Construction and labor price increases are having a dramatic impact on the national retail market. Franklin Street’s Cary Beale, senior vice president of Retail Landlord Services, and Nick Sanfilippo, senior vice president of Project Management, recently shared their expert insights on how retailers and developers can fight back.
Developers are seeing rising costs for land, materials and labor. Will this trend continue in 2019?
Sanfilippo: Absolutely, and we are seeing this in every region of the country. We are experiencing a very busy construction market which continues to drive increases in materials and labor. We’ve been witnessing a steady increase in building costs since 2013 and year over year they have been rising. There is a healthy development pipeline already lined up for 2019. The high demand will continue to keep constraints on the skilled labor market as well as a continued rise in material prices. This trend is happening consistently across the country and in all market segments, ranging from new construction to retail and office buildouts. We diligently track these trends and have yet to see any signs of things slowing down.
What are some common causes for cost overruns on commercial real estate construction projects?
Sanfilippo: The most common cause for cost overruns is having a poorly planned project. If a project is planned properly from the beginning, this will significantly limit overages. Some common causes for overruns include a poorly defined scope of work, improper or unrealistic budgeting, not executing a detailed and accurate set of construction drawings, as well as failing to implement diligent construction management.
How have these high costs impacted retail landlords?
Beale: The main challenge with higher construction costs is with new construction and tenant build-outs. Due to the elevated costs, retailers are now asking for additional tenant improvement allowance to help them cover their build-out expenses. In most cases, landlords will try to raise the rental rate per square foot to make up for the additional allowance the tenant is being provided. Landlords are generally more selective about doing deals when they are offering tenants significant leasing incentives, which can include free or reduced rent, or up-front cash payments for items like moving expenses or improvements.
How can project managers help builders reduce their costs?
Sanfilippo: Construction projects are dynamic ventures that involve risk and many unknowns. An experienced project manager knows how to mitigate and navigate these challenges. Any scope creep or cost increase can quickly escalate and derail a project. A skilled project manager knows what obstacles to look out for and always has a strategic plan to handle them.
For example, we had a client that was wanting to do some major exterior patio work for their restaurant. The client already had their drawings completed when they hired Franklin Street for the construction project management. Thankfully, we caught the drawings prior to permit submission because the way the patio was designed would have triggered a land disturbance permit. The process for this permit was four to six months and would have required the older building being brought into current energy code compliance. With our input and redesign, we saved the client in excess of $100,000 and four months on their schedule.
In what ways can brokerages offer added value for retail tenants and landlords facing higher build-out costs?
Beale: Landlord brokers can add value through their relationships with quality tenants that can fill available space quickly if it is the right fit. The best brokers pride themselves on knowing the local market and helping companies find the most profitable spots for their specific kind of business. They attract credit worthy tenants to the owner’s property and negotiate above-market rents. Full-service firms like Franklin Street also provide other value-add services such as in-house property marketing, property management, and construction supervision.
As Senior Vice President of Franklin Street’s Retail Landlord Services division, Cary Beale focuses on overall strategy for the division, talent recruitment, along with supporting business development efforts across all Franklin Street offices. Mr. Beale has more than 20 years of experience providing customized landlord and tenant real estate services for retail and restaurant clients throughout the United States. Reach him at [email protected]
Nick Sanfilippo serves as Senior Vice President of Project Management for Franklin Street. In this role, he provides comprehensive project management and consulting services for both investor and occupier clients while leading the project management division across all markets. He has more than 15 years of experience in building and leading project management teams, consistently creating value for his clients ranging from tenant build-outs, to redevelopment projects, to new developments. Reach him at [email protected]