Two Alarming Trends In Construction

Episode Transcript
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(00:02):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, we're taking a
look at the latest research of new construction and whether
there are constraints that are driving costs higher even as
fewer projects are getting builtin the current environment.
But first, I'd like to invite you to learn more about an
exciting new opportunity locatedin Bradenton, FL.

(00:24):
Bradenton is next to Sarasota. For those of you who are
familiar with Florida, this market has an industrial
moratorium that's driving one asset class to new heights,
specifically light industrial. This 35 acre property right in
the middle of Bradenton has an existing charter school on
eleven of those acres and 24 acres of land that we are
developing with my development company, Y St.

(00:45):
Capital. We're hosting a webinar on
Wednesday, October the 8th at 7:00 PM Eastern Time.
This opportunity is only open toaccredited investors residing in
the US in compliance with USSEC regulations.
To learn more, click on the linkin the show notes.
And we look forward to seeing you on Wednesday evening at 7:00
PM. On today's show, we're taking a
look at the latest research on new construction and whether

(01:06):
there's constraints that are driving costs higher, even as
fewer projects are getting builtin the current environment.
Now. Specifically, I'm summarizing
research from four papers on thetopic.
These come from the Associated Builders and Contractors
Association, another paper from the end of last year from the
Associated General Contractors, and a paper from the Home
Builders Institute. The links to these papers will

(01:26):
be in the show notes. So here we go.
If there's one thing that appears to be driving the
industry, it's the need for increased automation.
Stick building the way it's beendone in the past simply doesn't
make any sense. That drive for automation is a
response to chronic labor shortages. the US construction
labor market is defined by severe and persistent imbalance
where high project demand consistently exceeds workforce
availability. The slowdown in construction,

(01:48):
despite strong market indicators, is still resulting
in a shortfall in many key skills.
And while some companies have laid off staff and have paused
their hiring, very large percentage of firms see plans to
increase hiring in the near future once this cycle recovers.
A staggering 77% of firms reportdifficulty filling some or all
of their salaried or hourly craft positions.

(02:09):
That high difficulty rate has remained largely unchanged, and
it signals a deep inelastic constraint on the availability
of Labor that prevents immediateresolution through standard
market mechanisms. The industry's primary defensive
strategy against scarcity has been to increase pay
aggressively. IN202363 percent of construction
firms reported increasing base pay rates more than in the

(02:32):
previous year, and 25% provided additional incentives and
bonuses to attract and retain skilled workers.
The competitive pressure translated to an average
increase in compensation for subcontractors by 72%.
That's a staggering number. The reliance on specialized
talent is critical, with residential specialty trade
contractors accounting for 2.4 million jobs within the

(02:54):
residential sector alone, and emphasizes the vulnerability of
project outcomes to skilled trades availability.
The second major trend relates to subcontractor
competitiveness. Used to be the case that picking
the lowest bid was the most important thing.
Today, the primary measure of competitive differentiation is
the ability to accurately price working capital risk.
Subcontractors who successfully account for the cost of working

(03:16):
capital in their bids gain an average of 11% larger profit
margins. That strategic pricing is
directly correlated with superior growth and nearly a
third of those financial institute firms reported a year
over increase in revenue exceeding 20%.
The ability to successfully passthis cost on confirms its
acceptance within the industry, with one and two subcontractors

(03:37):
reporting success in incorporating the cost of
working capital into their bids.That high success rate
establishes financial acumen is necessary in the competitive
process. The 11% higher profit margin
achieved by these companies represents A quantifiable
recovery of a hidden subsidy. By financing, operations and
material cost for an average of 57 days, subcontractors are

(04:00):
effectively providing interest free credit to upstream parties,
specifically the GC and the owners.
The 11% profit premium is the measured cost of recovering the
subsidy, and it validates the strategy of treating working
capital as a justifiable cost center.
It demonstrates that successful subcontractors are accurately
pricing the transactional risk inherent in the current industry

(04:22):
payment cycles. There's absolutely widespread
prevalence of slow payments, andit necessitates financial
discipline. The data is indicating that 60%
of subcontractors report being subjected to slow payments by
general contractors. The average wait time of 57 days
for payment from invoice submission forces nearly 8 and
10 subcontractors to use their own capital or leverage to cover

(04:44):
material cost during those payment periods.
That cost of capital, which comes directly out of the bottom
line for half the businesses unless priced into the bid,
underscores the critical link between cash flow management and
the bidding strategy. General contractors benefit
significantly by partnering withSubs who possess the financial
discipline to price in the working capital risk.
These firms are reporting betterworking relationships with their

(05:07):
GCS and maintaining more optimism for growth in the
coming years. The competitive landscape shows
a clear divergent financial acumen has become a key barrier
to entry and scalability, and the companies that lack that
sophistication to implement the strategy will see the profit
margin squeeze by rising labor costs.
Remember that 72% increase and the long payment cycles that are

(05:28):
averaging 57 days and that severely compromises their long
term viability and their scalability compared with the
other group of peers who have successfully implemented that
pricing strategy. And GCS that disproportionately
favor the lowest bidder run the risk of engaging A subcontractor
from the financially fragile cohort.
It exponentially increases the risk of performance failures and

(05:49):
defaults. So these are two very specific
trends that are driving the market for new construction.
As you think about that, have anawesome rest of your day, don't
make some great things happen, and we'll talk to you again
tomorrow.

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