Panel: Labor shortage increases construction time, costs

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CHARLOTTE – The city’s commercial real estate market is “fundamentally strong” and is expected to remain so for a while, but construction labor shortages and a high number of inexperienced workers are causing building costs to rise.

That was the consensus of seven panelists at business media outlet Bisnow’s fifth annual State of the Market breakfast Monday morning at the Omni Charlotte Hotel, attended by about 200 people. The panel included executives from development companies, property management companies, contractors and banks, and was moderated by Christi Lewis, a partner at financial services company CohnReznick LLP.

Toby Bartlett, senior vice president at J.E. Dunn Construction Group Inc., said construction costs have increased 20 percent since 2007, and that higher costs could continue to be a problem.

“Really, as long as the economy is good, it’s going to be like this,” he said.

Steve McClure, president of Spectrum | Residential Inc., which specializes in multifamily development and acquisition, said labor shortages – specifically in skilled workers – and a high number of inexperienced workers can extend what should be an 18-month project into a 22- or 23-month endeavor.

“I think there’s more of a risk now that you have to really spend time standing over the (subcontractors), making sure they’re doing the work that they need to be doing,” he said.

However, despite increased construction costs and labor shortages, the panelists agreed that Charlotte’s commercial real estate market is in good shape.

Phil Payne, CEO of Ginkgo Residential, said that whereas the fundamentals of the market showed signs of “cracking” right before the recession, there are no signs of weaknesses now.

He said commercial real estate typically goes through cycles, generally peaking every seven years, and noted that 2015 is the eighth year in the current cycle.

Panelist Melanie Gersper, chief operating officer at multifamily property management company CFLane, said commercial real estate products delivered now are a lot different than those during the last development peak. She said that from a property management perspective, the transition has been difficult for workers in the property-management field.

“I can’t take that same person who was successful in the same market, and put them on a piece of product that’s more sophisticated and expect the same thing,” she said.

McClure agreed with Payne that the length of the current cycle is atypical, but suggested that Charlotte developers should stay the course for now.

“We’ve been in the seventh inning for about three years now, and…we’re playing a lot longer than nine innings; there’s going to be extra innings,” McClure said. “I think if developers stay on the more conservative end of underwriting, then we’ll be OK for a while.”

The panelists said that as long as high-quality jobs continue to attract millennials to Charlotte, overbuilding shouldn’t be a problem, but also that it may be time to consider the potential of other renter demographics, specifically active adults or seniors. The other panelists included John Saclarides, senior vice president of Wells Fargo’s real estate division; Grey Poole, a partner at Selwyn Property Group; and Ned Austin, vice president at Crescent Communities.

When asked about the growing demand for senior housing, Gersper said seniors may want the same things that millennials want, such as access to amenities and walkable urban environments.

“We think that market would appreciate some of the same things that we’re doing with other programs right now,” she said.

Payne agreed with Gersper, but also said the rents would need to be affordable in order to make that happen.

“You can’t build $2,000-a-month apartments for someone who’s living on Social Security,” he said.