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August 8, 2023

Financing Difficulties, Rising Costs Continue To Frustrate Developers

Clark Lundy, President of RREAF Construction Services, was featured on GlobeSt.com. Clark gives his thoughts on the current state of construction today and how it affects the overall industry based on his own experiences and trends in the market. By sharing his perspective, Clark not only contributes to a deeper understanding of industry dynamics but also highlights the significance of adapting to evolving trends.

As Featured on GlobeSt.com
Richard Berger, Globe St.com, 8 August 2023

In construction, today’s issue is finding workers, and tomorrow’s issue could be finding work, according to accounting and advisory firm Marcum’s 2023 Annual Construction Survey.

Exacerbating the current and future situation is the dual threat of rising inflation and rising rates.

The survey showed half of the respondents expected projects to be delayed or canceled, more than half anticipated difficulty in passing expenses on to customers, and large percentages of delayed equipment purchases lowered overhead spending and expected fewer projects to bid on.

It doesn’t get much better in terms of obtaining financing.

Marcum reported that the percentage of those surveyed who saw a decrease in their ability to obtain financing doubled to 26% from last year, and those who found financing easier than in the prior year plummeted to 4% after hitting an all-time high of 19% in 2022.

Companies have renewed their focus on cutting costs as overall costs remain a challenge. Some 60% of respondents said general and administrative (G&A) overhead expenses were higher than the past year, and 43% expect the coming year to be higher still.

Zach Moore, VP of Commercial at Caddell Construction, tells GlobeSt.com that general and administrative costs have increased due to the cost of living.

“We have to redefine the new normal for the cost of a starter home and basket of groceries,” Moore said. “This is causing companies to be more strategic with their hiring process and the clients and businesses they align with.

Clark Lundy, President of RREAF Construction Services, tells GlobeSt.com that maintaining project budgets have become almost unachievable due to the shortage of qualified labor, floating supply schedules, and general and builders risk insurance.

“Delays and cost overruns have become inevitable,” Lundy said. “All of this to say, that many of these costs are ultimately passed through to ownership through change orders. Unfortunately for many owners/developers, they are locked to a low variable construction loan rate and must fund with personal equity.”

Taxes continue to be a focus, rated as the third-most important political issue facing companies, behind only material price volatility and healthcare costs.

The Research and Development tax credit could help to ease the pain, but the survey found that only 26% are leveraging it and 58% are not while 16% are aware of it but do not plan to use it.

Work Remains ‘Plentiful’ in Some Verticals

Marcum found that the project backlog is healthy, with work remaining plentiful in many construction verticals. However, the years-old issues of high input costs and challenges in finding skilled labor persist, with the survey indicating that labor and skills shortages are even more of a problem today.

Moore said his company is “redefining what ‘skilled’ means in our industry and accepting what we can get to fill all the gaps in our workforce on top of having to pay more for sometimes less-skilled labor.

“We are seeing $1B+ projects more frequently now, which takes a large skilled workforce to execute. These types of projects pay more and give better incentives just to get the people to the project, however, this will catch up to contractors if not careful.”

Debt Repayment Weighs on Many Minds

Many are understandably worried about the roughly $1.5 trillion of U.S. commercial real estate debt that is due for repayment before the end of 2025.

“This could easily exacerbate the banking woes we’ve already seen with the collapse of multiple banks in the spring of 2023,” Marcum writes. “We are also seeing considerable pessimism among corporate leaders, who are already conserving cash, making new construction less likely on the corporate side.”

Marcum added, “Simply put, this period is fraught with risk,” but the risks are more pointed depending on the end markets a construction company serves.

“We will likely see more disparate performance as certain sectors like commercial real estate, retail and residential construction may slow significantly if not fall off a cliff.”

Marcum did find some opportunities for construction within healthcare and manufacturing-related megaprojects tied to onshoring the production of computer chips, clean energy, data centers, and other nonresidential buildings.”

These sectors should continue to benefit from raised public spending, according to the report.

This article originally appeared on GlobeSt.com