Inflationary pressures in the commercial real estate construction industry in Texas have presented significant challenges for contractors and developers. According to industry experts, the consequences of inflation and its far-reaching effects are becoming increasingly evident.
Project costs in Texas have surged by over 30% in the span of three years, accompanied by interest rate increases by the Federal Reserve, explained Tim Sommer, president of SPD Construction. This inflationary environment is expected to result in shrinking backlogs for private sector contractors well into 2024.
“Thankfully the population growth in Texas has given developers the confidence to continue pursuing projects despite the cost,” Sommer said.
John Atcheson, president of ARCO Design/Build, said his company’s cost-tracking history reveals the initial onset of inflation pricing came in late 2020, peaking in June 2022.
“We have seen tremendous pressure on the construction industry to keep up with the demand of the robust industrial distribution and warehouse market,” Atcheson said. “The outright demand for warehouse and distribution space, plus the inflationary market, created a perfect storm for cost increases and material supply issues.”
The uncertainty and volatility introduced by inflation have strained relationships among stakeholders in the CRE sector.
“The standard language in contracts that was typical for many years suddenly became scrutinized by all sides,” said Michael G. Scheurich, CEO of Arch-Con Construction.
Then, he added, financing projects became more arduous and time-consuming. Higher interest rates, construction costs, land expenses and equity requirements make it less likely for projects to advance to the construction phase, despite strong demand.
Although short-term trends suggest a slight decline in construction pricing on average, the industry still grapples with the consequences of inflation. While a return to pre-pandemic pricing levels may not be feasible, the short-term expectation is for construction pricing to continue decreasing if demand slows due to rising costs and the Federal Reserve’s persistent upward pressure on monetary policy.
There are positives to be found. Progress is being made in addressing supply chain challenges, which have plagued the construction industry for several years now.
“The lingering issues that the market is still experiencing are secluded to electrical components and concrete cement supply increased costs,” shared Atcheson.
Scheurich said delays with items such as doors and hardware, glass and glazing and appliances have seemingly been resolved. Like Atcheson, he is concerned about availability of gypcrete, cement and other gypsum products.
“Most other construction materials have returned to an about-normal timeline,” Sommer said.
Texas construction companies have been proactively managing the challenges they face by adopting effective strategies. Communication plays a vital role in mitigating project costs and timelines, experts told REDnews.
“Some projects are subjected to cost overruns and delays, but by communicating up and downstream, relationships can not only be salvaged, but reinforced,” shared Scheurich.
By establishing early and transparent communication channels with clients, companies can convey project constraints and explore alternative methods to minimize impacts.
“Our clients enlist our services very early on in the design process to make sure procurement issues are addressed,” said Sommer.
ARCO Design/Build emphasized the importance of agility, risk reduction and efficient project completion. Open lines of communication have been crucial in informing clients about evolving market conditions, including supply chain issues and inflationary pressures. Early and frequent communication allows for dialogue and proactive measures such as releasing materials ahead of time to ensure uninterrupted project timelines.
“We openly communicated cost implications on the front end of the project before a contract was signed, so everyone could understand the impact on the development. Once the contract was signed, we held our ground and kept our word,” said Atcheson. “One of our core values is ‘treat people fairly and do the right thing’ and that’s what we did.”
Maintaining strong relationships with clients and vendors is a key priority for companies like Arch-Con Construction as well.
“Adverse conditions like what we have encountered the past few years make great companies stand out, make good companies get better and make bad companies go away,” Scheurich said.
Some companies are looking to an innovative approach to address some of those issues: 3D printing.
CIVE, a leading company in the construction industry, is collaborating with PERI 3D Construction and HANNAH Architecture to create the first multi-story 3D-printed home in the United States. Over the course of two years, extensive lab testing was conducted to refine the concrete mix and perfect the home’s design.
“The objective of this project was to test the architectural limits of what 3D printing can do, gather data on the process, and use this information to scale 3D printing towards affordable multifamily housing in the commercial sector,” explained Leci Wood, marketing coordinator for CIVE, which is serving as the general contractor for the project.
The inspiration behind CIVE’s foray into 3D printing stems from the visionary mindset of its president and CEO, Hachem Domloj. With a deep interest in technology and innovative construction techniques, Domloj recognized the potential of 3D printing to revolutionize the industry.
“[It] allows faster, less expensive, stronger, weather-resistant solutions to some of the most common issues that the commercial sector faces,” Wood said, adding that 3D printing allows for architectural complexity without the need for costly cold form techniques.
Beyond their pioneering 3D-printed home project, CIVE has a robust pipeline of more than 1000 multifamily units under design, permitting and construction. The company envisions transformative 3D-printing developments that have the potential to revolutionize the construction industry and challenge conventional building practices.
“CIVE strives for excellence and beyond. We add value to every project we take part in and we believe in achieving higher than industry standards,” said Wood. “We’re looking to lead the design/build industry into the future not just with 3D printing, but by designing new and innovative ways to approach all the sectors: multifamily, retail, mixed-use, entertainment, hospitality, medical office, industrial, etcetera.”
Despite the significant challenges posed by inflationary pressures in the commercial real estate construction industry in Texas, companies have demonstrated resilience and adaptability. Contractors and developers have navigated rising project costs, supply chain issues and strained stakeholder relationships through effective strategies and open communication. With their experience, strategies and forward-thinking mindset, these Texas experts are well-positioned for success in the coming years, building our future.