & Steel – Announcements from these industries indicate price increases around 5–10% will start in early 2024. • Labor – Forecasts point to around a 4% rise into 2024. Much of this is driven by a broad skilled labor shortage.
CURRENT IMPACTS • Millwork – Production labor constraints due to skilled labor shortages have impacted schedules in the Texas and Northwest markets. In most regions, there is a low number of qualified millworkers with few multi-regional players. • Electrical Equipment – Lead times for all electrical items have never fully recovered post-pandemic. Generators, ATSs, and other large gear items are still running well over a year in most cases. Mission critical expansion has had and continues to have large impacts. Manufacturers are investing heavily in expanding current production facilities. • Labor – The scarcity of labor in the trades is intensifying, exacerbated by fewer newcomers and increased retirements, particularly in higher-skilled and less technologically advanced trades. This has led to significant wage rate increases in sectors facing shortages, such as millwork and metalwork, over the past two years.
CONTRIBUTORS
DAVID HAMILTON (Group Lead) Director of Strategic Sourcing STO BUILDING GROUP David.Hamilton@ stobuildinggroup.com 212-251-9389
JUSTIN ACQUAVIVA, LEED® AP Purchasing Manager STRUCTURE TONE Woodbridge, NJ jacquaviva@structuretone.com 609-658-6347
STEPHEN DENNIS Estimating Manager STRUCTURE TONE Philadelphia, PA Stephen.Dennis@structuretone.com 215-563-7875
BRET FIELDS Director of Preconstruction, CA BCCI Bret.Fields@bcciconst.com 415-817-5116
BRIAN S. LYNCH Purchasing Manager STRUCTURE TONE Boston, MA Brian.Lynch@structuretone.com 617-348-2800
TIMOTHY PAPPS Purchasing Manager PAVARINI NORTHEAST Stamford, CT tpapps@pavarini.com 203-978-2340
ROSS ALLEN, LEED AP® Senior Estimator LAYTON CONSTRUCTION Ross.Allen@layton.com 801-563-3847
JASON FRENCH Director of Purchasing, TX STRUCTURE TONE SOUTHWEST Jason.French@structuretone.com 214-525-5142
MARC PARSONS Estimator ABBOTT CONSTRUCTION mparsons@abbottconstruction.com 206-467-8500
GREG COURTMAN Estimating Manager NATIONAL STRUCTURE TONE GLOBAL SERVICES Gregory.Courtman@ STOBuildingGroup.com 347-491-2813
NAVLEEN GHAI Purchasing Agent STRUCTURE TONE New York, NY Navleen.Ghai@structuretone.com 212-251-9328
SILVIU STOIAN Vice President, Estimating GOVAN BROWN & ASSOCIATES Toronto, Ontario, Canada silviu.stoian@govanbrown.com 416-703-5100