CREJ - Office Properties Quarterly - March 2016
Colorado’s commercial construction market is booming, and all indications are that the fundamentals will remain strong throughout 2016. The state’s construction sector is poised this year to record the highest value of construction since 2006, according to the University of Colorado Boulder’s Leeds School of Business. Our Denver office recorded nearly $400 million in revenue in 2015 and is on pace to exceed that revenue in 2016. We’re either under construction or about to start construction on nearly $200 million of commercial office work across the region in 2016, including the Colorado Center office tower next door to our offices at Interstate 25 and Colorado Boulevard. But a strong economy comes with its own challenges, including the ongoing labor shortage, volatility in materials costs, increasing sustainability demands and inflationary fears shaking business confidence. In the construction market, the war on talent that we expected is now in full swing. Skilled workers are becoming selective in the jobs they’ll choose to work. The migration of displaced oil and gas workers back to the construction industry has yet to materialize, according to Leeds’ 2016 Business Economic Outlook. We see high demand for cement masons, carpenters, sheet metal installers, electricians and other skilled craftsmen. This means that even though we’ve seen a drop in steel prices thanks to the downturn in China, wages for skilled laborers continue to escalate. For example, we’ve experienced a significant increase in the cost of rebar installation over the last 18 months. Like us, many of our trade partners are starting to pay higher wages to keep good people. As a result, we are seeing an uptick in fees. In this environment, there is a real concern about the temptation to use non-skilled labor to backfill the shortage. Work quality and productivity can suffer, and it brings a need to increase the focus on training and safety. It is important for construction companies to be vigilant about safety and promote a culture of safety that is the result of attention to detail, as well as thorough planning and consistent enforcement. A risk management and prequalification process also helps ensure the health and vitality of trade partners. While these are practices we follow, not everyone does. The Associated General Contractors in 2015 reported that 15 percent of construction firms have seen an increase in the number of reportable injuries and illnesses because of workforce challenges. Thirteen percent reported experiencing increases in jobsite hazards identified in inspection reports because of worker shortages. There was a reported 11 percent increase in worker compensation claims that is attributed to a tight labor market, according to the AGC. Ensuring a safe work environment is really a mindset. Over the same period, we recorded a 25 percent decrease in total recordable injury rate and did not have a loss-time injury across the region. Many construction firms expect that it will remain difficult, or get even harder, to find qualified workers because they have a low opinion of the training pipeline. With respect to materials pricing, we’ve seen some ups and downs, depending on the commodity. The slowdown in China and weakness in Europe and Japan created a drop in steel prices and moderated prices in copper, pipe and other products. With fewer suppliers, however, the cost of gypsum and glass has increased about 10 percent. Gypsum wallboard is a key component of building construction, and architects are using an increasing amount of glass in their office designs. In addition, the cost of cement is up about 4 percent in the last year. With respect to office design trends, Colorado continues to grow as a center of green construction, so sustainability demands remain strong. LEED Gold is now the de facto standard, with a growing number of developers considering LEED Platinum, and some owners expressing an interest to explore net-zero energy standards. It’s not just an environmental trend. Lux Research reported that buildings with LEED Gold certification outperformed their peers in rental and occupancy rates. Healthy, collaborative workspaces also are growing in popularity, as is evident in The Nichols Building, completed in 2015, and PearlWest, which is currently under construction in Boulder. The Nichols Building, in the historic Platte River neighborhood downtown, is an 85,000-square-foot urban infill, mixed-use building. It’s an innovative steel structure with concrete on metal deck for levels one through four. The design includes open floor plans, innovative work areas, floor-to-ceiling windows, a central atrium staircase and a large skylight, providing tenants with lots of natural daylight. The building also features a bike barn, in-house café, restaurant and event spaces, all designed to promote community and collaboration. PearlWest, which is pursuing LEED Platinum, is located in the former Daily Camera site on the Pearl Street Mall in Boulder. It includes retail, restaurants and 135,000 sf of creative office space. It also features floor-to-ceiling windows, a rooftop terrace and an automated parking garage. These are 21st century offices, and we expect these design trends to continue. So while we are enjoying Colorado’s commercial construction boom and are bullish about 2016, economic prosperity has challenges as well. In addition, we see some possible bumps in the road after this year, as we’re watching monetary policy, global economies and election-year politics. Time will tell how those issues may affect the United States and Colorado in 2017 and beyond.