CEO roundtable: Costs of labor, city fees hitting construction industry hard

FORT COLLINS — Construction costs in Northern Colorado are being driven upward by a dwindling labor pool, forcing builders in the region to pay more for subcontractors who have their pick of an increasing number of projects in the region.

“It’s brutal out there,” said David Shigekane, president of The Neenan Co. “Subcontractors get to pick and choose,” forcing general contractors to pay more for labor in order to keep timelines in order.

While the cost of construction materials has declined somewhat during the last six months, Connie Dohn, chief financial officer of Dohn Construction Inc., said the labor shortage is taking a toll and the skill levels of those who have remained has declined.

“High schools aren’t training trades,” she said.

Shigekane added that increased city fees on construction are compounding the problem.

Nathan Klein, partner of LC Real Estate Group, said the wave of construction will continue. “We are making up for what we didn’t build during the recession,” he said.

The comments were made during BizWest’s Real Estate and Construction CEO Roundtable focusing on Northern Colorado held Tuesday in Fort Collins. Participants discussed a variety of topics ranging from finding land, securing water, new construction, repurposing old, tired buildings, and the investment climate.

Investment climate: “There’s plenty of money, lots of demand,” said Steve Stansfield, broker/partner with Realtec Commercial Real Estate Services Inc.  “The challenge is to find product. There seems to be more appetite for industrial rather than office, and there is a huge demand for apartments with high-performing rents.”

There has been a rash of investors from outside the region who have been buying apartment complexes. Mark Bradley of Realtec Greeley, said there are a lot of East Coast and California investors willing “to pay stupid cap rates,” referring to lower returns on investment created by the high cost of the property compared with rental rates.

Nick Christensen, chairman of Chrisland Real Estate Cos., said apartments are the most stable investment right now. “Large institutional investors will do well in this market,” he said.

Apartments in demand: Multifamily housing is on the top of the construction-demand list. Apartment rents have been rising in the region because of low vacancy rates caused by job growth, but Stu MacMillan, founder of MacMillan Development LLC, said the cost of construction and rental rates don’t match up, making new construction difficult.

Dohn said condos would relieve pressure on apartment rental rates, but few builders are constructing them because of the state’s current construction-defects law, which homebuilders contend make them too vulnerable to lawsuits. A bill to change the law was shot down in the State Legislature last year, causing some cities to consider their own construction-defects laws to spur condominium construction projects.

Alternative to new construction: MacMillan said the shortage of available land provides an opportunity to repurpose old buildings, but developers feel the deck is stacked against them.

Stansfield said changing the use of a building is a big challenge because of requirements set forth by cities.

“Requirements make it cost-prohibitive,” he said. As an example, he said his client was required to pay a fee to the Natural Resources Department to build on his own land.

Dohn said the timing takes too long for rezoning property for a different use.

Public-private partnerships: Drew Notestine, co-founder of Thomas & Tyler LLC, said developing public-private partnerships is very important to achieve larger projects, citing a deal recently signed for a hotel and conference center in downtown Greeley.

Jay Hardy, chief operating officer of Brinkman Partners, which is working with the city of Loveland on the Catalyst project to revitalize a portion of its downtown, said public-private partnerships allow projects to happen.

“With free land, waiver fees and $18 million in public incentives, it allows us to complete a $55 million to $60 million project,” Hardy said.

Industrial market: Stansfield said there is a strong demand for industrial space in Fort Collins, but the supply isn’t there. But developers may want to look east to Greeley, which Notestine said is “one of the few places in the country that still looks good.”

Klein said although some oil and gas companies in the area have cut back on operations, they are hanging on to their land hoping to outlast the downturn of oil and gas prices.

“Oil and gas companies need yards. Their equipment comes home, so to speak. I haven’t seen widespread vacancies in the area.

Tom Livingston, founder of Livingston Real Estate & Development LLC, said industrial construction has suppressed land values, and that water availability is a key. “Finding water is a problem,” Livingstone said, referring to new construction.

Part of the shortage of industrial space is a function of cities focusing more on retail, Klein said.

Adding retail: Retail projects have been sprouting up in the region. The Centerplace retail center Greeley has been gaining momentum with multiple retailers signing on and beginning construction. Bradley attributes the attraction in part to Greeley recently surpassing 100,000 in population.

“Retailers look for that mark,” he said.

Allen Ginsborg, managing director/principal of NewMark Merrill Mountain States, which is redeveloping the indoor Twin Peaks Mall in Longmont as the outdoor Village at the Peaks, said it’s a good time to own retail land, but developers need to pay attention to the changing consumer.

“Fashion and sporting goods industries are in retraction,” he said. Ginsborg said retail rents are moving up, and small retailers, the mom and pops, “will see struggles, but there is a lid on how far you can raise rents.”

Doug Storum