Ongoing supply chain disruptions and virus spikes could spell feast or famine for industrial construction contractors in 2022
With the ongoing supply chain disruptions and nearly two full years of collectively pushing through the pandemic, we’d think that the construction supply chain and runaway costs would be under control by now, right? Wrong. As soon as cases drop and life starts going back to normal, another variant wreaks havoc on an already exhausted nation.
At this point, Chicago-area construction professionals have had enough time to adapt to the challenges. But it doesn’t help that the delays are growing and price increases are getting even bigger. However, developers still need to build the space and are bucking up to meet the moment.
“If you order precast [concrete] today, you won’t get it until 2023. So that’s been a challenge,” says Mike Sullivan, President and CEO of Peak Construction. “The good news is that demand remains high and developers seem to be resilient in their efforts to build modern, state of the art [facilities].”
Compared to the final weeks of 2020, a Chicago-focused Q4 2021 industrial report from Savills shows that the vacancy rate, which currently stands at 8%, has declined while asking rent rates — nearly $6 per square-foot — have increased. And by the end of this past year, there was 28.5 million square feet of new space under construction. Despite the ongoing issues with building material costs and lead times, there was roughly 10 million square feet more new space under construction in Q4 2021 versus Q4 2020.
Year-over-year industrial deal activity was up in 2021. Overall leasing improved by 7.7% for the Chicago metro in 2021 versus 2020, the report indicates.
Or in other words, it’s still a feeding frenzy.
However, all submarkets are not created equal, so some areas are getting more attention than others. The Savills report indicates that the bulk of the projects still under construction at the end of 2021 were either in the Joliet area, with 7 million square feet of projects, or up in Kenosha, which has 5.6 million square feet of active construction.
“Compared to a year ago, it’s every bit as challenging — and maybe more challenging — because we thought over the course of the year, some of the supply chain stuff would work out and it just hasn’t,” Sullivan says of the current moment.
Sullivan highlights one example where his team paid for the expedited delivery of rooftop air conditioning equipment, but are now told that the order will be at least two months late.
On top of all of the logistical issues that have plagued the industry over the last two years are only getting more complicated as the highly-contagious Omicron variant sweeps through the nation. And despite relatively high vaccination rates in the Chicago area, the virus is knocking workers out of the job for at least a week or two as they recover.
Just like inflation, which can no longer be considered “transitory,” the supply chain disruption is still going to take longer than expected to get resolved, Sullivan suggests.
“I guess if there is good news, I do think a lot of our customers understand that we’re really battling the storms and headwinds and that there was no way we could have anticipated this,” he says. “There’s nothing we can do other than try to react and scramble as best we can to keep things moving ahead.”
Recently, Federal Reserve Chair Jerome Powell has expressed concern about the high level of inflation and the threat it poses to the country’s economic recovery. He’s also indicated that the nation no longer needs aggressive stimulus deals to get the wheels turning again. Instead, the Fed is looking to raise interest rates to try and calm the runaway inflation.
In the Chicago area, we can expect to see another strong year for industrial in 2022, Sullivan says.
“I think 2022 will be a good year for us because we’ve got so much work already,” Sullivan says. “But it will be a challenge to fulfill it because we get calls everyday from people who signed contracts and made promises that they can’t keep.”
However, for construction businesses who may still be behind the eight ball, it’s likely to be a very tough year.
“I would tell you, if you don’t have work on your books in the Chicago area for 2022 right now, you’re not going to be able to do it,” Sullivan elaborates. “All of the available materials are booked through all of next year.”
This story also appears in the January 2022 issue of Chicago Industrial Properties.
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