Construction and development experts delve into industry stressors

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A theme of uncertainty permeated NJBIZ’s May 23 Construction and Development virtual panel discussion, as the industry navigates lingering pandemic stressors compounded by recent economic pressures.

Moderated by Editor Jeffrey Kanige, the discussion featured Samantha DeAlmeida Roman, president, Associated Builders and Contractors of New Jersey; Damian Santomauro, co-leader, Construction Law & Litigation Team, Gibbons PC; and James Thaon, principal, Bohler, who explored how the industry is incorporating and adapting to current complications – higher interest rates and costs, environmental and regulatory considerations, and sustaining workforces, among them – which, the speakers pointed out, are just the latest proverbial wrenches to be thrown in the mix.

“The goal in doing a project is to try and get it done on time and according to bid … with no issues,” Santomauro said. “But, the next project that happens on, where it goes that perfectly, will be the first that there’s ever been.”

A change, “a delay, a supply chain issue,” he said – whatever is increasing the time is going to end up increasing costs. “And when you’re talking about rising interest rates, especially … adding work or adding changes and having to get contractors additional money to get the work done. You’re talking about complicating an already complicated situation, right? And making it that much more difficult to get the project done.”

Unexpected challenges that may have been more easily worked out in the past – getting financing to cover a necessary and significant change to a project, for instance – now constitute a potentially more obstructive hurdle due to how high interest rates have climbed. The jump has also caused some developers to reassess or rethink projects altogether.

Thaon agreed his firm is seeing the same things. With the rapid rise in rates driving up the cost of borrowing, he thinks “developers are being more cautious – rightfully so – and making sure that the deal really makes sense,” because, as he explained, something’s got to give.

“So I’m seeing developers spending a lot more time trying to negotiate land values and bring some level of understanding to landowners of what things are valued at now relative to the cost of debt,” Thaon said regarding acquisitions and expectations. He added that the move is also being accompanied by caution on the development side about what deals are being considered due to regulatory issues. That, he suggested, may bring long timelines along with higher costs.

Proceed with caution

According to the panelists, that reticence – or intentionality, as Thaon described it – when it comes to weighing a potential investment doesn’t mean that money isn’t available from lenders. He thinks what’s at work is a reduced appetite for risk.

“I think many would agree that being conservative is the name of the game right now,” DeAlmeida Roman said, adding that things are hard to predict at the moment.

“I don’t think it’s necessarily one factor,” Santomauro said. “Maybe if you were just dealing with higher interest rates … there’d be some issues associated with that. But when you’re talking about higher interest rates, an uncertain economy, issues with supply chain issues with you know, workforce — having a stable, steady supply of labor. And then you couple that with sort of uncertainty about some development[s].” Now consider all those things at once. According to him, it’s that nexus that is causing owners to look more closely – and further out – to determine what makes sense.

“[T]here’s a lot of uncertainty that has to get factored into that mix,” he said.

Replay: 2023 Construction & Development Panel Discussion

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In his work on the contractor side, one of ways Santomauro achieves this is to learn from past experiences and put that knowledge directly into future practice, for instance by updating construction contracts.

“I think if I think if you approach projects in a similar way – where you almost have, like, your database of experience: What was the cost? Drivers? What were the things that impacted you? So that when you start on the next one,” you’re working to avoid the same potential pitfalls.

Thaon explained that working to control costs is an important component of a project’s initial design that varies depending on the developer. On one end, it mirrors Santomouro’s “database of experience.”

“So, there’s certain developers that we work with that already have in-house construction experts, that when we are doing a conceptual analysis for them and preparing concepts, they’re already using their in-house individuals to determine what potential costs are based on prior experience and understanding,” Thaon said. “However, for developers that don’t have the ability to have that in-house, I think it’s really important to leverage experts in the industry and construction management and general contractors early on in the process. Use them as a resource to start getting some preliminary numbers.”

Just as important as controlling costs, he added, is making sure you have an accurate expectation of what those costs will be to begin with, “because, as Damian said, multiple times costs are going to change.”

Laying foundations

Also mired in uncertainty is the pipeline of future workers.

“[W]hen COVID hit, the industry was a lot older,” explained DeAlmedia Roman. “We saw a lot of individuals that just decided it’s my time to retire. I’m going to step away from this. I’m going to close my business, or I’m going to pass my business on and that made huge impacts, as well.”

At the outset of the discussion, DeAlmedia Roman called attention to the issue of sustaining and developing that workforce; in particular, the ability to find qualified and skilled employees. With more than 1,300 member companies, the ABC she leads in the Garden State is the largest of the national association’s 68 chapters. The non-union, merit shop contractors cover the range from small business operators to companies with staff counts of more than 500. And the organization is looking to tackle the issue of labor from multiple fronts.

“Everybody wants the employee that has 10 years’ experience, is a veteran of their trade, and works well with others,” DeAlmedia Roman said, recognizing that those workers are hard to come by: “You have to create them and invest and ultimately make those employees,” she said.

And ABC NJ is trying to do just that, including with a U.S. Department of Labor apprenticeship program for 19 trades. To meet labor challenges, the organization also has an “earn while you learn” initiative.

“We get these individuals placed with our members so they get the hands-on experience,” DeAlmedia Roman explained. “They get paid while they are, obviously, working and going to school, and at the end of the day they get to build a meaningful career where they can ultimately start their own business if they want to and get trained in a profession where it could be very lucrative.”

“And that’s to the credit of the state. I have to say, there’s a lot of money out there for apprenticeship grants,” she said, adding that unions and other organizations like hers were pursuing similar courses as a result.

On the engineering side, the increase in available federal funding for infrastructure investments through the Infrastructure Investment and Jobs and the Inflation Reduction acts is shining a light on an engineering shortage that stands to get worse. “There simply are not enough engineers to do all the infrastructure work planned or underway in the U.S.,” asserted a May article published by the American Society of Civil Engineers exploring that dearth.

Thaon confirmed that engineers are in short supply. “On our end, it’s really similar in a sense that we need highly qualified individuals, and they’re really hard to come by,” he explained, agreeing with DeAlmedia Roman.

Thaon said Bohler likes to get involved with students at the college recruitment level, which can offer a glimpse into “what paths are available to them.”

“So, we’d like to spend time, even before college, truthfully, even at the high school level,” Thaon, who himself got his start at the firm as an intern, said. “You know, volunteering time to speak with students and to discuss with them what the options are, as well as going into a college campus and again, doing speaking engagements with them, being at career fairs, helping, educating them as well as bringing them in for internship programs that are paid programs.”

To take uncertainty out of potential workers’ conceptions of what a career in construction may look like, DeAlmeida Roman explained that ABC NJ is meeting people where they are to offer first-hand knowledge of the pathway.

“We have some really cool equipment that we like to bring on the road,” she said, going on to describe a 26-foot-long goose-neck trailer with two heavy equipment operators and some simulators. “Handing somebody a piece of paper is not always the best way to entice them into looking into a career in the trades,” she explained. “But when they can sit behind a machine and go through a simulation of what it would be like to be a heavy equipment operator, that piques their interest.”

The outreach is also helping to change the culture and perception that surrounds the industry, another stumbling block toward building its ranks. “We can certainly talk to the kids and the young people, and they can express their interest, but if they don’t have the support of their parents or the adults in their lives—you know, we want to make sure that those individuals are on board and understand that this is a career path and not just a fly-by-night job.”

Brave new world

With skies tinged in hues ranging from yellows and golds to orange last week in the Garden State, yet another kind of uncertainty – along with the steps being put in place to try to mitigate and meet its challenges – hangs in the air. From building differently to withstand new hazards, regulatory costs for policies that aim to abate those complications, ESG considerations being tied to projects, or changing standards and processes for builders, sustainability is “sort of the way of the future,” said Santomauro. “More and more on the development side is going to be incorporating those elements.”

Thaon said his firm is seeing requests for sustainability to be incorporated into projects. Sometimes, that’s because where a company’s funding is coming from dictates it, other times, it’s because a company is trying to achieve its own ESG goals. As highlighted by Santomauro, the real trepidation, or what may be perceived as such, comes down to cost.

“[B]ecause these things increase those requirements, whether it’s additional layers of review, whether it’s additional design requirements, whether it’s incorporating additional more costly materials measures, whatever the case may be—all of that adds to the sort of intricacies of a project that we’re talking about that can impact cost and time, which are the main drivers of a project,” he said.

“If somebody will pay for it, we will absolutely build it,” DeAlmedia Roman said, adding that if new building techniques require additional education, keeping members informed is inherent to her and the association’s work.

The panelists agreed that, since the onset of the COVID-19 pandemic, everyone is navigating a new normal. But the industry is making its way.

“I don’t think that we will ever be back to the normal pre-COVID,” DeAlmeida Roman said. “At least not one that I can see. But generally, my members are doing very well. They’re busy.”

And new normals – adjusting to supply chain disruptions, inflation, incorporating AI – are cropping up all the time. Even though it’s a lot to contend with, the panelists reflected an industry willing – even eager – to confront issues head on and more than expect the unexpected—plan for it.

“But I think, you know, the industry as a whole—it adapts to changing market conditions, changing labor force conditions, changing technologies, changing legal landscapes,” said Santomauro. “The industry has always figured out a way to adjust and adapt and I don’t have any doubts that they will continue to do so. There may be obstacles along the way. There may be dips and valleys, but ultimately it’s adaptable, and when there’s a need for building,” it’ll get built.