Industrial Midwest

Industrial Design-Build increases, more buildings under construction this year

Mark_Augustyn_headshot
Mark Augustyn

The Design-Build construction business serving the industrial industry is trending up. There will be more permit starts and more buildings under construction in 2015 than there were last year, according to Mark Augustyn, chief operating officer at Principle Construction.

“What we are seeing now is the manufacturers starting to expand buildings again, or building new for their new products,” he added. “They are confident their business is growing and they can afford the expansion. They probably have been planning it for a long time but were just reluctant to pull the trigger—well now quite a number of them are pulling the trigger at the same time.”

Augustyn pointed out that a contributing factor to the manufacturers confidence growing is that they have realized there is less vacant property available for people to choose from.

“Developers watch indicators, like vacancy rates,” he said. “So when they see it get to a point that makes sense to add new product and exploit an opportunity in any market, they will —they are all pretty savvy. It’s not just Chicago they are looking at either. They are looking at other submarkets where product is scarce with demand. When they see that a demand is unmet they will pull the trigger on their development.”

“A lot of the things we are witnessing in our industry right now relate back to the downturn,” said Augustyn. “Back in 2008, everyone hit the brakes on development and expanding their business. Everything was put on hold for an extremely long time. Some thought our great recession would last one year, some thought longer.  I don’t think many thought it would turn out to be five. But finally, the train is moving again.”

Augustyn noted that design-build contractors, like Principle, are the caboose of the economic recovery train. “Once that train gets moving it takes a little while before all of that additional recovery gets to our bottom line,” said Augustyn. “Definitely, there has been some pent up demand as the developers quit developing speculative buildings, and the manufacturers worked on improving efficiencies within their footprint instead of taking leave of expanding their buildings.”

Many of the developers we work for have business parks with vacant land, according to Augustyn. “It’s not as easy to rent proposed space on vacant land as it is to rent truly available vacant space in a building. Unfortunately for them, and us, our customers don’t leave enough time to do a build-to-suit,” said Augustyn. “So, those customers need to be able to walk into a building, see it’s vacant, negotiate their lease, and take occupancy in several months.   Finally, vacancy rates have declined to a point where speculative building has resumed.

In the real estate development world, Augustyn also noted that the developers haven’t been building speculative buildings for a long time. “That’s partly from a demand standpoint, but it’s also related to the new realities of financing. Everyone is starting to figure out the financing model out again.

“Last year we saw just a few speculative buildings come out of the ground,” he continued. “This year we are seeing a lot more from our developer customers. So, the outlook is a much rosier picture. We also track long lead item delivery times and subcontractor pricing in our market.  I can tell by the lead times for materials and by the pricing of some of our commodities that business is trending up.”

So ultimately how are costs and other factors coming into play with this huge surge of development? Augustyn noted that although there is a strong demand for product in the marketplace, for the most part, costs have remained fairly reasonable and stable.

“As the volume of business has increased in the marketplace, many subcontractors are trying to restore themselves to profitability once again. The only single cost that has risen dramatically, is concrete. Concrete costs in this area have risen approximately 12 percent just from last year.”

“A number of people have asked how could that possibly be,” Augustyn added. “In the union trades there is an increase for labor roughly every year, which amounts to a two to three percent increase. On any given job that equates to a one and a half to two percent increase in the total cost of the project. So the twelve percent increase is predominantly related to a thirty percent increase in the price of cement.  Why the price for cement has risen so dramatically has been very difficult to explain, but it is likely related to consolidation of cement manufacturers, ready mix suppliers and transportation constraints.”

Augustyn said he also continues to track the drop in oil prices. “Before we would track the rise in oil prices, and how it would affect many of the products that would go into our buildings. Now, we are tracking the dramatic drop, waiting to see the impact on what we procure for our buildings.  Most people think of parking lots as being impacted with respect to the price of oil due to the petroleum based nature of asphalt paving. But roofing materials installation, roof membranes, even PVC piping, are related to oil.”

“So far, I really haven’t seen any reduction in pricing for those products, considering the fifty percent decline on a barrel of oil,” he added. “We may witness that this summer when the real demand for buying asphalt paving picks up and more building products are bought and shipped to the job site.

Mark Augustyn is co-founder of Principle Construction Corp., a design/build general contracting firm located in Rosemont, Illinois. As COO and Treasurer, Mark has the responsibility of overseeing and managing many of the companies’ functions and providing overall leadership for the growth and development of the organization. Mark is a licensed Architect in Illinois and Wisconsin.