In many ways the commercial real estate industry is thriving. While the industry isn’t facing the issues it was during the recession, builders and developers are facing and adapting to a new set of challenges. Recently, executives representing builders and developers in Nevada met at the Las Vegas office of City National Bank to discuss building and development industries.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. This magazine’s monthly roundtables bring together leaders to discuss issues relevant to their industries.
How big of an issue is construction costs?
Doug Roberts: If you look at land availability and the constriction of land, construction costs are going up, interest rates are going up, so the cost to make a project pencil, just on pure economic basis, is probably the biggest hinderance to development right now.
Chet Opheikens: I’ve seen somewhat of a plateau. Our lumber costs are actually dropping right now. It’s somewhat stable I would say. I’m expecting the first quarter to be somewhat level but, nationally, I really don’t know what’s going to happen between China and Trump with the tariffs. Planning with [all the unknowns], with our clients, is difficult.
Scott Loughridge: We saw a big bump [in costs] a year ago. I was talking to our pre-construction people yesterday in preparation for this and [they’ve] seen a little bit of a dip but it seems like it has leveled off. We assumed that everybody was going to have price increases at the first of the year but we really haven’t seen that, yet.
Jason Kuckler: Three, four years ago, we were changing the way we design buildings based on what we were seeing with material costs and then trying to build a better product long term. Last year, we’ve changed and gone back to the hybrid roof system. I’m curious as to what the construction guys are seeing over the next year or two with specific material costs.
Shawn Danoski: When we had the increases last year, people started approaching how to build more efficiently. The efficiency in building has taken place, while materials have stabilized, recognizing maybe a little drop. We’re building smarter; we’re building better. [In regards to] material costs, when the conversation first came out, everyone jumped on the bandwagon [of prices going up]. Some of it was real, some of it was an opportunity to increase margin and then stabilize.
Larry Monkarsh: Some of these numbers on construction got pushed to the end of the year artificially because they’ve put the pressure on you to order your building. Two years ago, we were designing all of our buildings in steel girders, steel joints and steel deck. Then we had to go back to the hybrid-roof system to save four to five bucks a square foot. The economy is slowing down a little bit. I think we’re going to start getting some better pricing from subcontractors. They’re going to need to find ways to keep busy to be able to keep their guys working, so they don’t lose those valuable employees they currently have. Even though prices might be going up on commodities, we might be able to see the subs taking a little bit less of a profit and being able to get more competitive to keep their numbers stable.
Robert Potter: I disagree with that. I think you’re going to see that, because of the shortage of the workforce, you’re going to have to pay more to keep good labor. People are stealing labor right now. If you’re saving something on material, you’re going to see an increase in labor. I don’t think it’s slowing down, I think it’s just repositioning. There’s just not enough good labor to go around so they’re stealing it and paying more to keep it. They’ve got to pass that cost on. What you save in material you’re going to increase in labor cost.
What’s the challenge with skilled workers?
Bruce Ford: [The] biggest challenge, I’ll say for our industry (banking), but it’s probably the same for yours, is finding high-quality colleagues and employees. That’s really tough.
Opheikens: A skilled labor workforce is a major challenge to us that we’re dealing with in recruiting, not only for what workforce pool we have today but recruiting for the future and getting the younger generation motivated to step in and want to be a part of our industry.
Dan Stewart: I echo my colleagues on workforce but let me take that a little deeper. Maybe a solution is our education system. It’s sorely needed, some solutions. We need skilled workers. We need to look at how we can help get them trained going into construction and development.
Danoski: Being a native Las Vegan, born and raised here, I see the trends of our schools and our education system. There was a pattern of pushing everyone to higher education and ignoring the skilled workforce. Targeting that skilled workforce—tradesmen and management—is a future opportunity we have [with] many students in school.
Aaron West: From the association perspective and what we hear from the over 800 companies that we represent, it comes back to workforce. I’m actually on the Governor’s workforce development board. I also was recently appointed to the commission of professional standards and education. I’m the first private industry person on that commission and the idea is to actually bring the voice of the private sector into the licensing process and requirements for teachers, so we’re really going to be pushing on how we get more skill-based education rolling and what that looks like.
Potter: Workforce development is clearly the biggest issue that we have and it’s only going to get worse because of the immigration issue. Millennials just don’t want to get out into the workforce and work. If they can’t do it with a computer or a smart phone, it just seems to be too difficult. We look at our workforce [and it’s] primarily Latino because they’re the only ones that are prepared to go out there and work hard. That’s our biggest challenge and it’s only gonna get worse.
Loughridge: We need the schools to get back to [an attitude that says], construction can be cool. We heard for too long, too many times, “If you can’t go to college, you could always go into construction.” [It’s as though] that’s a last choice rather than, perhaps, a first choice. I’d like to see, from the education standpoint, a renewed [emphasis on] shop classes and vocational education that would help kids get a start and then progress through the trade. A coupling of that and an increase in helping workforce development is critical in the near-term and the long-term.
Jim Stuart: Las Vegas’ opportunity is not in taking the long view of trying to build the education system. [We should], perhaps, take a more short and pragmatic view, which is to make Las Vegas cool, so that millennials want to relocate here. There’s an entire country that’s educating a new workforce. We just have to make this [the] location that they choose to live.
Where is the labor shortage most dire?
West: It’s across the board. Northern Nevada was using about 7,000 union construction workers before the stadium got going. Up north, for projects, those have all basically pulled back, there’s only about 2,000 now. When they try to ramp up again for the next phase of the Gigafactory, they’re going to be in trouble because labor is tied up [in Southern Nevada]. Between GOED (Governor’s Office of Economic Development) and DETR (Department of Employment Training and Rehabilitation), [we] came up with a model for looking ahead at workforce demands. We’re projecting that we need, over the next five years, somewhere around 130,000 construction workers in Nevada as a state. A big part of that is the fact that 25 percent of our current workforce is over the age of 55. It seems like every day there is another announcement. So what are we up to, $12 billion worth of projects now that are in the pipeline?
Stewart: I’m still struggling with this because I had phone calls from two different electricians last week looking for work. A large strip electrician laid off 250 employees in a day. There [is] some movement. I think eventually you’re going to see it when we get all that work but I think right now, there is an opportunity to shoot the gap. We are in between right now. The long-term trend is always going to be wages are going to be increasing. The minimum wage is going to be $15 an hour nationwide very soon. But, short term, there’s an opportunity. I would probably say through the third quarter of this year. I see a really nice strong 2019. I’m getting worried about the fourth quarter leading into the first quarter of 2020.
Loughridge: We’re doing two identical healthcare projects down here. We priced a third one, identical, in Reno in the summer. There was anywhere from a 15 to 20 percent increase in Reno for the same product that we’re building down here. I think it’s labor. I mean the concrete is 40 percent more up there for a flat slab and some footing. We couldn’t wrap our arms around it.
Roberts: It’s not getting better anytime soon.
Monkarsh: There’s no new blood, you’re just recycling old blood. We put out ad upon ad every week and you’re seeing the same people respond to the ad. Rarely do you see somebody coming out of college with a construction management degree that actually wants to go to work in the office in construction.
Potter: In the old days, we were actually in a bubble. We were always doing good when other parts of the economy weren’t. So we had an attraction for workforce to come here. There’s other places [where] the economy is doing very well. We’re not the only one now, so, we don’t have that ability to attract those guys from a reduced labor force to come here because they’re making a good living at home.
Stuart: Las Vegas now is on the precipice of identifying as a major-league city. Rather than singularly focusing on, “What company can we recruit?” instead, [we should think] more holistically so the state itself is attractive to an educated workforce. [Those people would] seek it first as a low cost alternative but finalize their decision because they want to live here. They move in tandem with each other. The brand of Las Vegas, paradoxically, is driven towards the behavior of tourists. And as much as we, or the convention authority, would celebrate, the idea of “What Happens Here, Stays Here,” that is contrary to producing people who want to live here. Somehow, there needs to be a balance between the message so that people want to be in Las Vegas and not simply [promoting] it as a place to visit. Frankly, [we] couldn’t have this conversation pre-Golden Knights and pre-Raiders. We’re about to be on a national platform. Not to be thoughtful or deliberate about what we do next would be a wasted opportunity.
Opheikens: It’s an opportunity for a viable community. I agree. The major league teams, the Smith Center and things that have been built, we can take advantage of those.
David Picerne: Do the jobs or the people come first? Look at Portland. It rains every day in the winter, yet it’s one of the fastest growing cities in the country. Now, a little of that is out-migration from California but, it’s also hipster central. What you’re saying is, if this becomes a desirable place for young people to want to be, the jobs may follow.
Danoski: With our population approaching three million in Southern Nevada, the professional sports teams and some of these new living communities going up, it changes the dynamic of who we are. We can capitalize, if we capitalize on creating an environment that people want to be in, outside of the strip.
Ramous: I think there is more urban opportunity here, too. We’ve had the ability on the east side, the east side is untapped. If you bring two or three major tenants in that side, it’s going to stimulate that area and the proximity is incredible. There are opportunities both to capitalize urban but also to further growth. [We should work] with UNLV to take the next step to be around a university and research. You have the infrastructure there, you have lines to go between the airports and downtown. The east side will be an untapped area you just need two or three companies to spur and create that opportunity.
What is happening with financing and interest rates?
Lance Bradford: A significant challenge for us, here in Nevada, is the economy and the raising interest rates. We have a lot of room for growth here and a lot of good things going on but I’m interested to see what happens when the national economy, the rates and those things, slow it down. Otherwise, I think we have some really good years ahead of us.
Kuckler: One of my biggest concerns in the real estate industry over the next couple of years is private financing. I see two types of developers in this town: institutional developers and non-institutional developers. Non-institutional developers are financing through private debt, which nowadays is all non-recourse. As long as that continues to get funded, that non-recourse debt for the private guys, that will continue to develop the light industrial flex product and the smaller entrepreneurial product that we need in this town.
Bradford: We just have to see where it goes. We’ve had quite a few good years here. There was good financing from a development standpoint to get things built. With these increases this past year and the unsettling of the tariffs, economy and the change in the government, it’ll be interesting. That could slow things down. On the good side of financing, I’m seeing more institutional capital start to come back. That’s positive. Through the recession, that really stopped to ground zero. So, from the capitalization standpoint, not so much the lenders, we’re starting to see institutional believers again and we’re seeing a lot of that. I hope that continues going because that helps offset [uncertainty].
West: Hopefully we continue to see [positives]. Last month was the best month in foreclosures, residential foreclosures are actually down a point. Hopefully that provides some stability from a regulatory perspective. To see banks get back into the A&D (acquisition and development) financing would be tremendous. At this point, it’s all private equity and high return. You can’t buy land right now through a bank.
Ford: We are lending in other areas but you are probably right. We used to do a lot of A&D stuff. The banking industry certainly doesn’t do it like it used to. You are correct about that.
How will the new make-up of Nevada’s legislature affect this industry?
Danoski: There are bills are already being proposed from real estate transfer taxes, added sewer connection fees to providing expenses for specific programs. I think we’ve only seen the tip of the iceberg of what is forthcoming.
West: Senator Riley is proposing a renter’s bill of rights so, you’re going to see a huge impact on the apartment side.
Danoski: Once [they start with] residential they may transfer into commercial.
Stewart: What are the chances of them rolling back construction defect?
Potter: They’re already having meetings. I spoke to Jason Frierson, the speaker of the house. He’s already had meetings with trial attorneys. It may be substantially residential, but if they get it back in, they’re going to bootstrap it. They’re just going to keep banging on the door until they get it over into the construction portion of our arena.
Opheikens: It impacts multi-family drastically also.
Danoski: This legislative session could add one, two, three points to the cost of all of us doing business. That could be a ripple effect when it comes to affordable housing, rent growth or just how we do business.
West: Look at it from the standpoint of obtainable housing. We eliminated an affordable option for people to buy because construction defect was so bad. Now that we were able to change that law in 2015, we’re actually starting to see projects come back. If they have their way [that could reverse]. The bill has already been proposed, it’s a committee bill out of the Senate. It’s moving forward so we’re all preparing for it.
Potter: [We should] be aware and be involved in the coming legislature. It’s going to impact us much more than we all think right now. They’ve all got their pens and they’re ready to sign for more money. I will be there, and I expect to see everyone else there because we’re going to have to fight to maintain status quo.