Month: October 2022

Inflation and Interest Rates Highlight Design Build Need

Posted on by Tom Radz

Since the pandemic hit, the only thing constant in the construction industry has been volatility. We went from a total shut down to demand being almost off the charts for a number of sectors, and now, with soaring inflation and the Fed raising interest rates, we are back to a period of uncertainty.

Just when it appeared that there was light at the end of the tunnel, general contractors are forced to deal with even more adversity. The current situation, which has some believing that we are headed for recession, is causing certain construction projects to be put on hold. Developers are not willing to take the risk of paying more for these projects and are opting to wait it out.

When we enter times of economic uncertainty, it’s common to focus on these types of stories. It’s easy to get swept up and in the “doom and gloom” of the situation as they often dominate the headlines. However, while it is true that projects are being paused, there are still plenty of them that are moving forward.

The construction projects that are continuing to see green lights are moving forward because the developers simply see some advantage in proceeding. Simply put, these projects are still profitable and that is often credited to how they are going to be built. A true design builder is the most cost-efficient solution for developers who are hoping to push through projects in these uncertain times.

Construction Superintendents looking at blueprints

SAVES TIME ON CONSTRUCTION

One of the biggest benefits of working with a true design-build firm is that it is going to save time. Having all the players on a project under one roof creates a symmetry that directly translates into efficiency. Interaction between the architects and the engineers becomes seamless, as does the eventual hand off to construction.

During a time when interest rates are skyrocketing, along with indications that the Fed is planning to raise them even more, time is certainly of the essence. Developers have more confidence working with a true design-build firm who can get their project across the finish line with more haste.

THE MOST COST-EFFECTIVE SOLUTION

Aside from the savings a developer sees from an accelerated timeline associated with working with a design-build firm, costs are mitigated in other ways. Projects can be value engineered form the very beginning to ensure money is saved at every turn. The entire budget for a project is coming from one source when you work with a true design-build firm, and those teams will work in tandem to ensure the client gets the most wants out of their project without breaking their budget.

Architects will work hand-in-hand with the engineers and the construction team to find solutions that are cost-effective for the project. This is not always the case for the design-bid-build process where the architects often have no interaction with the general contractor, who begins to touch the project only after it has been designed.

Designer Meeting

RESPONSIBILITY FOR THE CONSTRUCTION PROJECT

When the architecture for the project is handled by a separate entity than the one that handles construction, problems can arise. When this occurs, the developer can find themselves in a situation where each of the firms they are working with are trying to assess blame to the other. Not only could this delay the project even more, it could turn into added costs that were not budgeted in from the start.

This is such a common issue that the AIA even released a report that outlines how architecture firms and general contractors can work together in a way that is more beneficial for the client. What they detail are pain points that are solved by merely bringing these two teams under one roof, like you find at a design-build firm.

STREAMLINE BILLING AND BUDGETING

Another advantage to dealing with a design-build firm is that all of the charges are coming from one place.  This allows for careful oversight, which means there is a better chance the project comes out on or even under budget.

Oktoberfest 2022: Build, Beer, and Brats

Posted on by Tom Radz

Prost! Last Friday, we tipped our steins back and celebrated Oktoberfest at our company-wide quarterly event. While these types of events are normally held offsite, it is sometimes nice to use our beautiful breakroom and courtyard to gather our team, especially when we can enjoy this beautiful Fall weather in Arizona.

This time of year is perfect for an event like Oktoberfest and a good time was had by all of our teams from, LGE Design Build, LGE Design Group, LGE Residential Design Build, and Creation.

Our break room was decked out with the traditional blue and white checkered décor, while the sounds from our hired accordion player, Tom Angelo, filled the air. His tradition German selections, along with his take on many contemporary rock songs, set the backdrop for our team members as they competed against each other in various games.

Traditional German food was brought in for a buffet-style lunch that included Brats with sauerkraut, pretzel bites, pogi, German fried potatoes, and apple strudel. Of course, there was a wide variety of German Beer and a tasting contest for those who wanted to show off their refined palate.

As we do for every quarterly event, we announced our Rockstar of the Quarter, along with the winner of the job site photo contest. Certificates were presented to the team members who sported their lederhosen and other traditional German garb.

We Have Touchdown in Houston

Posted on by Tom Radz

Team members from Creation and LGE Design Build joined some guests last week in Houston to celebrate the expansion of both companies’ footprint in the Texas market. The event was a happy hour to mark the groundbreaking of two new industrial projects in the northwest part of the city – Houston Point 290 and Cypress Creek Distribution Center.

These projects represent the first two industrial construction projects for LGE in the Houston metro area. With more than 21 million square feet under construction as of late July, Houston ranks toward the top of the list of U.S. cities when it comes to industrial growth.

PRIME LOCATIONS FOR DISTRIBUTION

Both projects are conveniently located near the intersection of Hwy 6 and Route 290, providing easy access to other major transportation thoroughfares. Each location is situated approximately 10 miles from Interstate 10, which connects Houston to the East and West Coasts.

Houston Construction Map

HOUSTON POINT 290

Houston Point 290, a three-building complex, will boast just under 385,000 square feet of state-of-the-art industrial product. The buildings will range in size between 150,000 to 106,000 square feet and will cater to tenants that are seeking a facility for light industrial work or warehouse space. Other features of Houston Point 290 include:

  • 112 dock doors
  • 32’ clear height
  • 341 parking spaces
  • 130-135’ truck courts
  • 31 trailer spots

CYPRESS CREEK DISTRIBUTION CENTER

At just over 150,000 square feet, Cypress Creek Distribution Center will be a rear-load industrial facility with best-in-class amenities. It will feature two main points of ingress and egress with direct access to FM 1960, making it ideal for distribution purposes. Other features of Cypress Creek Distribution Center will include:

  • 42 dock doors
  • 32’ clear height
  • 150 parking spaces
  • 125’ truck court

MODERN EXTERIOR DESIGN

The architecture of all the buildings will feature the modern design that has become the calling card of LGE Design Group. With clean lines and two-stories of storefront window systems, these buildings will have a uniform appearance, despite their separation into different locations.

MORE ABOUT THE HOUSTON INDUSTRIAL MARKET

With its close proximity to the Gulf of Mexico Ports, Houston is well-poised as a distribution hub domestically and internationally. The industrial vacancy rate, as of July, was 5.7 percent with a net absorption approximately 6.6 million square feet, year-over-year. Of the 21.9 million square feet under construction, more than a third of it is happening in the northwest submarket where Houston Point 290 and Cypress Creek Distribution Center are located.

In 2021, Houston was atop the list of cities with a thriving big-box retail market, with an 11 percent increase in industrial facilities over the course of that year. E-Commerce sales have been very strong, especially since the pandemic, driving up new industrial construction starts right along with them.

Sand: The Forgotten/Disappearing Construction Material

Posted on by Tom Radz

When you hear the words “construction materials,” it is only natural to think of the more common commodities, like lumber, steel, or glass. Someone in the industry might also include less popular materials like gypsum or copper. However, a material not often considered is one that directly affects the production of a number of vital materials: sand, which is in short supply globally.

When it comes to raw materials, sand only trails water as the most used commodity in the entire world. In the construction industry alone, between 40 and 50 billion tons of sand is used every year. The demand is so strong that sand pirates have stolen entire beaches overnight and islands have completely disappeared from illegal mining.

CONSTRUCTION MATERIALS MADE WITH SAND

Among the many products that are produced with sand, the more prevalent ones used in construction tend to be concrete, glass, and plaster. Considering that all three of these materials are found in almost every construction project across the globe, many general contractors are monitoring the sand shortage situation closely.

WHAT TYPE OF SAND IS NEEDED?

For those unfamiliar with sand’s role in the production of construction materials, they may wonder how it’s possible to have a shortage of sand. In the United States alone, there is more than 86,000 square miles of desert, which is less than 1 percent of the total sandy deserts on Earth.

However, the sand in deserts is very fine and smooth, so the ability for the grains to bond is basically non-existent, rendering them completely ineffective for the production of materials like concrete. Even cities like Dubai, which are surrounded by vast deserts, have to import sand from countries like Australia to construct their buildings.

The sand used in the production of construction materials is mainly extracted from riverbeds, lakes, oceans, and beaches. This type is known as marine sand.

Sand mine dug into hillside

HOW MARINE SAND IS CREATED

Most of the sand that you find on beaches is primarily made up of quartz and mainly originates in rivers and streams. Erosion takes place in these waterways and the sand that is produced is carried to the ocean where the waves break it down even further. The hard pounding of the water currents and waves against the rocks creates a type of sand with jagged edges, allowing it to bond together easier. This process is what makes marine sand better suited as bonding material than that of desert sand, which is roughly all the same size and smoother because it is moved by the wind.

EXTRACTION’S EFFECT ON THE ENVIRONMENT

This process of extraction is not very eco-friendly as it creates unnatural erosion, destroys ecosystems, and pollutes waterways. Citing environmental concerns, specifically erosion, the State of California, under pressure from local activists, forced the CEMEX Lapis plant in Monterey to shut down its operation. This was the last coastal sand mine in the United States.

LACK OF REGULATION

Unlike other commodities, sand has very little to no regulations, depending on what part of the world you are in. This is what ultimately makes it a cheap commodity in comparison with others. Other than ocean mine operations, which is a little more involved, it is fairly easy to extract sand and transport it.

Due to the lack of regulations, sand can theoretically be mined by anyone who has a shovel and a bucket and it often is. However, they do have to compete with the large companies who have the proper machinery for such operations.

SAND PIRATES

It may sound like something from out of an apocalyptic movie, but sand pirates are very real, although in some areas, like India, they are referred to as sand mafias. These organized gangs have been known to remove entire beaches literally overnight. Over time, we have seen entire islands disappear due to erosion because of illegal sand mining operations.

There is no differentiating between pirates and sand mafia, as both often rely on intimidation through violence to carry out their mission. There are plenty of instances where bribes were offered and murders were committed by the sand pirates who operate on black markets all over the world.  From the Caribbean, to India, to the Far East, sand pirates have murdered journalists, law enforcement officials, and environmental activists.

Sand mine aerial view

WILL WE RUN OUT OF SAND?

Another negative byproduct of having no regulations is that there is no inventory of just how much sand is actually out there. What we do know is there is not an infinite supply and mining it can have catastrophic effects on the environment depending on where and how it is sourced.

Nearly a third of the construction on the entire planet is happening in China, where they produce more concrete than the rest of the countries in the world combined. From 2011 to 2013, China used more concrete than the U.S. did in the entire 20th Century. This, of course, means they use a large amount of sand for their concrete.

SEARCHING FOR SOLUTIONS

The United Nations Environment Programme (UNEP) recently released a report where they make 10 recommendations to solve what they call a “crisis” in the sand industry. Among their recommendations are “recognize sand as a strategic resource”; “map, monitor and report sand resources”; “restore ecosystems and compensate for remaining losses”; and “source responsibly.”

Arguably the most important recommendation from UNEP states, “Establish best practices and national standard, and a coherent international framework.” Organizing the international community to regulate the sand industry is tantamount to solving all of the other present issues.

ALTERNATIVES TO SAND

Crushed rock can be recycled from demolition sites to make products that are historically made from sand. Another emerging alternative to concrete and steel in construction is engineered timber.

Lendlease recently completed 25 King, the tallest and largest engineered timber building in Australia. While the building does have a concrete base for the first two floors, the next nine floors are all constructed from engineered timber. As more products like engineered timber come to market, the construction industry’s reliance on scarce materials like sand will begin to wane.

E-Commerce Still Driving Industrial Warehouse Demand

Posted on by Tom Radz

The demand for industrial warehouse space remained surprisingly strong during the pandemic. Statistics showed that shopping habits changed dramatically, especially during the shutdown, and many people shifted toward e-commerce retail for almost all of their needs. In 2020, e-commerce sales rose by $244 billion since the previous year, which was a 43 percent increase. Because of this increase, brick-and-mortar retailers joined e-commerce companies by seeking out industrial warehouse space to fulfill their online orders.  

As one would suspect, Amazon led the way in sales during the pandemic, with their May and July sales in 2020 up 60 percent compared to that same period the previous year. The e-commerce giant had always been atop the food chain amongst its peers, but the pandemic seemed to catapult them even further out ahead. As of June of 2022, Amazon enjoyed 37.8 percent of the market share and brought in more revenue than the next 13 online retailers combined.

DEMAND FOR INDUSTRIAL SPACE

While other online retailers did not get quite the boost Amazon did from the pandemic, they did see their e-commerce sales grow significantly. The increased demand for products purchased online led many retailers with brick-and-mortar locations to shift their focus to a more e-commerce approach.

Industrial Warehouses Aerial

This created a significant uptick in demand for industrial warehouse space for retailers looking to fulfill their online orders. From 2020 through 2021, approximately 40 percent of industrial absorption in the U.S. was made up of companies who were looking to use these facilities for e-commerce purposes.  

THE FINANCIAL APPEAL OF SHIFTING TO WAREHOUSES

What made the move of placing an increased emphasis on e-commerce sales even more appealing to big box retailers is the cost of rent for these industrial facilities compared to their already-existing brick-and-mortar locations. It is considerably cheaper to rent industrial warehouse space than it is to rent a high-traffic retail location. The national average for renting retail space is $26-per-square-foot, whereas in the industrial sector, the national average is $8-per-square-foot, and can be as low as just over $4-per-square-foot in some metro areas. Even the more saturated industrial markets, where prices can be nearly double the national average, they are still well below their respective retail markets.

National Average Monthly Asking Rent in US Dollars, Q1 2022

AMAZON CANCELS CONSTRUCTION ON FACILITIES

The e-commerce industry has only recently begun to slow, and there has even been some cause for alarm triggered by Amazon who has been delaying or cancelling planned warehouse projects. More than 15 warehouse projects have either been delayed or cancelled since the beginning of 2022. They have even gone as far as shuttering some of their brick-and-mortar stores that just recently opened.

Even though this would appear to be a projection of the e-commerce industry as a whole, the moves do not seem to be indicative of any lack of demand for online shopping. Amazon officials have even pointed toward internal reasons for their realignment of priorities. Instead of a decrease in online retail demand, they are citing labor issues as the main reason for the scaling back on these facilities.

“We hired more people and then found ourselves overstaffed when the omicron variant subsided rather quickly, at least from our standpoint in warehouses,” Amazon CFO Brian Olsavsky said recently. “So, the issue has switched from disruption to productivity losses to overcapacity on labor.”

Labor, in general, has been an issue at Amazon as of late. A number of facilities in the U.S. and abroad have been the scenes of worker strikes, citing unsafe labor conditions and low pay. However, it is unclear how much this factored into their decision to contract their warehouse footprint.

E-COMMERCE REMAINS STRONG

A more in-depth look at the e-commerce industry supports Olsavsky’s claims that the move by Amazon was precipitated by internal reasons as opposed to what is happening in the market. Experts project 266.7 million people in the United States to shop online in 2022, which is a decent portion of the more than 2 billion people globally in the same category. In 2021, e-commerce sales reached more than $870 million and comprised 11.8% of total retail sales. In the first quarter of 2022, e-commerce sales rose by 2.4 percent, but dipped slightly in terms of total retail sales.

INDUSTRIAL SECTOR REMAINS STRONG

Despite inflation, the demand for the industrial sector has passed its pandemic peak, but still exists, and in areas where vacancy rates are down, warehouse space is even more coveted. A once-flourishing area like the Inland Empire in California is down to a 0.6 percent vacancy rate with industrial leasing rates on the rise there. Keeping up with demand, which is partly due to the continued upward mobility of e-commerce, is even more difficult in places like this.

While this issue is more pronounced in land-constrained markets, like the Inland Empire, the supply side of the industrial sector is having trouble keeping up with the demand across the entire U.S. Experts have forecasted 2023 to be another year of growth in the nonresidential construction industry, with the industrial sector poised to lead the way.