Leopardo’s Cowart: Rising labor costs equals higher construction costs

Pierre Coward

Pierre Cowart

by Dan Rafter

Chicago’s Leopardo Companies knows the national construction business. The company is one of the bigger players in the construction industry, after all.

That’s why Leopardo’s Construction Economics Report and Outlook is a must-read each year. The 2015 edition — which you can find here — is no exception.

This year’s report shows that low oil prices are reducing the cost of construction. But this has been more than offset by an increase in labor costs, brought on by a shortage of skilled workers. Leopardo reports that more than 25 percent of construction workers left the industry during the past five years.

Pierre Cowart, senior vice president with the corporate and community business unit with Leopardo, recently shared his thoughts on his company’s report and the state of the construction business in the Midwest. Here is what he had to say:

Why are we are seeing an increase in construction costs?
Pierre Cowart: Construction demands have already reached pre-recession levels, and the industry is experiencing labor shortages after a large portion of the workforce retired or changed industries during the downturn. There is extraordinary competition for skilled workers, giving labor unions a degree of leverage in contract negotiations.

Our report shows double-digit union wage and benefit increases between 2008 and 2014. With the U.S. economy expected to see annual GDP growth of 2.2 percent, and an intensifying shortage of construction talent as development gets traction, organizations are well advised to carry out their expansion and development plans as soon as possible, and budget for annual construction cost increases between 4 and 6 percent.

Are there any particular markets in the Midwest that are seeing a particularly strong amount of new construction?
Cowart:In Chicago, large-scale construction projects are underway or in the planning stages in the multifamily, office and retail sectors. Around 5,000 apartment units have been added to neighborhoods around the Loop over the past two years, with some 3,000 new units planned for 2015 alone. Several thousand more are teed up to start construction in just the next several months.

Office development here in Chicago is also ramping up. Until recently, the biggest office project was the renovation of the former Fulton Market Cold Storage building into a 357,000-square-foot office space for Google to take occupancy of by early 2016. Recently, however, two major office buildings have been announced, including a 53-story, 1.2-million-square-foot office tower at 150 N. Riverside Plaza, scheduled for completion in 2016. That’s not all. The expansion of McCormick Place, the resurgence of retail development and redevelopment around the city, and a sprinkling of large data centers encircling downtown have all contributed to the increased demand for construction.

How strong is the spec market? I know that the industrial market is seeing a lot of spec construction right now.
Cowart: The only place we are seeing speculative development is in the industrial market. It has not returned to the retail or office markets, especially in the suburbs.

What are the biggest reasons for the increase in construction activity today?
Interest rates hovering near historic lows have helped. Vacancy rates have declined for key asset types, and rents are stable or creeping up along with absorption. Plus, employment reporting has shown positive gains, which is a leading indicator for the construction industry.

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