Arguably the most beleaguered industry during the Great Recession, builders and developers have bounced back with a vengeance. Executives in this industry recently gathered to discuss their industry, the rebound and new challenges builders and developers face.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for this event. The magazine’s monthly roundtables bring together leaders to discuss issues relevant to their industries. Those discussions are recorded and a condensed version is published in the following pages.
How big of an issue is land availability for this industry?
JOHN RAMOUS: Certainly the challenge is coming back to a lack of land in core areas that we would like to be in. Not to say you can’t necessarily find land farther out. However, our preference is certainly in-field and around our centers. It’s becoming a challenge to find opportunities for us to grow for the next 10 to 20 years. The supply has dwindled and what we’re finding left is extremely challenging parcels.
SHAWN DANOSKI: Land is a very big issue. It’s not only the developable land, it’s the land that has infrastructure into it. There’s some good land but there’s no infrastructure, there’s no utilities, there’s no power to it. Those restrictions are going to make it very difficult to keep up the demand for the growth.
KEVIN BURKE: We’ve seen a disconnect between the cost of land and, ultimately, what you can develop on it. The land price should only be worth what you can develop on it, whether you’re on the Strip or off the Strip, it’s office, industrial or whatever. There is a disconnect with that, especially for speculative development. I can’t tell you how many projects that we’ve looked at for our developers that, by the time you run all the traps on it and you get to the end, you just can’t make the numbers work. What you’re going to see is prices go up, rent go up. Something’s got to give.
RAMOUS: It gets back to, again, location. We’re starting to look at our product that’s in-field, they’re being sought-after for e-commerce companies. They’re not the five or six hundred thousand square foot users, they’re small e-commerce companies that want to be located ten minutes from their client. Those are things that are going to impact this market. I’m glad that’s happening. It certainly doesn’t change our land issues; we didn’t get any more land and that’s certainly causing a problem.
GUY MARTIN: I think it was Rick Meyers [of Thomas & Mack Development] that said there’s a difference between land and real estate. Real estate you can build on, land holds the globe together. There’s a lot of land that the Bureau of Land Management (BLM) has, there’s not a lot of real estate. You start looking at the encumbrances that come with a property to get the infrastructure there. The problem is that BLM doesn’t have a mechanism to reduce the encumbrance of that improvement to make a difference on the value of the land. There’s no way to get it pried out of the hands of the people that own it that reflects the value of what it would cost to make it buildable. It’s a bigger conversation about how to get that encumbrance taken into consideration.
How competitive is this industry post-recession?
LARRY MONKARSH: In the construction community we’ve got a definite decision to make on how low we are going to go. Things are pretty cutthroat out there. Guys are coming in and chopping you off at the knees and I think the biggest hurdle for me is to consistently be low bidder and still not get the job. Integrity is one of the things that we’re coming up against where you put your heart and soul into something, you bid, you put your best foot forward, you’ve got the right number and you still don’t get the job. For us that’s the biggest constraint, where’s our time best spent?
BURKE: From our standpoint, the pendulum swang hard from the left which was just bid, bid, hard bid, hard bid. Now, the pendulum has swung all the way over and the majority of our work is negotiated. I think that creates space for us all to operate. Now the question is, what fee do you take? That’s what we see in the market.
MONKARSH: On the smaller stuff we’re seeing an influx of the Clark County building department cracking down on unlicensed contractors. There’s such a shortage of guys that will take the work for a quarter million dollar tenant improvement. You’re finding a lot of people coming in from out-of-state that are unlicensed and the municipalities are starting to go out there, inspect and crack down.
JEFFREY VILKIN: At the subcontractor level, we’ve seen a shift in the last four months from the general contractors mindset of who’s the lowest and cheapest to who can get it done?
JEFF WOOD: [Collaboration] is something important for everyone to focus on going forward. I don’t want a subcontractor to fail on your project because that’s going to impact ours. All the contractors in town need to be collaborating and talking. Going through the process of the Raider stadium, we’ve been working with a lot of our competition. We want to understand who they have signed up on their projects in pre-construction. We want to understand capacities and make sure we’re both not going to get in trouble. We’re not going to allow subcontractors to get in over their head.
MARTIN: In today’s market, this environment is more peers than it is competitors. Because you’re right, if someone fails on your job, he’s going to fail on two of mine and we have to talk. We have to communicate with each other and that creates more of a peer-like environment. I think you’re right Kevin, having the bulk of our work being negotiated loosens that noose.
Do clients have realistic expectations?
MARTIN: For us, the biggest hurdle is probably unrealistic delivery schedules on our projects right now. Everything has a catalyst. You can go to all these different factors, but it’s a time-money continuum and they’re giving less time and wondering why it costs more money. That’s a real arm wrestle. It’s further complicated by a fear of running out of materials and labor with these mega-jobs and all the stuff coming on. I don’t know how developers do it but we see stuff come across our desk from our developer partners and we’re like, “If we started tomorrow, we can’t get there.”
DANNY AMSTER: And of course there’s the unrealistic expectations of owners. [They say], “We can squeeze the subs and we can do it in less time.” Well, no you can’t. You’re lucky just to get bids. This is shades of 2006, it’s same thing.
How severe is the labor shortage?
AMSTER: My big worry going forward is, where are the people who are going to do the work? If you send stuff out for bids right now, nobody has the ability to bid. I’ve gone out to mill workers who say, “Our calendar’s full, we’re not bidding anything more this year.” Okay, now what?
BURKE: There was a recent national survey that came out and eighty-plus percent of general contractors are experiencing constraint, whether it’s hourly trades or salary employees. It’s not just here, it’s everywhere which is concerning because where do we pull from?
WOOD: The sub-contractor capacity, really has me worried. I think a lot of people are going to come home. McCarthy has offices in California and Phoenix. Those offices are scared to death that we’re going to take all the labor from their markets. The labor rates are really competitive here and the cost of living is much more desirable. I don’t think that’s going to have as much of an impact as the sub-contractors that were constricted over the last five to seven years had, when the market was really tight. Are they going to have the capacity to manage the projects that they’re going to be out bidding on? Are they maybe even potentially biting off more than the can chew? That’s something we’re really focused on, especially with the stadium awarding a lot of really big contracts. We’re doing a lot of due diligence on our sub-contractors, just making sure that they have a good plan in place to staff the jobs as well as manage the projects.
Is compensation the issue?
VILKIN: What we’re experiencing, literally right now, is, maybe the largest I’ve ever seen, run up in the compensation rate for labor. The guys who work tools, working in our divisions, are getting big rates, they’re demanding big raises or they’re not going to come to work. We’re thirty years in business here and our phones ring daily from crews of framers, hangers, tapers, painters, whatever the trade may be, who work together and are going to be done where they are in a week. Our phones ring when they’re looking for their next place to go. They all want more money, a lot more money. That’s putting a profitability challenge on our contracted backlog. We’ll get through that. But, in the longer term it’s going to mean higher prices.
SHAWN DANOSKI: The challenges moving forward are going to be labor prices. It’s not just manpower, it’s manpower with a skillset. Whether it’s a tradesperson or a management level individual, the amount of people needed to produce the amount of work that we have coming up just isn’t there. We’ve seen numbers on population growth, which means more construction, but are that many people going to move here fast enough?
What about home-grown workers?
MARTIN: We have a breakdown in philosophy in our industry that says that the tradesman aren’t working as hard to replace themselves as they did in my dad’s generation. My dad’s a career carpenter, he started in 1964 and was a carpenter all the way up until they started our company. I knew from, maybe six, seven years old exactly what I was going to do. I was going with my dad. Today, you have tradespeople out there making $85 to a $125 thousand a year in salary and they will do anything in their physical power to prevent their child from joining our industry. I believe this is a deeper issue within our industry. We lack the ability to willingly replace ourselves at a trade and professional level. The hurdle that our industry has is, you have to make parents believe that we are a safe and sustainable career. I believe the issue is at a social level within our industry more than just a training thing. You can throw all the money you want at training, but if it isn’t a viable thing, nobody’s gonna show up.
DANOSKI: That’s relevant if you look at the tuition rates and the construction program in the nearby universities, including UNLV. One of the smallest is the construction program and it’s hard to get people into it.
MONKARSH: Don’t forget that program was almost annihilated. Real estate is cyclical. We’ve all found ways to survive the cycle. My son has been exposed to the industry but he even questions [whether or not he wants to go into the business]. The real estate side goes up and down. I even tell him, strike while it’s hot, but it’s a training thing, it’s a mindset. I don’t know if we even believe it because we want to take advantage of those opportunities when they’re good. What I’m curious about is the programs that are tested in other areas. We, as a community, need to look at success elsewhere that’s sustained and then duplicate it or organically trying to do the same, which is somewhat difficult. I’ve seen great strides happening at UNLV with their real estate program, some on the construction side, but it’s not enough.
How Does the entitlement process Affect this industry?
BURKE: Could we be doing a better job in the Valley? Absolutely. But, we’re doing a pretty good job when you compare. Let’s take Austin for instance. It’s about the same size of this city and tenant improvement could take you four to six months to get through the process. We’re doing a good job here. I think Clark County Public Works, self-admittedly got a little caught off-guard by the industry. At Nevada Contractors Association (NCA), the permits inspection work hard with them to try to get them to staff up and get out in front of it a little bit. They’ve responded, albeit slower than we would like. It’s a convoluted process and it takes a long time.
RAMOUS: That’s well said, it’s all relative. The reality is, in other markets that we deal with, it’s much worse. It’s all relative to the area. I expect a slowdown over this next twelve months because we are starting to run out of land. It’s really a question of, is it two or three years where this continues? My gut feel is, yes it will. It’ll probably continue for the next couple of years. But I think we’re going to start struggling on some of the stuff here. The feedback we’re getting is, there’s quite a bit in the pipeline right now.
Is the current growth market sustainable?
RAMOUS: It’s steady growth, which is good, which I like to see. We’re not pricing ourselves out of other competitive markets with home prices; rates are not going up as much as I would have anticipated over the last two years. Yes, we have seen some incredible increases but they still aren’t where they were before their last downturn.
MONKARSH: I’d rather have this problem, struggling to find time to go and spend with your family because there is so much out there for you to do. There’s so much work on the table that we have to be counting our blessings at this time. I think 2018 will be a good year. The momentum will carry forward. Vegas came out of the recession a year or two later than some parts of the country and I think whatever cycle comes back in, we’ll be a year or two delayed into that. We’re projecting through 2019 to be pretty good and 2020 is an unknown at this time.
BURKE: Give me this environment to operate in versus any other. These problems are tiny compared to what they once were.