Industry Trends
Fall/Winter 2022
Introduction
Brad Hayes
Director of Preconstruction & Estimating
When we published our last Industry Trends Report in April, we polled a group of 50 owners, architects, and subcontractors about the state of the market. And while there was ample optimism featured in many of the responses — and in some of our own analysis — there was also an undercurrent of unease and uncertainty regarding cost escalation, labor availability, and the future of the office.
Six months later, we have a clearer picture — and a markedly different outlook for the next few years. This report includes:
Sellen’s most up-to-date analysis of current conditions and cost escalation projections.
A preview of design trends we are seeing in the post-pandemic office sector, including how hybrid work is influencing workplace design.
Discussions with our leading in-house experts about how we are continuing to add value for our partners and build a more diverse construction industry.
As always, our goal is to provide our partners with the timely information you need to make critical project decisions. Thank you for your continued partnership and please reach out if you have any questions about our Fall 2022 Industry Trends Report or ideas you’d like to see us explore in future reports.
Thank you,
Featured Topics
Escalation, Labor Updates,
& Code Changes
Our latest construction cost escalation projections, and a brief update on labor negotiations and code changes that owners and architects need to know.
Office Market Trends & the Impact of Hybrid Work
The hybrid workplace is impacting the office sector in multiple ways. Our preconstruction experts diagnosed some of those trends and the temperature of the market.
Integrated Design
& Construction
Sellen is committed to continuously improving our processes to add value for our partners, including more holistic design document review during preconstruction.
Building a More Diverse Construction Industry
We asked Director of Subcontractor Diversity Angela Battle three questions about how Sellen is focused on building relationships with new, diverse-owned partners.
Construction Cost Escalation Projections
In the spring, we projected a 10% escalation rate for construction costs in 2022. That projection was accurate, but escalation throughout the year has been very volatile, with costs spiking in Q1 and Q2 before gradually tapering off in recent months.
Looking ahead to 2023, we are projecting a 6% - 7% increase in construction costs. These projections are based on data from recent labor negotiations and supply chain discussions with many of our subcontractors and suppliers. Key factors influencing construction cost escalation rates and our changing projections include the following:
The war in Ukraine continues to have an impact on all energy-intensive products, including aluminum, glass, and steel.
With the continued prominence of hybrid and remote work in our market, many clients are still evaluating just how much office space they will need in the coming years. As a result, many office projects that were once considered imminent have gone on hold indefinitely. This slowdown in the office sector should translate to improved labor availability in the Puget Sound construction market and lower escalation rates in 2023 & 2024.
In addition to a slowing office market, rising interest rates are contributing to an overall slowing of the local construction market.
Supply chain constraints that plagued the construction industry over the past few years are beginning to ease. After much discussion with our subcontractors and suppliers, we are anticipating that these constraints will continue to taper off almost entirely by the end of 2023.
Key Takeaway: We are seeing early signs of a cooling construction market in the Puget Sound region. A slower market will ease the labor availability constraints that have impacted our industry in recent years, resulting in a slight reduction to our previous cost escalation projections for 2023 - 2024. As the Federal Reserve continues to raise interest rates to combat inflation, we are projecting a slowdown that will likely persist for at least the next 18 to 24 months.
Labor Negotiations Updates:
There have been 23 labor agreements negotiated over the past two years, with an average outcome of 5% annual increases. Notably, the teamsters concrete truck drivers union ratified a new, four-year deal retroactive to July 2022. Only four labor contracts are set to expire in 2023: plumbers, sheet metal workers, sheetrockers, and roofers. With many existing agreements set to expire in 2024, upcoming negotiations are likely to take place in a much slower market than the highly publicized contract discussions of 2021 and 2022.
2021 Code Changes
The 2021 International Building Code (IBC) revisions will go into effect in Summer 2023 for most jurisdictions. There are more than 100 pages of edits and revisions included in the 2021 IBC, and while most edits are relatively minor, the changes will certainly have an impact on upcoming projects. Below, we have highlighted some of the code changes that will affect local commercial construction projects:
Section 404: Clarifications to atriums and smoke control systems
Section 429: Updates to the requirements for electric vehicle charging infrastructure
Section 503: Clarifications to occupied roofs
Section 510: Updates to allowable materials for exit stairways in podium construction
Section 602: Updates to mass timber construction, specific building type categories and fire ratings
Sections 703 – 722: Updates and clarifications to fire ratings and fire protection assemblies
Section 909 - 1006: Updates to smokeproof enclosures, egress and exit paths
Section 1009: Wheelchair spaces have increased in size
Section 1010: Updates to door hardware
Section 1020: Updates to dead-end corridors
Section 1030: Updates to stairs and railings in open stair situations
Section 1406 - 1408: Clarifications to building materials on exterior walls
Section 3001: Updates to communication in elevators
Section 3314: Fire watch during construction for all new construction over 40 feet tall as required by the fire code official
Chapter 16 - Structural: Several structural code changes are included in the 2021 IBC, but they are not nearly as impactful as the 2018 code changes. Most of this code update is focused on the calculations of loads on a building and the increased structure to offset these loads. There will be a significant increase to concrete shear walls for code-prescriptive buildings. This is typically low and mid-rise buildings that are not performance-based designs. The basement walls and shear walls will be in the range of 15% thicker.
Office Sector Market Trends
Adam Lorenz
Chief Estimator
While preparing our previous Industry Trends update in the spring, we asked a group of 50 clients, architects, and subcontractors about the post-pandemic workplace and the role of hybrid work. At the time, 80% of the clients we polled said their firms were embracing a hybrid workplace, with most employees coming to the office three to four days each week. It remained to be seen, however, just how much office designs would change in response to the new hybrid environment. It was also unclear exactly how macroeconomic factors — including inflation, interest rates, and the war in Ukraine — would impact the local market.
Today, we have a clearer picture. In the six months since the report was published, Sellen has worked closely with leading office tenants and architects throughout the Puget Sound region to provide preconstruction support on new office projects. Here are the trends we are seeing in the office sector:
Make the Office Look and Feel More Like Home
To encourage employees working from home to return to the office, clients and design teams are making the office look and feel more like home. Our design partners regularly conduct focus groups with the office employees of our clients. Feedback from those sessions has made it clear that simply refreshing desks, cubicles, and other individual work areas is not going to attract workers back to the office.
Impact: Instead, new workplace designs are less formal and more focused on the comfort of employees – particularly in shared, collaborative spaces where they can work with their team. These spaces serve as a “living room” of sorts for the new office, and our estimators are seeing more dollars allocated to these shared spaces than ever before.
Designing for Collaboration and Interaction
In addition to the overall feel and comfort of the office, design teams are focused on exactly why office workers come to the workplace. Data collected from our design partners and numerous studies across the country show that hybrid workers see the office as a place for collaboration and connection – not individual work. Equipped with this feedback from clients, architects are allocating more and more space for flexible conference rooms, informal gathering areas, and other collaborative spaces.
Impact: Before the pandemic, a typical office floorplan allocation might be 60% individual work space and 40% conference rooms/amenity space. Today, the inverse is true with 60% - 70% of space dedicated to conference rooms and group work areas.
Widespread Project Delays with Global Economic Uncertainty
While many office projects are moving forward with these new design considerations, we are also seeing widespread caution as office clients gauge a turbulent economy and a potential recession. As the Federal Reserve continues to combat inflation with rising interest rates, many clients are waiting for calmer market conditions to emerge.
Impact: This uncertainty has led some office clients – particularly in the tech sector – to freeze or significantly reduce hiring through the end of 2022. Clients are using this hiring pause to reevaluate their corporate real estate needs and consider the long-term ramifications of hybrid work, and many planned projects have gone on hold as a result.
Integrated Design & Construction
Sellen’s Integrated Design and Construction (IDC) initiative is focused on improving quality, reducing costs, and streamlining schedules, resulting in a better experience for all project stakeholders. To achieve meaningful progress in pursuit of this initiative, we need to address longstanding industry challenges through a new lens. That’s where Trevor Schaaf comes in.
Trevor joined Sellen in 2019 as our Integrated Design Document Specialist – a unique role in our industry that draws upon his background in architecture and his knack for thorough, holistic analysis. He conducts in-depth reviews of design documents during preconstruction, helping to identify potential issues well before they show up in the field.
“I’ve always been detail-oriented – it’s just the way my mind works...Most project team members are focused on a particular scope and don’t have the time to look at the bigger picture. I look at the drawings holistically to see how different building systems relate and interact with each other.”
Prior to his current role, Trevor worked as an architect for more than 20 years. This experience provides him with a unique perspective and a broad base of knowledge that informs his work and gives him the ability to help projects mitigate costly delays and rework.
“I certainly have empathy for the architects we work with, and I understand the pressures and constraints they are working under,” Trevor said. “The further we get into a project, the more costly it becomes to fix issues. My role as an extra set of eyes during design document review is to catch those issues early in the process and reduce risk and costs for our owners and design partners.”
One of the primary goals of Trevor’s work and the broader IDC initiative is to reduce the amount of Requests for Information (RFIs), which occur when builders need additional design information to execute work in the field. In a 2019 study, Sellen’s preconstruction team evaluated 10,600 RFIs from 10 recently completed projects. The study showed the cost of each RFI to be approximately $3,100. By improving the document review process with experts like Trevor, we can significantly reduce RFIs and deliver better value for our clients.
Three Questions With…
Angela Battle
Director of Subcontractor Diversity
As Sellen’s Director of Subcontractor Diversity, Angela is dedicated to fostering new partnerships with historically underutilized businesses.
We asked Angela three questions about her role at Sellen and the company’s commitment to building a more diverse and inclusive construction industry.
What is Sellen’s overall goal for diverse subcontractor inclusion and what is your role in helping to achieve that goal?
Today, Sellen has a companywide goal of 15% diverse subcontractor inclusion, which means that we should spend at least 15% of our total construction costs with diverse subcontractors, suppliers, and consultants. My role is to guide our decision-makers and serve as an active resource to ensure Sellen consistently achieves or surpasses our 15% goal. This includes providing our project managers with real-time data to see how we’re performing on a project-by-project basis — and to suggest corrections when we are not on-track.
These small and diverse firms aren’t lacking the capacity or skill to do the work— they just need the opportunity. My job is to help them get that opportunity by working on a Sellen project and hopefully help them establish a foothold in an industry that can be challenging to break into.
“It’s going to take all of us working together to make meaningful change in our industry, and I believe we can achieve it.”
Angela Battle
Director of Subcontractor Diversity
How does Sellen build relationships with new historically underutilized firms?
We regularly attend outreach events and monthly industry group meetings to introduce Sellen to new partners. These venues include the Northwest Mountain Minority Supplier Development Council, the Northwest Alliance, the Associated General Contractors of Washington’s Contractor Exchange, and the Snohomish County Small Business Alliance, to name a few. We are also involved with the Ascend program at the University of Washington’s Consulting and Business Development Center. The program provides access to hands-on business management courses, and Sellen covers the tuition for two minority-owned businesses each year.
It’s important for us to be proactive in building these relationships so that we can understand who our potential partners are, what they do, and their staffing capacity. These early conversations help us understand the type of scopes these subcontractors and suppliers are looking for and match them to great bid opportunities on Sellen’s upcoming projects.
How can large contractors help historically underutilized firms succeed in our industry?
As an industry, we can make a real impact in local economic growth and generational wealth by taking a hard look at our everyday business practices. “Business as usual” can create barriers of entry to our industry, and even small changes in procurement practices can make a big difference. Large, legacy contractors like Sellen should always be evaluating opportunities for new partners to contribute on our projects. Involving historically underutilized partners leads to innovation and opportunities to streamline costs and schedules for our clients.
We believe in this commitment wholeheartedly, and we’re encouraged to see many of our peers in the industry on this same path. It’s going to take all of us working together to make meaningful change in our industry, and I believe we can achieve it.
Pictured: Angela attends industry networking events throughout the Puget Sound region to establish new relationships with historically underutilized firms.
Pictured: Each year, Sellen covers the tuition for two local firms to go through the University of Washington’s Ascend program.
Want to receive upcoming Industry Trends from Sellen?
Enter you email below to subscribe.