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Here Comes the [Building Sector] Boom

by | Jan 3, 2024 | News

This article originally appeared on Construction Executive.

When the U.S. Bureau of Labor Statistics released new jobs data in August, the numbers painted a rosy portrait for the current state of construction. Year-over-year employment had increased by 212,000 jobs, and—according to analysis from Associated Builders and Contractors—total spending on nonresidential construction had jumped by 16.5%. Among the sectors in the nonresidential space that have been booming in the post-pandemic economy: manufacturing, health care, data centers and multifamily housing.

Will that narrative continue in 2024 and beyond? These four areas all have continued promise, but as construction companies grapple with rising financing costs in the face of stubborn inflation and a persistent labor shortage, it’s not guaranteed that the money will keep flowing there. Construction Executive talked with industry leaders whose companies are doing work in these sectors to see what’s driving the recent surge in business and how long it might last.

Making It in America

Compare 2023 to 2022 in the construction industry, and there is one huge difference: the number of dollars being spent on manufacturing projects. According to an ABC analysis, spending on manufacturing increased by more than 70%—a signal of what ABC Chief Economist Anirban Basu calls “an economic transformation” in the country that has included a growing demand for stable, secure sources of electric-vehicle batteries, semiconductor chips and other high-tech building blocks.

“For decades, American industry has been offshoring to places like China and Mexico,” Basu says. “Increasingly, the view among American CEOs is that to simplify logistics, to create more predictability in terms of quality of output and to better protect intellectual property rights, it makes more sense to make it in America.”

James “Pepper” Rutland, founder, president and chief executive officer of MMR Group, headquartered in Baton Rouge, has noticed an uptick in new projects across a wide range of industry segments, including steel, pharmaceuticals, pet food and data centers. Each has its own unique needs and challenges, but according to Rutland, they all share one commonality: The upheaval from the pandemic marked a critical turning point.

“I think a light bulb went off that reminded everyone we cannot be dependent on others for the basic needs of the United States,” Rutland says. He adds: “Look what COVID did for the pharmaceutical industry. Whether it was vaccines or masks, we were caught a little off guard, not knowing what to do, and had to react fast. We have a strategic oil reserve, but we don’t have a strategic medicine reserve. Now, pharmaceutical production is being imported to bring in the medicine we need.”

Rutland consulted with one leading pet-food company to get a better sense of what was driving recent major projects in that sector, including a new headquarters and production complex for Carnivore Meat Company in Wisconsin, a 200,000-square-foot expansion for a Freshpet manufacturing facility in Texas and a new, $450-million Nestle Purina Petcare factory in North Carolina. “The answer, strangely enough, was COVID,” Rutland says.

“During that two-year shutdown period, everyone went out and got a dog or a cat. Now, the pet-food industry is trying to get to market using American-based products.”

Regardless of what a company needs to manufacture in any of these facilities, they don’t have time to waste. “They’re all under a fast-track design-build arrangement,” Rutland says. “They’re trying to get them to market as quickly as they can. That seems to be the same model across the board.”

New Spaces for an Older Population

According to figures from the U.S. Census Bureau, one in five Americans will be 65 or older in 2040—quite the jump from the beginning of the century, when just one in eight Americans belonged to that category. The aging population, combined with lessons learned from the lack of ICU and medical-surge space during the pandemic, is keeping construction professionals like Mark Cleverly, a project director at McCarthy Building Companies who oversees the company’s work in the Atlanta metro area, very busy.

“What we’re really doing is building hotels with hospital services inside of them,” Cleverly says. “The level of finishes and the amount of money that the major health-care players are prepared to spend to maintain their brand standards is incredible. And it’s all about the patient.”

But it’s not just about the finishes and an upscale-hotel-style experience to make patients feel comfortable. Many of these facilities look much different due to innovations such as robot-equipped operating rooms—and that has implications for the companies that build them. “There is a lot more high-end technology that’s going into these spaces,” Cleverly says. “That creates a new set of demands when it comes to the skill set we’re looking for in the people that can execute on those jobs. These are really logistically challenging projects. This is not just concrete, masonry and builder-type work. Therefore, the people that we hire need to be of a different caliber. Our focus is on promoting within, because finding those people is really, really tough.”

That complicates an already-challenging work environment, one of the major stressors of which has always been the need to balance an active jobsite with an active patient-care environment. “Hospitals don’t shut,” Cleverly says. “They’re open. The patients are at their most vulnerable, and it’s a very difficult time. So, we’re trying to get the job done while minimizing our impact.” He adds: “Dust and sterilizers don’t mix.”

For a recent health-care project that involved a vertical expansion, McCarthy worked with the owner to figure out how the existing facility could remain fully operational during construction. They ended up renting a mobile unit for the facility’s sterile processing department, which allowed McCarthy to use the whole space without disrupting hospital operations—and reduced the estimated project timeline from nine months down to five. “It probably didn’t save any money overall,” Cleverly says, “but what it did do was save a ton of disruption and a ton of heartache while leading to a very happy client. And that’s my main goal.”

Speaking of clients, some of them are a bit hesitant to break ground on massive projects due to the current economic climate. “Right now, we’re seeing a lot of the smaller projects in the $100-million to $200-million range rather than the $2-billion investments they really want to make,” Cleverly says.

“However, when the economic uncertainty evens out and there’s a bit more confidence, I feel like the floodgates will open. We’ll see some more of the bigger capital projects released.”

In the Cloud but on the Ground

According to an analysis of more than 100 Fortune 1000 companies and large organizations recently conducted by NewVantage Partners, nearly 94% of organizations started the year with a plan to increase their investments in data. As more of those companies focus on collecting and analyzing all that intelligence, though, they’re facing a big question: Where are they going to store it?

“The processing power needed to drive artificial intelligence is profound,” Basu says, “and that will create greater need for data-repository and data-processing capabilities.”

AI may be driving the conversation right now, but the need for new data centers has been on an upward trajectory since well before ChatGPT could have attempted to write this sentence: Since 2010, global internet traffic has expanded 25-fold, according to the International Energy Agency. DPR Construction has been a leader in the space, completing more than 850 data-center projects since its founding in Redwood City, California, in 1990. Over the past decade, the size of those projects has grown along with the economy’s need for limitless online storage, culminating in a 170-acre, 2.5-million-square-foot data center for Meta that’s scheduled for completion in Fort Worth this year.

DPR has built a number of centers for the technology conglomerate, and while this particular project included seemingly unique challenges such as zero laydown area, unprecedented weather events and pandemic-related supply-chain issues, according to Chris Gorthy, advanced technology preconstruction leader at DPR, every data center faces considerations that differentiate it from other commercial-construction projects. “The quantity and expense of equipment to provide electrical service to the servers and the volume of cooling needed to keep a dense compute space operating,” Gorthy says, “translate to a much higher construction and operational cost per square foot when compared to other commercial sectors.”

That combination of electricity usage and cooling adds up to a tremendous amount of energy. Research from McKinsey shows that a hyperscaler—the largest type of data center versus smaller colocation facilities—can consume the amount of power required for 80,000 households. “Sustainability has become a hot topic in this sector,” Gorthy says. “We are hearing many of our customers asking at the corporate level about water consumption. Customers are also beginning to consider the embodied carbon values of their portfolio and potential new projects. Sustainability focuses are going beyond LEED [certification], which still remains important to customers but is no longer the primary factor we look at when it comes to building sustainable data centers.”

Moving beyond LEED certification has included innovations such as the ones DPR incorporated into an eBay data center in Salt Lake City. As the first data center in the world to use fuel-cell technology as its primary power source, the facility produces roughly half the carbon emissions that a data center relying on the local electrical grid would.

As sustainability shapes the next wave of data-center construction, the map of where new projects break ground will begin to look different. “Growth in the primary markets like Northern Virginia, Chicago, Dallas-Fort Worth, Phoenix and Silicon Valley is starting to bottleneck due to limited power availability, which will shift this growth more toward secondary and even tertiary U.S. markets,” says John Arcello, advanced technology core market leader at DPR. “To reduce latency in transferring data between the major data-center hubs, edge computing is putting smaller data centers close to population hubs outside of those primary and secondary markets.”

Regardless of where the projects are located, expect to see plenty more of them. Arcello says: “Continued adoption of cloud services and increased utilization of artificial intelligence will continue to make the data-center market one of the strongest, if not the strongest, of any real-estate sector.”

People Have to Live Somewhere

Over the past three years, around 1.2 million new apartment units have opened their doors to welcome tenants. It’s the fastest pace of new construction in decades, including a forecast for 484,000 units in 2024—the most in 40 years, according to figures from RentCafe. However, the “story of multifamily housing is much more complicated,” Basu says, pointing to tightening credit conditions in the wake of the failures of Silicon Valley Bank and First Republic Bank earlier this year that are creating big hurdles for developers.

Indeed, Turner Burton, president of Hoar Construction, headquartered in Birmingham, Alabama, has encountered short-term headwinds for multifamily-housing projects. “We’re seeing it get more difficult for our clients and developers to make deals work,” Burton says. “In a typical year, we would have eight to 10 projects starting up, but over the last year, we’ve only seen two close so far. It’s been a sudden slowdown for developer-driven deals because of how expensive it’s become.”

Despite that, Burton remains optimistic that the lack of housing supply combined with continued population relocation to parts of the Southeast will fuel a need for more multifamily development. “We’re really bullish on the multifamily-housing sector as a whole,” Burton says. “When you look at the price point for first-time homebuyers, it’s out of reach for the average American. That’s going to continue to drive multifamily housing, especially in our key footprint in the Sun Belt.”

As more of those projects break ground, Burton sees additional opportunities for stick-built suburban multifamily developments—a shift from traditional urban high-rise projects. What isn’t changing is something that has always been a unique challenge of this type of work: the need to turn over units as quickly as possible. “You’re trying to help clients generate revenue early,” Burton says, “which involves balancing some residents moving in while finishing work on the upper levels.”

One of Hoar’s most recent projects—The Palmer, a 228-unit complex in downtown Birmingham—is a prime example of the need to phase completion to help deliver early ROI for an owner. Hoar broke ground on The Palmer in 2019 and soon encountered a range of issues, including discovering surprise caverns and sinkholes on the site and dealing with pandemic-induced supply-chain issues such as cabinets that were stuck offshore. “There weren’t any dull nights,” Burton says. “That team was onsite into the wee hours of the morning to get final signoffs and work with inspectors to get the job done, so that we could open units sooner than what was initially in the contract. We reworked the schedule and pulled additional permits for all trades.”

“These jobs require more than managing a subcontractor,” Burton says, reflecting on the lessons of The Palmer, which received an Excellence in Construction Merit Award from ABC’s Alabama Chapter last year. “It’s about going deeper to understand where all the parts and pieces are and monitoring that throughout the entire project. You have to work with the client to understand what matters most to their business and how to hit every step along the way with an aggressive schedule.”

On the positive side, the supply-chain troubles of 2020 and 2021 have had a lasting impact on Hoar’s operations model. “Now, everything is managed down to the exact detail,” Burton says. “It’s not just about when the cabinet is showing up. Now, we know about the status of the hardware for the cabinet, too.”

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