Tim Hughes: Adjusting to Escalating Construction Costs

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Tim Hughes, president and CEO of Falcon Realty Advisors. Courtesy of D Magazine

By Tim Hughes and D Magazine

Dallas is fortunate at the moment, as commercial real estate is in a “hypermarket” due to the abundance of construction projects underway. As a result, our industry is experiencing macro and microeconomic influences to construction costs.

In the construction business, there is a high demand for quality subcontractors without the corresponding supply, which is escalating prices. Despite the increase in demand of subcontractors, it doesn’t benefit the general contractor to hire just any subcontractor available. These relationships and job opportunities are built off of trust and previous successful work experiences. So, from both a developer’s and consumer’s perspective, it is in the real estate industry’s best interest to pay up for quality.  

In the past, we’ve had temporary demand spikes, like when China was buying all of the steel or after Katrina when an abundance of lumber was needed to rebuild an entire region. Now, we are in a prolonged hypermarket that has legs because it wasn’t built on a temporary macroeconomic event. The labor market will rebalance in time with the addition of quality subcontractors, but for now, the real estate industry has to adjust to the escalating construction costs.  

To adapt, there are two common approaches on how to secure quality contractors and also secure the best prices for all costs associated: the Design-Bid-Build method or negotiating directly with general contractors. Although both are commonly used methods in procuring construction services, identifying the correct one to use in your current market can substantially differentiate the outcome of a project’s costs, timing and quality. Through the construction arm of Falcon, I have experienced firsthand the significant difference in results, particularly within the multifamily development and the retail markets. Read More >