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Construction costs have increased steadily in recent years, outpacing the U.S.
inflation rate.

So, you think this is a labor crisis, eh? At 4.1 percent unemployment-the lowest level since 2000-everyone is struggling to find and retain good people. But the construction industry is worse, way worse.

The industry was hollowed out when the economy fell apart in 2008 and 2009. More than 1.5 million seasoned construction workers lost their jobs, and unlike other industries, they didn’t come back and young people aren’t eager to swing hammers in this opportunity­rich employment market. In fact, the construction industry labor force is 5 percent smaller than it was in 2008, meaning 400,000 fewer workers and shrinking, according to Bureau of Labor Statistics (BLS].

Conversely, the restaurant “Labor crisis” comes amid 24 percent growth in restaurant employment since 2008; ifs 2.4 million workers larger. Overall retail has grown by 2 percent or 311,200 people despite industry pressures from ecommerce.
That dire worker shortage and the huge influx of easy capital to every corner of franchising means prices are going up precipitously.

According to a Construction Cost index kept by national construction firm Turner Construction Company, prices across the industry are up 30.3 percent since the first days of post-recession recovery in 2011 through the fourth quarter of 2017. And prices are accelerating skyward, 5.7 percent of that price increase came in just the last year.

The workforce problem means a lot of seasoned, well-paid workers on site. Adam Meyer, who founded founder of Studio M Architects in 2010 said there are many senior construction folks on site.

Jim Smart of Smart Associates.

“I think you’ve got two to three senior people working on every job site, on every construction crew. You’ve got a project manager, a superintendent on the job site-never before did I see that,” said Meyer, noting that he’s seen fees as high as 20 to 30 percent of a project going right to general contractors.

Studio M, which administers construction sites for Uberrito, Cowboy Jack’s, MyBurger and Dunn Brothers, has had trouble just getting people to some sites even at the high rates.
‘We’ve had a hell of a time getting subcontractors to perform, they’re too busy,” said Meyer. “They show up when they want and don’t when they don’t. They can kind of rule the show.”
Fast growing Dallas, for instance, is 20,000 workers short of what it needs to keep up with demand. The Dallas Builder Association said that adds thousands of dollars to every project. Mike Dimond of Cardinal Development Corporation, a Minnesota-based national development firm, said that means slow work. He said a Texas project he bid out to a subcontractor is way behind because of the shortage.

“This is a 620 foot build out, we’re at least three weeks and as much as six weeks that’s because the crews aren’t there,” said Dimond. ‘We should be seeing 15 to 20 trades. Yesterday we had four, the other day we had three-that backs things up horribly.”
For major franchise developers like GPS Hospitality, which operates more than 425 Burger King locations and takes on about 60 construction projects each year, that’s tricky. Chief of Development Officer Brian Arnold said their 40 to 50 remodels and 10 to 12 new builds are slower and more expensive.

“[Costs] have steadily gone up over the last three years, it’s been noticeable beyond what you’d expect for regular inflation. I would say that has been up 6 to 8 percent over the last couple of years,” said Arnold. ‘We’re definitely seeing natural-disaster pressure on materials that is driving up costs. And money is cheap, that is driving growth and also franchisor ownership changes that drive incentives to drive development.”

Labor, however, isn’t the only thing driving construction costs up. Materials are more expensive, driven especially in 2017 by the hurricanes in Texas and in the Southeast. Of course to retain the limited number of construction workers, wages are way up. Since the recession, wages in the construction industry have risen 19.8 percent to $38.15 an hour, largely driven by benefits, according to BLS September 2017 data (the most recent available]. With everyone fighting for space, tenant improvement dollars are down to, meaning more out of the owner’s pocket.

It’s a perfect storm for construction prices, and something that caught Arnold and a lot of operators by surprise.

“The last two quarters kind of caught us off guard, I wasn’t expecting that back half of the year pressure on pricing. We were kind of playing catch up a little bit after we bought the strategic group and changes that drive incentives to drive development.”

Labor, however, isn’t the only thing driving construction costs up. Materials are more expensive, driven especially in 2017 by the hurricanes in Texas and in the Southeast. Of course to retain the limited number of construction workers, wages are way up. Since the recession, wages in the construction industry have risen 19.8 percent to $38.15 an hour, largely driven by benefits, according to BLS September 2017 data (the most recent available]. With everyone fighting for space, tenant improvement dollars are down to, meaning more out of the owner’s pocket.

It’s a perfect storm for construction prices, and something that caught Arnold and a lot of operators by surprise.

“The last two quarters kind of caught us off guard, I wasn’t expecting that back half of the year pressure on pricing. We were kind of playing catch up a little bit after we bought the strategic group and “J think the offset is if you are using a traveling crew, you’re using someone who knows exactly what they’re doing and how to do it,” said Dimond.
It’s certainly not union work, but Dimond said it’s a way to make up valuable time since a traveling carpenter is focused on the next job or getting back home.

“They’ll work straight through until they’re done; those are some of the ways you pick up time,” said Dimond. “They like it, they can do it and fit it in wherever, squeeze it in during the weekend.”

At GPS, Arnold says he’s pushing as much development to the first half of the year as possible. During the slower winter months, construction is generally cheaper. But that shift does mean some extra planning.

“it just causes you to evaluate, you have to start ahead of time, you can’t wait to finish the projects. So it’s just a lot of pre planning and getting ahead of the markets,” said Arnold.

Another way to stay on track is keeping things simple. Jim Smart principal at architecture and design firm Smart Associates said a restaurant needs something iconic, but it doesn’t have to be complicated.

‘What are your golden arches?” asked Smart rhetorically. “if you’re going to do multiple units or want to put this together and stamp it out later, have something iconic. It could just be a paint color.”

As always, there is second-hand equipment and lower-cost materials too, but restaurateurs should just be prepared for the high costs so they aren’t skimping on what’s necessary to be competitive.

“The main thing is don’t under capitalize. Don’t plan your business so that it just breaks even, you want to plan it and do a pro forma that shows four years of debt service, throw it in there,” said Smart. “ifs going to be there whether you like it or not so plan ahead.”

That’s key for those who need to build, those who might not see our latest market correction as a good sign.

A Brutal Labor Shortage Drives Construction Costs Up, Project Times Down (page number 6 in pdf document)

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