As most industries recover from the impacts of the COVID pandemic, builders and developers are still facing challenges with the supply chain, workforce issues and market uncertainty. In spite of those challenges, industry leaders are forging ahead in shaping Nevada’s skylines. Recently, builders and developers met in a virtual roundtable, sponsored by City National Bank, to discuss Nevada’s commercial real estate landscape moving forward.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together leaders from different industries to discuss relevant issues and solutions.
How are Supply Chain Issues and Shortages Constraining this Industry?
Guy Martin: We are seeing, what I will call, “fabricated shortages”. We saw it in the late 90s with cement powder. When Cemex, who is arguably the first or second largest producer of cement powder, shut down a kiln and stopped making cement powder they fabricated their shortage. Are there legitimate supply chain issues? Absolutely. But the one thing my clients are having a hard time choking down is, [they] write the PO (purchase order) and get the order placed, but there’s fine print in the PO that says you pay a “produced” price. (This refers to the price at the time a product is produced, rather than a pre-agreed upon price.) So, they get whacked with a half a million dollar up-charge because the price went up 50 percent. Some of these pricing challenges are actually just taking advantage of a market. We’ll work around some of this, but some of it is just gouging. This has gotten to be very complicated waters to navigate.
Larry Monkarsh: Trucking is one of the other avenues they’re playing games with. Freight charges are quadrupling overnight and they say they don’t have any trucks available. You call their bluff. I’ve got a half dozen trucking companies that I do work with. I call them up and say, “Hey, can you get a truck to North Carolina to pick up my AC unit and get it here?” They go, “Sure, no problem.” We call the company and have it on the dock to pick up. Lo and behold, the next morning it’s on a truck. There is gamesmanship going on and they’re basically holding everybody over a barrel.
Dan Morgan: On the multifamily side, from an availability perspective, we had a project sit for almost a month waiting for window packages. It’s just sitting there framed out, ready to go. [We’re waiting for] everything from window packages to PVC to hardware drawer and cabinet pulls. It’s a supply issue that’s affecting the cost significantly.
Aaron West: It’s interesting that this came up because [Nevada Builders Alliance is] commissioning an economic analysis. We’re really struggling, especially in northern Nevada with trying to understand why our prices are so much higher than in comparable markets like Rockland, Roseville, Boise or Salt Lake. We’re going to be diving into it because there’s definitely something that just doesn’t add up.
Where are you Seeing the Biggest Spikes in Cost?
Michael Russell: [We’re seeing cost spikes] in materials. We did see some relief in lumber in Q3, but because of some flooding in British Columbia, some of the mills shut down. Basically, pricing on lumber doubled between November and December of last year. We’re seeing those prices hold, although the industry is telling us that if interest rates climb, and home builders slow down, some of this may abate, to some degree. We don’t think it’ll ever go back to what it was when all of this started in December, early 2021, when we [saw] the huge cost increases. But, it’s still kind of a day-by-day thing. We can’t pre-buy lumber far ahead of our projects because there’s allocations that every one of our suppliers have.
Monkarsh: Electrical gear in the last six months has nearly doubled. Gear that [normally] costs $125,000 is over $200,000 today. We’re looking at different building materials. We’re using a new panel-insulated system that saves money on future TI’s (tenant improvements). So, we’re doing things that are going to, hopefully, hedge some of these material price increases going forward. One of the things we’ve noticed [from] some research we’ve done is, not all of these items are coming down to availability of materials. A lot of it has to do with the subcontractor base and their availability to handle the workload. [We are] making sure they are prioritizing their orders properly and, when they receive an order, they immediately turn around and place it.
Jeff LaPour: [Rising] land prices and interest rates have been a function of our business forever. It is what it is; we find a way to work around it. The biggest issues I see are cost and schedule. Schedule is just as important, if not more so than cost. Costs are way up – [with] the percentage increase in things over the last [few] months. Schedule is, really, the biggest surprise to me. I’m not talking about waiting for material as much as just trying to get the job executed.
How Concerned are you About the Rise of Interest Rates?
Erik Skogstad: The cost of money is concerning right now with interest rates. The Feds noted that they might raise interest rates up to seven times this year. That’s concerning [because of] what that may do to construction in the near future. [Cost] is the main nut when developers start deciding how they’re going to develop a project; [it’s] the amount of money they’re going to pay for getting money. The higher that goes, the higher the cost of their project goes, the less likely they may be to building some projects.
LaPour: There’s been a big run up in rent in industrial, specifically, that have helped cover up some of the cost issues we’ve been facing, both land and construction cost, but it’s been a rapid run up. Adding interest rates and cap rates at historic lows, while it might not halt construction or development, it’s probably going to impact the acquisitions of industrial and the underwriting of the deal. But, demand has been strong [and] rates have been rising consistently. If [rental] rates flattened it would definitely slow things down.
How Difficult is it to Find Available Land?
West: In the last 40 years, Nevada has gone from 87 percent federally owned to 85 percent federally owned. At the end of the day, we’re still up against that. The lack of available land is evidenced by the fact that just about every county in the state right now has a lands bill they’re pushing through congress to try and get more federal land into their possession.
Michael Dermody: Land availability is an issue north and south, the BLM (Bureau of Land Management) controls most of the land in the state. Having said that, you go out to northern Nevada to TRIC (Tahoe Reno Industrial Center) where Tesla is, [there is land]. Where we’ve tried to plant our flag is Apex. We’re in the process of developing a 660,000-foot spec building in Apex. We think it will be a market leader. There’s a lot of people I know that are doing a lot of spade work in Apex, and that’s a good antidote to limited land supply. Availability of land is always an issue, but a lot of areas are addressing it.
Shawn Danoski: Land is an issue, and the opportunities at Apex in North Las Vegas are going to open some new ground for southern Nevada. Figuring out how to get more land is going to be important.
Scott Loughridge: There’s also a total lack of long-range planning by BLM to release these lands. What is the plan to release this ground? It seems like there should be a federal/state/local partnership program to give local governments that looks out 5 to 10 years to plan for the future release of the ground. [They could] then plan for infrastructure. That just seems like an easy way to help mitigate some of this issue.
How did the Construction Industry Respond to Covid?
Martin: Our industry invented the term PPE (personal protective equipment). We understand it. I’m super proud of the industry and the way they stepped up and figured it out. I’ve never seen sneeze guards installed between two tradesmen on a boom lift and we had it at the convention center. I’ve never seen three plaster guys jump out of a truck to go shoot plaster on the outside of a building wearing masks in the truck, and they did it. Our industry responded very well. It also revealed the people that would take advantage of COVID and the trades and call out sick or take PPP (Payroll Protection Program) money. It brought out the worst of our industry, too. But, overall, our industry probably responded and behaved better than others.
What Challenges are you Experiences with Permitting and Regulations?
West: One of the issues we’re seeing on the regulatory side is, they’re stressed, from a workforce perspective. We have kids just coming out of college with a civil engineering degree being asked to review civil improvement plans. They’re going by the book and, in a lot of cases, questioning very senior engineers. We have examples of where it’s costing more and taking longer to review [a project] than it does to design. A lot of it is [due to] labor. There are some good [examples] in small jurisdictions like Carson City that don’t really have an impact. But there’s certainly bad [examples], like the City of Reno. The fact that they allow building permits to be appealed after they’re issued is absolutely nuts.
Morgan: It seems to go in cycles. Everybody is doing interesting things to delay the process. Whether it’s administrative, the appeal of permits or final maps, or inspectors making arbitrary interpretations to code holding projects up, it’s a very significant problem.
Monkarsh: The length of getting things done now, [the entitlement process], is going to 28 to 30 months. Getting through current planning for your land use application has doubled or tripled because everything’s online now. You can’t get face to face with a planner. In the old days, you’d have a meeting, they mark [the plans] up, then you’d go back to your office, fix them and bring them back and you’re in. [Now] you submit by a February 8 deadline, they take two weeks to review it and they give you corrections. You just missed two more cycles. A lot of that is on the front end.
Skogstad: The self-certification program in North Las Vegas has helped a little bit. I know Clark County has been doing that as well. But, in our experience with them lately, they’re still trying to figure it out. We put in for some permits that should have taken a much shorter period of time. It’s almost as though we’re going through the same permit process that it normally would be because they haven’t figured out how to do self-certification yet. Clark County has always been very slow in the process, and it has not gotten any better.
Reed Gottesman: The challenge is certainly bottlenecking the development pipeline as we push out deliveries. That creates a significant risk for us moving forward. [Right now] we’re seeing that 18 months is not 18 months. In the county, our best-case scenario if everything goes smoothly moving forward, which it hasn’t, we’re hoping [it will take] 28 months.
Russell: We deal with a great number of jurisdictions, both north and south, Storey County and some of the outlying counties. In the south, city of North Las Vegas has their self-certification process, which I think is their attempt to help everybody locate business in their jurisdiction. The reality is, all the other jurisdictions in Clark County have very lengthy entitlement permit processes. On a simple permit, because of the drainage and offsite improvements, you can spend 9 or 10 months just trying to get a building permit. That doesn’t account for any entitlement you might have to do before. It’s been compounded by the fact that all the cities and jurisdictions we deal with have a labor shortage.
Loughridge: I’m concerned about the way in which southern Nevada companies get to market. Like [was] just mentioned, I’m hearing the 28 to 32-month range. My worry is that we’ve got potential clients coming to town, wanting to be here. They hear that time frame and go, “No, that doesn’t work. We’re going to Texas.” That is going to bite us in the [end] here, if it hasn’t already. Our worry about [meeting] demand is going to go away because the market is going to other states because they can get [building done] much sooner.
How does Nevada’s Water Shortage Affect the Building Industry?
LaPour: Like climate change, we just kick the can down the road. Everybody knows about it but hey, that’s tomorrow’s problem. That seems to be the general attitude. [Fixing the problem] starts with expense, they’ve made the price of water very expensive. Everybody is concerned, but there’s a lot of measures that can be taken that haven’t been taken yet. They [probably will] feel drastic to people, but it’s a big issue. It’s a regional issue, California has a problem, Arizona has a problem, it’s a big topic issue for sure.
Dermody: In northern Nevada, TMWA (Truckee Meadows Water Authority) is predicting that, through the end of the century, we’ll have water, even allowing for some drastic, unusual circumstances, like we’re having right now. It’s an interesting study. Water is a management issue, above all. It’s scary for all of us, but at the end of the day, there’s some really good people trying to manage it well, particularly in the north.
Danoski: I personally don’t believe water is a problem yet. But, I believe the perception of water being a problem is what’s being painted out there and we have to mitigate that. It is a management issue and water is being managed, but it’s also being used as, somewhat, of a scare tactic. That’s not healthy for our community.
Gottesman: It’s a [matter] of stakeholders coming together and figuring out the best solution. A [misconception] can hurt southern Nevada. Companies could eventually say, “You know what, that’s an issue,” and move on to the next city. Perception alone, if this isn’t managed correctly, can hurt us.
How is a Changing Workforce Impacting your Business?
Skogstad: One of our long-term issues is an aging workforce. There’s not as many young people coming into trades and we’re very concerned about that. Finding quality people is always an issue. Also, bringing people up through the ranks is [another] issue that needs to be addressed relatively soon. We need to start getting more of these individuals into our trades.
Robert Potter: Kids don’t want to work today if they can’t do it on a computer. Issues with the border and immigration are compounding our problems. There’s also poaching going on. Some of the people within our individual companies are now moving around to get a little more money. I do wonder, if we didn’t have COVID, would I have a full workforce? If I’m supposed to get five plumbers today, I get two. I suspect they’re robbing one job to cover another job. A lot of people don’t honor the commitments that are made.
Martin: Workforce development is a big deal. All the unions have closed their apprenticeship programs because they’re under a DOL (Department of Labor) law federally that says they must have a certain amount of journeyman hours being placed before they can place apprentices. There’s no journeyman work, so they’re not taking [new applicants].
Dermody: Out of these dark times we could have a huge reinvigoration of apprenticeships. The apprenticeship program is not a money fix as much as it is a time fix. All the ability [in this industry] and others, could make a real difference in the state of Nevada for apprenticeship.
Martin: This issue goes back to the dinner table when parents make it okay for children to choose construction as a career. That’s where everything leaves the track. This is a societal issue. It took us 15 years to get where we’re at today to complain about it. It’ll take us 15 years, at least, to fix. It is a bigger discussion. There are a ton, almost immeasurable numbers, of empty apprenticeship seats because people don’t want to go into construction. This is not a programmatic issue. There is money to be made in apprenticeship, that’s guaranteed. There will always be available apprenticeship programs. This is an issue of getting parents to be okay with their kids going into the industry. When tradesmen and women work harder to prevent their children from entering our industry than they do to protect the nobility of the craft, we’re on a downward slope. That’s why our industry ages 17 months every 12 months. Tradesmen and women are not replacing themselves.
Kevin Burke: Shortages in skilled trades, professional staff, supply chain constraints [are all challenges to this industry]. But, if you look back to the hyper days of the mid-2000s, we’re much better suited to deal with these problems. For us, it’s easier to recruit from out of state than it ever has been. Even though a lot of the problems continue to be the same, it’s a little easier for us to deal with because [the industry] is just in a different spot. We’re going from our adolescent years to our young adult years.