TOMMY HOLDER: Atlanta’s recent recovery after the 2008 recession was a response to the pent-up demand for construction and the normal cyclical nature of the construction industry. Atlanta is experiencing growth in all sectors, public, private, health care, higher education, science and technology, housing, retail and office. Of course, the low-interest-rate environment has helped. Our company is experiencing similar growth across the country.
NILES BOLTON: It always seems that Atlanta comes out of recessions slowly and then picks up speed as the economy improves. That is when all the advantages that we have here in Atlanta really stand out. By this I mean the relative affordability of land, housing and office space—all in a growing area with a good climate and educated work force when compared to other major cities. Atlanta appears to attract corporate relocations during these cycles and this just further spurs the growth. And this time, Georgia Tech has really served as a catalyst for all the activity going on in the Midtown area.
EMMY MONTANYE: Indeed, Atlanta hesitantly emerged from the recession. As we gained confidence in selling land, buying land, lending money, negotiating contracts, designing, permitting and building, Atlanta increased momentum. Initially the banks were lending for multi-family apartments, but over time new jobs were created and other market areas began to flourish, including the sports venue industry, health care, hospitality, mixed-use, institutional, industrial, commercial office and more, all of which continue to contribute to the current boom. Atlanta continues to be an attractive place to work and live.
MICHAEL TOBIAS: Why is it happening in Atlanta? Just follow the leading indicator to construction. The population growth of Atlanta from 2017 to 2018 was 1.5 percent, according to the census. Compare it to America’s population growth of 0.7 percent over that time, the city is growing twice as fast—making Atlanta one of the fastest-growing cities in America. All those new people need to live somewhere, work somewhere, play somewhere. That’s a lot of building to support all this.
RICK PORTER: While demand is certainly the primary driver of new development, one also has to recognize the impact of the regulatory infrastructure and financing availability. The lag time between concept and actual project construction and delivery is typically a minimum of a year, and a lag time of two to three years is not unusual to move from program to design to financing to approval and finally construction. So, we see the result of several years of demand culminating with the current supply chain. Further, the current low-interest-rate environment has made investment in real estate more attractive. The increased availability of financing is a major contributor to the current activity.
Q: What are some of the biggest opportunities and, conversely, challenges your industry and your business face for 2019 and the near future? What role, if any, do rising labor and material costs play in this?
PORTER: Creative, mixed-use environments continue to create opportunity not only in major urban centers, but even in smaller, suburban areas where urban development is taking place. The primary challenge to this opportunity is the archaic regulatory infrastructure that has matured based upon segregated land uses, and looking forward, the difficulty in dislodging this fundamentally misaligned regulatory infrastructure. That being said, the last major real estate downturn severely reduced available labor and manufacturing facilities associated with development. The pricing pressure created by this reduction is challenging the production of affordable space.
MONTANYE: We are all busy and there are challenges. There are plentiful investors willing to spend money, but as land prices continue to increase, many projects locally are financially threated by Atlanta’s lower rental rates—making it difficult to make the numbers work. Layered onto that is the increase in construction material prices and the increase in labor rates as the industry responds to the demand of a boom economy. The threat to the industry is a workforce that is diluted in talent and experience that compromises quality design and construction, combined with escalating construction costs that limit the potential for new projects.
BOLTON: The opportunities are terrific for architects and engineers now. The problem is the shortage of trained professionals available to work during this economic expansion. During a downturn like the one that happened a decade ago, students see what’s happening and change their majors while in school or leave the industry quickly if they cannot find a good job. This effect usually lasts 10 years before universities are able to build enrollment back and graduate enough architects and engineers to replace those exiting the workforce, including retiring Baby Boomers.
HOLDER: The biggest challenge has been finding the people to do the work. As Niles said, the last recession resulted in droves of people leaving the construction industry. Replacing the intellectual capital that left and finding skilled tradespeople has been challenging. My company is quite active in workforce development at a national scale—teaching, recruiting and raising awareness from grade school through high school levels to identify and create the construction workforce of the future. We are looking everywhere for talent, and many of our newer associates are coming from nontraditional sources. Meanwhile, labor and material costs have been rising steadily for over a decade in our industry. We have to constantly monitor the market to ensure we are giving our clients accurate information, to enable them to make appropriate choices to keep projects on budget. Schedules are also under stress as a result of labor and material shortages, forcing us to find new and creative ways to manage our clients’ expectations. We cannot rely on past experience as an indicator of future success. The game has changed.
TOBIAS: The construction industry is the final frontier for tech disruption. There’s still a lot of inefficiency and redundant work being performed—repetitive tasks that could be automated. There’s also a lot of customer dissatisfaction with the construction industry. People almost automatically assume projects will take longer then expected and cost more. What other industry has clients thinking that? There’s a big opportunity to heal these pains, not with advanced artificial intelligence, but merely simple automation. Streamlining the whole process is a big opportunity, aligning the dozens of companies needed to complete a project with competing motivations to all row in the same direction. Believe it or not, New York Engineers works best when construction material and labor costs increase. It makes our engineering design that much more valuable when we design our construction cost and time from the project entirely.
Q: One of the biggest potential opportunities that have lain dormant has been the push to fix the crumbling infrastructure in the United States. Do you see a possibility for a pick up in activity in this area?
BOLTON: We certainly need to speed up fixing our infrastructure to support the growth that Atlanta will experience—though my firm won’t be directly involved, our projects will need it.
HOLDER: Infrastructure investment is a national priority. In certain segments, Holder Construction is already very active in building and re-building the nation’s information and transportation infrastructure in the form of data centers and airports. I don’t see that slowing. By necessity, addressing aging infrastructure will increase for reasons of safety, replacement and needed upgrades. Beyond that, we have traditionally not focused on horizontal construction or heavy civil work.
MONTANYE: Locally speaking, Atlanta has an active infrastructure that dates way back to the turn of the 20th century. It’s old and crumbling. Recent special-purpose tax programs are providing funding for infrastructure improvements, but considerably more funding is needed to make comprehensive improvements and replacements to support the current and future upgrades of sanitary sewers, storm sewers, water lines, roads, bridges, sidewalks, transit, traffic signals and more. We have been “patching” for years, and it is time to solve some of the significant infrastructure challenges in the city and get out ahead of the growth.
PORTER: The increased infrastructure activity will no doubt present itself in the form of public-private partnerships. While not all development firms will be positioned to participate, many will include public infrastructure within developments produced with contributions from public entities at all levels of government. The contributions will come in the form of regulatory relief, financing through public vehicles such as bonds. and operational expense reductions such as reduced property taxes.
TOBIAS: Just traveling abroad, it’s very apparent to me that the U.S. is falling behind the rest of the world with our infrastructure maintenance and capital improvements. There’s a big opportunity here: Has any city enjoyed less traffic over the past few years? As infrastructure complaints mount, politicians will hopefully devote more budget to construction. My company has completed some major infrastructure projects like providing emergency power for JFK Airport’s air traffic control tower. We have completed dozens of MEP [mechanical, electrical and plumbing] engineering infrastructure projects for city, state and federal government agencies. Seeing how public projects work is eye-opening. I think there needs to be much more pressure on cost control of these projects. We’ve gotten to the point where it just takes so long and costs so much to get these projects done that we’re at a major disadvantage compared to other countries. For example, a long time ago we built the Empire State Building in just one year, but One World Trade Center took nine years and cost over $1,000 a square foot. Compare that to the Burj Khalifa, the tallest building in the world, which cost under $500 a square foot to build and has 64 more floors than One World Trade. Granted, much of the cost savings was due to bringing in thousands of migrant workers from other countries. Working three shifts of construction, 24/7, definitely speeds buildings along. Whether that’s good or bad for the country is a different story. But purely for infrastructure construction, we have to recognize almost all other countries are playing by different rules that allow them to build their infrastructure quicker and more affordably than us.
Q: Speaking of the international arena, how does the U.S. real estate development market compare to the global market, from your point of view? What’s happening abroad as compared to here in the States and vice versa?
HOLDER: There are many parallels. Global materials sourcing is certainly becoming more prevalent, particularly on the kinds of large-scale work in which we are involved. A large project or booming market overseas that is consuming steel or concrete capacity can quickly have an impact on domestic projects or markets. We rely on our supply network of trade contractors for their expertise to develop coping strategies to stay ahead of those impacts, and we have national procurement relationships which help us manage the efficient flow of resources.
BOLTON: Anyone traveling abroad will see the growth and development that is happening all over the world. We worked in China for nearly 10 years, even before the recession, but when the U.S. market improved we were ready to focus back on the market we could best understand.
PORTER: Real estate development in the U.S. is primarily delivered through a private-sector model. Ownership, concept, design, financing, construction and ownership are dominated by private entities. Much of the global market has a much larger contingent of public involvement, and hence, complicates the opportunity for participation by smaller, U.S. development firms.
What are some of the advances in construction and real estate development technology that you’ve seen businesses take advantage of in recent projects? How has this impacted the industry?
MONTANYE: Computer-aided design allows us to design in three dimensions and “marry” the site to the building model in real-time, 3-D space. This allows designers to identify conflicts and optimum routing and sizing of spaces, building systems, life safety, utilities and much more. The further benefit is that many of the building systems can be pre-fabricated off-site, including complex bends, and delivered on site for immediate installation, saving considerable time and labor efforts. For example, we recently pre-fabricated off-site and then installed onsite a complex piping system for the Georgia Tech Data Center at the new CODA complex on Tech Square.
TOBIAS: In our space, virtual building with BIM is approaching CAD as our primary design tool. New York Engineers is working on developing instant, automatic cost estimates using BIM software, so the design engineer gets immediate feedback about how much his design costs to build. Typically, this feedback takes months to get after the project was bid out to contractors. By that time, changing the design causes delays and is usually too late to do. So knowing the instant cost and quantities of material would be a huge benefit to the client.
BOLTON: I used a drafting board when I started, and now production is all computerized. Constantly improving software and hardware has improved communication between design disciplines and construction teams, which now extends to manufacturing and production. This is changing the industry tremendously. On the design side, the software for improved visualization and virtual reality brings a whole new experience to clients during the design process and make decisions easier for them.
HOLDER: Others have commented on the software, so I’ll share a different thought. I can’t emphasize enough the importance of being able to use handheld mobile devices on our sites so we can access synchronized, real-time data wirelessly. This is quite different from my early days in the field using out-of-date blueprints and trudging across job sites in the mud to get answers and information. Further, we also now use drones and laser scanning to “reality capture” thousands of points of data allowed us to verify as-built conditions on the Mercedes-Benz Stadium’s first-of-a-kind retractable roof. We couldn’t have done that without these kinds of new technologies coupled with the smart people and partners who know how to use them.
Q: Some onlookers worry there’s a bubble about to burst in commercial construction and real estate development with what they say has been a rush of overbuilding, especially in urban settings like Atlanta. Do you think one is looming, or is this fear largely unfounded?
MONTANYE: The nature of the market is very intricate. There are foreign investors bringing money to Atlanta and corporations continuing to come to Atlanta, bringing new jobs and a need for housing. I think that for Atlanta to continue to grow, we need “all oars in and rowing,” which includes growth and advances in education, public safety, transit, infrastructure, healthcare, affordable housing and community programs. There will always be a downturn looming—it is just a matter of when. A sudden decline in the market could be caused by a crash in the global or national economy as well as a major collapse in infrastructure, jobs and resources.
BOLTON: I do not think we have overbuilt at this point. Yes, the development and construction cranes are concentrated and certainly much more visible right now, as different building types are being erected. High-rise, mid-rise and student housing have certainly captured a lot of attention, but in total new units, Atlanta is nowhere near its peak periods of the past, and absorption has remained strong. New hotels are being built after a long period of very little new product. We are not seeing much spec office building or any new malls being developed as retail shopping trends change. Activity will slow down from lack of labor and poor absorption as we continue to catch up with demands for new product. Loss of confidence by the consumer is what I do not want to see.
HOLDER: If I knew the answer to this question, I would probably be better off working on Wall Street. We have to stay very focused on the market conditions that exist at the moment to ensure we are meeting the demands of our customers, while keeping an eye on the horizon and where the market is going. We stay in touch with the economic trends and forecasters and remain cautiously optimistic that growth will stay steady. Holder Construction has deliberately diversified our portfolio of projects by building types and by geographic regions, and by doing so we feel we are prepared to withstand market disruptions.
PORTER: Real estate development is a cyclical business, and these cycles must be priced into the business model. Thankfully most down cycles are not as deep as the most recent one, but they will always be a component due to the lag time between concept and delivery, and the obvious fact that property does not move. The commodity of real estate developers is land in a particular location, and we must attract demand to the commodity. We can’t take the commodity to the demand. The competition in the industry is good news for consumers, but also creates the potential of too many developers pursuing the same market, or the market changing during that significant time period between concept and delivery. While developers and bankers can have short memories, the last cycle was so deep that it continues to bring some discipline to the supply chain that will not eliminate a slowdown, but seems to be reducing the chance of a significant bubble.
TOBIAS: We’ve been riding the high cycle for an extended period now. Timing-wise, we are probably overdue for a downturn. However, the high period wasn’t as high as expected, so maybe it’s reasonable for its duration to be longer. Empty office and apartment spaces are the lagging indicator for a downturn. Once vacancy rates hit a time of sustained decreases, demand for the space falls and new building construction will decline quickly. That doesn’t seem to be the case at the moment. The leading indicator for the market health is design filings, which are still strong. Once this starts dipping down, a construction dip usually follows about a year later. In Atlanta population is increasing, jobs are increasing, for now everything is looking OK. I do predict in a year or so we’ll start to see a softening in the construction market. It starts at the high end—the luxury high-rise condo market always seems to soften first—then moves to market-rate residential and commercial spaces, while smaller renovation projects are minimally affected. When this happens, planning that new 50,000-square-foot manufacturing facility may get cancelled or postponed, but the office space reconfiguration, or HVAC boiler and chiller replacements, will continue through a recession.
Q: What should we understand about the commercial construction and real estate industry that most people likely don’t?
PORTER: Real estate development is one of the most regulated activities in the U.S. while being perceived as “out of control.” Development necessarily introduces change in a community that might appear unregulated, but the vast majority of development is, to the detriment of creativity, driven by regulatory compliance. Introducing the next generation of land-use delivery will demand the next generation of regulatory infrastructure that does not yet exist.
BOLTON: Affordability is something that everyone talks about. The truth is changing codes, regulations and fees continue to be the largest burden on new development, not the cost of materials.
MONTANYE: Nothing happens without leadership and vision. Jobs are the main building block, followed by land prices, financial lending, construction material costs and labor costs. Critical to our industry’s success are the people committed to creating exciting places like Mercedes-Benz Stadium, the Atlanta BeltLine, the CODA building at Georgia Tech, Ponce City Market and more.
TOBIAS: Construction seems like an easy, sexy thing to do, from the outside. People are in the buildings and homes we create every day of their lives and naturally start thinking, “Hey, I could build a home or space like this—it would be simple.” This can’t be further from the truth. They don’t understand that construction is one of the most risky businesses, and notoriously litigious. In addition, the stakes are very high: Almost nothing is as expensive as construction. I can’t tell you how many times I’ve heard of husbands and wives building their dream home and by the time it’s completed, they’ve divorced. For a project to go smoothly it requires a strong, experienced leader who can lead dozens of design professionals, real estate brokers, lawyers, general contractors and subcontractors. All these parties have underlying competing interests and you need to make everyone play nice to get the project done. Over a two-year construction project timeline, there will be many ups and downs. A very clear budget and schedule must be set on day one, and tracked weekly. Clear communication channels must be set. Weekly meeting rhythms with the whole project team is the heartbeat that keeps the project forging ahead, blasting through obstacles. Forcing this type of collaboration and communication among a dozen companies that just met is critical. Your success depends on how well you can manage all this and avoid internal conflict. When your team is in conflict, the only loser is you. My words of advice: If you want to enter this arena, you better understand what you’re getting into.
HOLDER: Most people do not understand that construction is a professional service business. We oversee skilled labor and manage safety, real-life issues, weather, trade contractors, and budget and schedule as a matter of course. But the degree of uncertainty, risk management, design assist, and management and collaboration with our owners and design partners is largely unknown. Owners are busy coping with their company challenges and rely on us to perform. Design partners are ever challenged to respond to tighter schedules, lower fees and more regulations. They benefit from the help of partners like us who manage schedules and budgets. We work hard to provide that help in sensitive, respectful ways, appreciative of good design, and to dispel the old contractor stereotypes. For us, it’s all about collaboration, service and teamwork.
Q: If you could predict something that will take your industry by storm in the near future, what would it be?
PORTER: Building urban environments in traditional suburban locations—and it’s already taking hold. These new developments will offer all the amenities of urban areas such as walkability and mixed use with less congestion and better community infrastructure.
MONTANYE: I do not know exactly what it is, but I think it will be about mobility options and better managing our peak traffic demands to tolerate further growth—potentially a combination of transit, rideshare, autonomous vehicles, small aircraft, a change in trucking and freight transport, changes in school and job schedules and other ways to optimize capacity and options. Maybe we stop building dedicated parking decks and transition to common area mobility hubs that allow people to arrive from multiple modes of transportation, park if needed and then travel a short distance by foot, scooter, bike or other non-automobile option.
TOBIAS: It’s hard to predict any new technology or practice that will suddenly and unexpectedly revolutionize the industry. After all, adoption of anything new is painfully slow in the construction industry. Revit, the leader in BIM software, was released in 2000, and 19 years later, it’s still not the predominate design tool. AutoCAD was released in 1982, and it overtook paper hand drawings in about 10 years. If I had to point to one thing, modular building is likely the big item that is starting to gain popularity. But the construction cost savings are barely present now compared to site-built buildings. The company that really figures modular building out and scales it to a point where materials can be bought in bulk for multiple projects will be a game changer. I think this is 10 years out. Drone surveys are starting but only for exterior pipelines and cool marketing videos. I look forward to one day throwing a handful of yellow jacket-sized drones out my office window to autonomously survey interiors of construction sites nearby, but that’s probably 20 years away.