Listen to this article

During an April 30 NJBIZ Construction & Development Panel Discussion, experts offered advice on taking precautions during uncertain times as well as insights into the industry, its challenges and opportunities.

Editor Jeffrey Kanige moderated the virtual event, joined by:

• Chris Erb, executive vice president and head of development, Russo Development 
• Donald Hoffman, partner, EisnerAmper 
• Lisa Lombardo, director, Business & Commercial Litigation Group, Gibbons PC 
• Michael Leondi, vice president of construction & design, Rockefeller Group 
• James Thaon, principal and branch manager (Red Bank), Bohler 

The discussion explored global headwinds, rising costs, labor and education issues, artificial intelligence and technological advances, sector specifics, office conversions, diversity and more. It kicked off where most things start in business, as Kanige put it, with money.

Regarding materials costs, panelists agreed they’ve mostly stabilized.

“If you can negotiate, I think that’s a great thing,” Hoffman said. “But there’s always uncertainties out there.”

“It’s certainly not cheaper, right? Nothing is cheaper,” Erb added. “But it’s definitely evened out a little bit.”

While costs may have eased up, certain items are still subject to delays. Switchgear, subject to longstanding, nationwide delays since the pandemic, received multiple shoutouts.

According to the Associated General Contractors‘ 2024 Construction Industry Hiring and Business Outlook Survey, Northeast respondents are speeding up the buying process after winning contracts (58%) and turning to alternative suppliers (45%) to combat supply chain issues.

In this new reality, panelists said keeping a finger on the pulse is key.

“What I’m hearing from my owner clients that are developers — there’s a high expectation on contractors and suppliers that they’re monitoring these headwinds,” Lombardo said.

They needn’t be able to predict the future, but they should be able to make an informed decision to lock in pricing. Lombardo added that precautions – like force majeure or escalation clauses – could help. She recommended “dusting off the contracts.”

“Owner clients, developers really want to get a sense of, what are the supplies? What are the goods that you’re concerned about? And let’s put some terms around those goods that if they go up or down over a certain percentage, and you demonstrate with documentation that you cannot get this, you need to give over a certain percentage, then maybe we’ll consider a change order,” she explained.

Labor issues

As New Jersey operators know, another cost point for businesses is that of labor. The Garden State is often lauded for its educated pool of workers as well as the plethora of colleges and universities producing new recruits. Panelists agreed, when it comes to fresh talent, there’s plenty available.

“We have such great local schools in New Jersey that have great programs for students. … And that’s a great thing,” Thaon said, adding: “It takes a lot to attract them though.”

“Students coming out of school are smarter than they’ve ever been and they have some realistic but demanding requirements that they need to go work somewhere, which is an exciting time for us, because I think just the general sentiment of what it means to go to work and what you’re supposed to get out of your day-to-day has changed over the last several years,” he said.

Replay: 2024 Construction & Development Panel Discussion

Click through to register to watch the full panel discussion!

Erb and Leondi expressed concern about the opportunities that are lost with the integration of hybrid and remote work scenarios.

“You’ve got options. And you’ve got access to a lot of talent … but if you’re a company that’s looking to kind of grow talent and bring new talent on, man, you better be a company that really insists on in-person work, because it’s really difficult to learn how to do a new trade over a Zoom call,” Erb said.

Leondi stressed the importance of face-to-face encounters for building company culture. “I do think it’s paramount that, as an employer, you set yourself apart and develop a brand and develop a culture and develop a passion argument for both new and existing talent of why — why your office is a fantastic place to work,” Leondi said.

He, Erb and Leondi all agreed that finding more tenured talent is more of a challenge.

Similarly, when it comes to skilled labor the demand is there, but the workers are not.

“I probably have two dozen clients right now, they will say, Don, do you know a good project manager or an estimator? And I said, ‘Yeah, I know a lot of them, but they work for our clients,’” Hoffman explained. “And people with experience? I mean, try to find someone with five to 10 years’ experience. Good luck. It’s just not happening out there.

“And it’s a very challenging environment and wages are going up significantly because of the shortage,” Hoffman added.

AGC found that 61% of participants increased base pay rates more last year than the one prior. Only 7% reported no increases in pay, incentives or benefits in 2023.

While 69% of respondents in the AGC Outlook said they expected to increase their total headcount in 2024, they did not anticipate it would be easy work.

Lombardo pointed out that there is a major issue with the lack of people entering the skilled labor market. At the same time, many people are also aging out of the work.

In the AGC report, 73% said they were having a hard time filling some or all positions. Looking ahead, 31% said it will continue to be difficult to hire, 20% anticipated it becoming harder, and 35% expected no change. Just 13% thought it would become easier.

Lombardo suggested that kids in high school need more available and presented options. “You know, college is wonderful for a lot of students,” she said. “Maybe it’s not the right path for everyone. Here are these other opportunities – because there are a lot of those opportunities out there.”

She offered that technology may be able to help bridge the gap, too. According to the AGC survey, the majority of respondents will make no change to their technology usage in 2024.

For Leondi, there are plenty of areas throughout the industry that could benefit from tech upgrades. “You know, construction utilizes technology at a rate of second to last across all major sectors of the economy,” he explained. “I think we need to focus on the operations and design and helping put challenging sites into production instead of some of the other stuff.”

Thaon offered a reminder that if a firm is interested in adopting advances, like AI, it is important to understand the risks.

“There needs to be true investment in your company, by your company, to use it or not,” he said, adding that now is the time to act.

“I think now is the time to invest if you’re interested in being able to use that [generative AI tools] when it comes,” he added. “You really need to be investing in getting your systems in place today, so that when things like that do come out, you’re actually in a place to utilize them for tools — like using it for design or using it to help think about how to write a pro forma, for example.”

When it comes to robots literally doing construction work – we’re not there yet. There are tools to help, but getting sector or worker buy-in isn’t always easy.

Thaon echoed the slowness of the construction industry to adopt technology. “And that’s a conversation with labor, as well,” Leondi added. “Because there is a reluctance to, quote unquote, ‘take somebody’s job away.’”

However, the benefits often prove themselves. “Through the utilization of things like digital twins, you can have a robot doing framing layouts or outlet layouts, or whatever that saves a tremendous amount of time and cost.”

Hoffman sees potential for his clients in the use of AI and other tech.

“I think this is going to ultimately take it to a whole new level, because I do believe that it will get to the point where you can scan drawing and you can get takeoffs and things that are done without a human actually going through the detail process they do now,” he said. “I think it’s going to reduce a lot of time and mistakes down the road.”

Lombardo spoke of the reluctance to integrate such tools. “I think there’s fear, and there’s trepidation, too, about what it will mean for people that’re doing those jobs that can now be dome more efficiently through AI.”

Beyond that fear, Leondi expressed concern about what is lost in employee development and institutional learning when more mundane tasks, like creating meeting minutes, are no longer handled by junior associates.

Sector report

The industry is adapting to changes elsewhere, too, as sectors rise and fall with demand.

Converting office space to something more useful in the moment, like multifamily housing, is a popular topic of discussion. But that doesn’t mean it’s actually feasible. “What works a lot better than converting office — tear down, start from scratch,” Erb explained, pointing out that “Tomahawk Missile strategy” is a lot more efficient, which is more important than ever.

Conversions can work. But when they do, it’s usually in urban settings, rather than suburban areas.

Erb argued that for many municipalities eliminating old office space could be a boon.  “A lot of times, especially if it’s a municipality that’s very heavy in suburban office, coming off of the last cycle, and they probably have an affordable housing issue,” he offered. “As a result, that’s a strategy that many of these towns are open to, even at the loss of the ratable that some would argue there is.”

Leondi added that because office buildings weren’t designed for whatever use you may want to convert them to, “it’s more of a headache than it’s worth” and you end up with a questionable product that may not speak to potential occupiers.

Industrial space demands have also prompted the reevaluation of outdated office space.  Thaon said he is seeing a lot of this work from 2020-2023. Amid challenges – inadequate zoning and road networks, pushback from townships and residents – now, he sees the trend shifting to multifamily takeovers.

Lombardo wondered if we hadn’t gone too far, already, in the suburbs, calling the amount of development she’s seen “really tremendous” and citing incentives offered to attract new tenants.

“My perspective [is] we continue to have a massive shortage of housing in New Jersey for the number of people we have,” Erb said. As an indicator of health in the market, he pointed out that New Jersey still sees healthy gains in rent. “I have this debate with our head of construction all the time,” Erb explained. “He’s like, ‘you’re looking at another project? … How can you be doing more?’ And it’s just the demand is out there. And I’m not going to be so foolhardy as to say that it’s going to continue forever. But it’s still very healthy here in New Jersey, I think.”

On its own, it’s no secret that the office market is still very tough.

“In the retail world, we used to say we’re not overbuilt, we’re under demolished, and I think that is very well said for the office market right now,” Erb said. “We’ve got to demolish some stuff and turn it into and repurpose it into other things before we see material gains on that side of the asset class.”

Industrial movement

In the industrial space, while things are no longer “bananas,” as Leondi put it, the sector is still strong.

“The pace of absorption is probably eased a little bit, probably touched … by some of that economic uncertainty we touched on earlier,” he explained.

However, “Capital is making its way back to the market.” For those confident in their real estate strategy Leondi said his advice is to jump back in now.

“There is going to be a dip and available inventory construction starts have taken a nosedive in the last six to 12 months,” he said. “So, vacancy rates right now are probably peaking in the next month or two or three tops, and I think we’ll be short on supply a lot more quickly than people might realize. And then that’ll drive rent growth again.”

In the first quarter of the year, New Jersey’s industrial market was still one of the hottest nationwide, despite being “cooler” overall. In its wrap up of the period, Cushman & Wakefield pointed out that the sector’s under-construction pipeline has fallen for six straight quarters.

Hoffman lamented rising rents in recent years that effectively held his clients hostage. “A lot of the buildings were bought up by REITs, and they were raising their rents like 40% and they [the clients] had nowhere to go,” he said. “There was just no availability and a very, very painful bottom line of these companies that needed these large warehouses.”

Thaon said the cooldown had been good for Bohler. During the flurry of recent activity, he said landowners were cold calling the firm looking for industrial designs.

“Because they had heard there was that much of a buzz in the industry; how valuable an asset they were. Thankfully, that’s stopped,” Thaon said, welcoming the onset of more “normal” circumstances. “There’s still a lot of interest, but there’s, I think, more strategy. There’s a lot of focus on the location … and I think that’s a good thing,” Thaon said.

When it comes to hurdles – panelists were quick to point out that the issue is not from the demand side in the industrial sector.

“I think we’re seeing a lot more fatigue from an entitlement standpoint,” Erb commented. “And so, I think that, coupled with the interest rate environment, has slowed construction starts. Let’s not confuse a tougher market with lower demand. The demand is definitely still out there, especially in New Jersey,” Erb said.

Let’s not confuse a tougher market with lower demand. The demand is definitely still out there, especially in New Jersey.
– Chris Erb, Russo Development

“The regulatory changes that have happened … dating back to 2021 had arguably the biggest impact to the industrial asset class,” Thaon said. “Because that’s an asset class that really benefits from large swaths of impervious areas because it needs to function appropriately. The regulations that came about really impacted that, which changes yield which changes the layout. And so it’s been very difficult with that asset class to get something that that makes sense and it’s marketable. But I think we’re coming to a space where it’s. It’s just kind of normalized in the industry.”

As may be expected in a business rooted in relationships, who you work with matters. “If you are in a willing town you can get through those entitlements pretty quickly,” Erb said. “If you’re in a town that maybe is a little bit more particular … I mean, there are the tools at their disposal to throw up as many roadblocks they need to slow your project down.”

The onslaught of new and changing regulations in the industrial space have added to pervasive uncertainty. And not just from the side of those trying to get projects done.

“When new regulations come out, even the reviewers themselves have to interpret the regulations … So I think that caused a slowdown on the review side,” Thaon offered. “And I also think that because of some of the regulation changes, particularly with flood hazard areas last summer, that create a large influx of submissions to the state and there’s a bit of a backlog.”

Lombardo asked about efforts to alleviate that through recent legislation that provides for the use of private inspectors in certain scenarios. While nice in theory, Erb again highlighted the role of politics and personality intertwined here.“I think building relationships with those onsite inspectors, with the planning board, or the planning staff members, is really your fastest and best way to get to the end,” he said.

Leondi seconded that strategy. “You know, we choose which towns we invest in and work in and develop projects,” he said. “And generally, it’s those that want to sit at the table next to us and roll up their sleeves and troubleshoot things together.”

AGC reported 31% of respondents cancelled or postponed work in 2023 with rescheduling while 41% did so without rescheduling. Overwhelmingly, the reason for postponing or cancelling was rising costs (60%). “The thing about New Jersey, though, is if you can get a project done in New Jersey, you’ve got a nice asset that will pay your rent and good rent and accelerating rent for longer,” said Erb. “So the risk is worth the reward here. But it’s definitely on a case-by-case basis.”