Electrical switchgear, which during normal production periods took four to six months, has seen delays double, and even triple in some cases, over the last year. Demand for electrical components has increased, as industries focus on electrical conversions to meet net-zero targets. This has placed a strain on the sector as manufacturers struggle to meet the high demand amid labor difficulties and certain raw material shortages.
A 2023 Cushman & Wakefield sentiment survey of over 70 general contractors (GCs) in the Americas showed some improved views on costs and timelines over 2022 levels. However, improved cost sentiment belies increasing labor costs in a labor-constrained market. Sentiment improvement is most likely a result of deceleration in construction and building costs, which are not increasing as steeply as they were in mid-2022. In April of 2022, building costs increased 16% on a year-over-year (YoY) basis; this slowed to 6.4% in April of 2023—still elevated but increasing at a slower pace.
However, the labor component of construction costs continues to increase, especially skilled labor, which increased 3% month-over-month (MoM) in April 2023. Non-residential construction employment continued to increase, growing 3.5% YoY as of April 2023, even as many open positions remain unfilled.
During the eight quarters preceding the pandemic, construction job openings outpaced quit rates. The pandemic accelerated this trend, leading to the widest gap between job openings and resignations during fourth quarter 2022. As of first quarter 2023, the gap closed slightly as the job openings rate receded but continues wider than historical averages. To attract talent to open positions, the sector has raised wages consistently and significantly over the last six quarters.
Project timelines have increasingly been delayed, not only due to the extended material lead times, but also because of the tightness in the labor market. Staffing a construction project with both common and skilled talent has become an additional challenge to the sector.
New development continues in the life sciences sector, despite persistent challenges, with over 33 million square feet (msf) of projects under construction—a 42% increase in activity YoY. Competition for materials and labor has increased significantly over the last year, causing some projects to be put on hold, delayed or scrapped altogether.
Demand for space will continue in the long term, given strong underlying fundamentals. Ongoing clinical trials, R&D and existing manufacturing will be augmented by onshoring efforts. U.S. government plans to bring the manufacturing of active pharmaceutical ingredients (API) back to the U.S. will impact demand for space. According to a 2020 report published by the Food and Drug Administration (FDA), 88% of APIs are manufactured overseas. Locating the bulk of the API supply chain outside of the U.S. has resulted in several drug shortages which have become more prevalent in the last decade. More recently, a shortage in cancer drugs, resulting from a plant closure in India where the drug is exclusively manufactured, led to patients receiving smaller doses of the lifesaving medication. 1
Moving manufacturing to the U.S. means more jobs and space will be required. However, the government needs to provide solutions to several hurdles, including costs to manufacture in the U.S. and the need for talent. The industry will need to be innovative in order to continue building new spaces or converting old ones, especially given the continuing material and labor constraints.
Persistently increasing delays means that planning and solutioning up front, and underwriting in the current industry, requires discipline and upfront investment. Strategies for starting a program and projecting accurately should include:
- Third-party site due diligence at lease inception
- Setting a strategic execution plan and accounting for true risk planning
- Considering procurement and the risks of the economy
- Locking down and securing materials with suppliers
- Engaging vendors earlier
Life sciences construction, which is particularly vulnerable to backlogs in materials, will continue to experience delays in the following supplies:
- AV and security systems: microchips, logic boards
- HVAC equipment: AC units, air handlers, specialty equipment
- Electrical: light fixtures, electrical switch gear (ATS, UPS, generators)
- Some fabricated millwork
Sound planning with clearly defined strategic goals allows for a more certain measure of true risk profile and a better prediction of a project’s cost and estimated time of delivery. Companies should also consider reverting back to design-bid-build contracting strategy in their project delivery plan, with an emphasis on identifying key long-lead items that must be procured before design is done—typically during early programming. This would help to alleviate the risk of trying to fast-track a project, while allowing the architecture engineering firm the ability to purchase long-lead equipment during the design phase.
Experienced project development teams make every effort to ensure delays caused by material and labor challenges are planned. In this current environment, however, project managers must be brought aboard early to revise timelines, reduce risk and deploy new tactics—all strategic efforts that will increase the likelihood of meeting a project’s budget, milestones and timelines.