HOW TO MITIGATE AND MANAGE THE IMPACT OF INCREASED CONSTRUCTION COSTS

How to Mitigate and Manage the Impact of Increased Construction Costs

For many retailers and logistics businesses searching for industrial space across Southern Ontario, the process may be frustrating. Availabilities are at all-time lows, while rents and values are increasing quickly and often. Lead times for new developments are stretching while landlords are pre-leasing oncoming inventory 18 to 24 months in advance, if not sooner.

All of these factors are overlaid onto an economic landscape that is chock full of uncertainty, with the cost of material and labour ticking up each and every month. Trying to account for all of these variables makes securing space incredibly difficult and is draining both intellectually and emotionally.

That said, for those businesses serious about pre-leasing or working with a developer to construct a new facility within the next 18 to 24 months, there are strategies which you can employ to help mitigate and manage the impact of increasing construction costs and elevating uncertainty.

In our last issue, we explored the impact of rising material costs and their scarcity on the availability of logistics and warehousing real estate. This week, we will examine a few strategies that retailers and logistics businesses can use to help mitigate and manage these factors.

Construction Costs Mitigation and Management Strategies

While there is no one-sized-fits-all solution to dealing with such complicated processes such as industrial development and construction, there are a number of strategies to consider. When executed properly, each can add up to significant cost savings and can add a layer of predictability to help reduce lengthened timelines and deal with unexpected delays.

Planning Ahead

The obvious answer to dealing with uncertainty is planning ahead. In the context of logistics real estate, this means completing all of your internal needs forecasts and getting sign-off from key stakeholders to both begin the search process and be able to quickly execute should the right option become available. In today’s environment, waiting even a couple of weeks to rubber stamp a potential site can be the difference between winning or losing your lease, acquisition, or development.

Securing the Best Possible Pricing

In discussions with our construction and project management advisors, we understand that it is possible to negotiate with the trades and general contractors to minimize construction costs. While it is largely dependent on factors such as location, development charges, availability of materials, lead times, building size, building design, and labour, a professional construction manager can help shave off costs in every facet of the process; leading to noticeable total cost savings. Overall, having this discussion up front will allow you to run a competitive process that may result in the lowest-possible pricing, as well as even locked-in rates; a huge win given the inflationary landscape we find ourselves currently in.

Considering Different Designs and Layouts

Similar to the process of securing tenders for materials is the decision regarding your final design and layout. With a creative and experienced team at your side, you can modify your plans to account for delays or price hikes, effectively allowing you to insulate yourself from these factors. They say that necessity is the mother of all invention, and it can be said that the past two years have been disruptive enough to force innovation in construction methods, planning, and execution.

Starting as Early As Possible

Finally, and related to our first point, you will want to get started on the construction process as soon as possible. Often, developers begin site work and preparation while finalizing the site plan approval process and securing tender bids from the trades. What this means is you can get ahead of any delays or price hikes relating to labour or materials while taking advantage of the time needed to get everything else in order.

Summary

Overall, the GTA industrial logistics market is red-hot, with all-time-low availabilities and supply challenges. This environment will see businesses looking to fulfil their growth plans by planning well in advance and considering various strategies, from pre-leasing new construction to finding opportunities off the market.

However, with space becoming increasingly difficult to secure in a timely manner, businesses with logistics and warehousing operations should also consider build-to-suit developments or joint-venture projects with reputable developers. While this option may take anywhere from 18 to 24 months to complete, it will ensure you have the right facility for your needs.

Many of our clients are approaching us looking to pre-lease or develop, and our team has access to specialists who can help guide and manage the process from inception through move-in.

On that note, if you would like our team to assist with any of your real estate needs, or if you would like to discuss anything mentioned in this article, please contact us directly.