Steady. That’s how Chris Vaeth, senior vice president and regional leader at Kansas City, Missouri-based McCownGordon Construction, describes the commercial construction industry today.
Yes, commercial construction companies face the challenges of high interest rates, rising materials costs, labor shortages and supply chain delays.
At the same time, the Federal Reserve Board appears ready to slow the tweaking of its benchmark interest rate and materials costs are at least beginning to stabilize. As that happens, the demand for new construction is slowly starting to increase again.
For Vaeth, this is a good sign that 2024 will be a stronger year for commercial construction than this one has been.
“From our standpoint, since about the second half of last year, we have seen a steady market,” Vaeth said. “We are putting a lot of work in place, work that will be ready to go when the time is right. We’ve had a steady last couple of years with even growth. I expect to see a better year in 2024 than what we saw in 2023. And 2025 is shaking up to bring a solid amount of work.”
This doesn’t mean that McCownGordon hasn’t seen challenges during the last year. The higher interest rates and costs of materials made commercial construction an industry that has been even more challenging than usual during the last 12 months.
But McCownGordon has an advantage: It boasts a diversified workflow of projects in both the public and private sectors.
That diversity has helped the firm weather the ups and downs of the commercial market.
“Having work in both the public and private sectors helps us navigate the ebbs and flows,” Vaeth said. “It helps balance everything out. We have seen the private sector work slow down with the higher interest rates and the overall increase in costs and labor. Some of those projects have become more difficult to finance. We have seen those slow or stall. But we have also seen growth in the public sector. We have seen a pretty significant growth in higher-education projects and municipal work. That has helped as private work has slowed.”
Another positive that is helping commercial construction firms? Vaeth said that while the cost of materials is still high, the rate of price escalations has slowed dramatically during the last year.
Vaeth said that two years ago, construction companies faced steep price increases in key materials every month, with prices rising by a percentage point seemingly every 30 days. Today, those monthly price increases have been cut in half or have slowed by an even greater amount.
Vaeth pointed to steel and lumber costs as an example. The cost of both of these building materials has fallen from all-time highs.
“The cost of everything is no longer rising at the same rate,” Vaeth said. “That’s been easier on our budgets. There is still price escalation, but it is half or less than what it was one or two years ago.”
What is challenging today is finding enough labor for construction projects. Overcoming this hurdle often means paying higher rates to workers for key jobs, whether that means paying more for laborers to install drywall or tackle electrical work.
Overcoming the labor shortage also requires careful planning, Vaeth said. McCownGordon makes sure to understand the manpower curve on its jobs, calculating when projects will need certain workers and when needed subcontractors might be busy working on other job sites.
“You have to understand who is working where and when,” Vaeth said. “That is the best you can do.”
And what about higher interest rates? How has that impacted McCownGordon?
Vaeth said that certain commercial classes are still seeing steady construction activity, most notably multifamily and industrial. There is still demand for new apartment buildings, warehouses and distribution centers.
The construction of new office buildings, though, is nearly non-existent, Vaeth said. What is steady on the office side is renovation work, as companies seek to transform their office space to meet the changing needs of today’s workers.
“Some owners are turning their Class-B office space into Class-A space,” Vaeth said. “Some are consolidating their space, reducing their total square footage. We have a lot of renovation work for office in our pocket now. People are investing more for less but better-quality space.”
The multifamily market retains its good fundamentals, Vaeth said. The demand for housing in the Kansas City market is still strong. And while interest rates have slowed both multifamily sales and developments, they haven’t killed them completely.
That’s largely because Kansas City, like most markets, still has a shortage of housing. It’s why Kansas City had at least half-a-dozen new apartment projects teed up for 2023. As Vaeth said, many of those projects have been pushed back because of higher interest rates. But most of them will eventually be built because the need for more housing is still there, Vaeth said.
“Developers and investors are waiting for some stability with the interest rates,” Vaeth said. “They want the ability to be able to forecast what a new project will cost. No one expects the interest rates to return to where they were, when it was like working with free money. People are waiting for rates to be in the 4% or 5% range again so that they can plan a different type of return for one, two or three years out. They want some confidence of where rates might be trending to in the coming years.”
Vaeth said that the Kansas City industrial market remains a solid one, too. The demand for new warehouse and distribution space remains strong.
That doesn’t mean that interest rates haven’t impacted this sector, too. As Vaeth says, developers have slowed the construction of spec warehouse space in the market. Manufacturing space, though, has gotten a boost as more companies re-shore the production of their goods to U.S.-based facilities.
“I believe that we will have a better year next year than we did this year,” Vaeth said. “And that is a consistent theme for a lot of our peers across the region. We have a consistent pipeline of projects. Next year will be a strong year for commercial construction. What happens in 2025 is what we are trying to get our hands wrapped around. But right now, we are still seeing a positive backlog and positive pipeline.”