And what you can do about it.

The construction industry in the US has a big problem, and it is not rising labor or material costs. The industry has managed to fool real estate investors and developers for the better part of 10 years.

Maybe it is the blue collar, “can do” attitude.

Maybe it is a fear of the most recent 2008 recession.

Maybe it is an understanding of the industry’s seasonality and (overall) economic cycle.

While total construction spending is the highest it has been in a decade, the labor performing that work is still 762,000 people short of the January 2007 peak.

In January 2007, about 7,725,000 workers were contributing to the $593.82 billion of total non-residential construction spending. For every worker, that is about $76,870 in actual spending.

Fast forward just a few months to November of 2007, and life in the construction industry was good. 7,523,000 workers were involved with $693.76 billion in construction.

Why does this matter? Miracuously, in 10 months the industry’s output supposedly increased 24% (on an annual basis) as each worker now was now responsible for $92,219 of the sector’s non-residential spending.

Can you sense my sarcasm? That is because the US government has measured productivity for a long, long time.

Since 2007, the average annual percent change of productivity has been 1.2%. Let me repeat that.

For 10 years, the average annual productivity change has been 1.2%.

In February 2017, the Associated General Contractors of America (AGC) had raised their own concerns about labor and material shortages. We would argue that they were about 10 years late to the party.

Why? Let’s jump ahead to November 2017 where labor levels in construction were reportedly 6,693,000. These workers were now contributing to $719.23 billion in total construction spending.

Magically, each worker is now responsible for $103,293 in total construction spending, an overall change of 34.4% since 2007, or if you want to get fancy…an average rate of change of 3% a year.

Taking a page from the real estate investment term “multiple,” that is over 2X of the annual percent change in productivity (remember it has been 1.2% these past 10 years).

Could the construction industry’s performance (and above average productivity) be related to advances in engineering/ design, material used, or technologies available? Possibly.

While we are optimistic that there have been improvements to the industry as a whole, we are skeptical that any of these improvements have led to massive advances in how the work actually gets built in the field. Don’t believe us? Go by your closest commercial construction site one day and watch the work for 30 minutes or so. Tell us what you see. . . Training these days consists more of on-the-job training. Some industries refer to this as ride-along training, which simply means, “watch what I do…” You can see how this method may not be the best for scaling as your work volume increases. You are at the mercy of the quality of the people that your new workers are shadowing.

During 2010-2011, the construction industry was at rock bottom, literally. As a sector of the US economy, over 2 million jobs had been lost with only 5.5 million workers still getting valuable on-the-job experience and gaining day-to-day knowledge of their craft.

CONSTRUCTION (NON-RESIDENTIAL) INDUSTRY LABOR, 2007-2017

In the years since 2011, the construction industry has made a comeback. Which is definitely a good thing!

But what is the quality of the work that has been “put in place” over these last 10 years? Based on the talent available for doing more work, we are concerned that construction defects have found their way into the most recent supply of new commercial buildings.

“It’s only when the tide goes out that you know who’s been swimming naked.”  — Warren Buffett

A common misconception is that new buildings do not have problems. Tell that to mechanical engineers and architects. They had to invent a whole new industry (called commissioning) to test if their designs even work.

Why does this matter now?

New real estate developments and existing assets that were constructed or renovated over the last 10 years were built by fewer workers, with less experience, and minimal supervision.

Even if…that is a big IF… there were no errors in the planning and design, the chances that the construction was completed correctly are slim to none.

We believe that fewer (qualified) workers doing more work is a recipe for disaster. Since 2011, the construction industry has seen a steady increase in spending.

Now more than ever, real estate investors and developers need to understand the risks of having an unqualified construction team. Unfortunately we think some real estate groups provide “risk-adjusted returns” by simply doing what everyone else does – – blame poor performance on the economy, the market, rising costs of materials, shortages in labor.

Think about the amount of detail and effort that is put into drafting NFL players. The recruiting, the scouting, the tests, the tryouts are all devised to make sure the team is “buying” the best talent possible. Why?

Talent matters.

Unfortunately, only now are most people realizing that talent is in short supply in the US construction industry. It is scary to think, but if you can fog a mirror and put a number on a piece of paper that says “I will build you XYZ for $1MM, you could be hired as a contractor.

You might be asking, “great, so what now?”

How do you mitigate your contractor’s potential lack of talent and qualified labor?

• CURATE A TEAM OF PROFESSIONAS. Amateurs think they know everything. Pros know that they can get better every day. Pros are never too proud to ask for help. Pros understand the importance of psychology. Pros know that mindset matters. Pros show up to train even when they may not feel like it. Pros know that preparation before “game day” is how they really win Pros can admit when they were wrong. Think beyond just your favorite construction company when putting together a solid team. Remember they can be rockstars on their own, but if they can not play well as a team, you are better off moving on to a group that can.

• LEARN FROM YOUR TEAM’S SUCCESSES & FAILURES. Things will go wrong. It’s ok. What’s not ok is not preparing for it the next time around. Did you and your team miss a deadline? Why? Did you crush your budget and save lots of extra $$$? Great! Now figure out why. A simple one-pager, for each (successes/ failures) can do wonders for your future performance. Real estate folks are usually too busy “networking” or “sourcing deals” or “hustling” to take a few minutes to reflect. It is a small investment in time (and thinking) that will compound for you as you hire construction companies. Imagine that you closed an incredible build-to-suit or value-add opportunity, but your preferred contractor has no capacity to take on new work. Ugh. Would it be great to have lots of previous lessons learned for you to find the next best contractor? We think so.

• START WITH A SHARP PLAN & A CRISP DESIGN. Good construction starts with good planning and design. No seriously. According to PwC, one of the biggest missteps iis starting construction before design and other project criteria are fully defined. Noticed it says fully defined…not “perfect.” Have a process and grade your team before, during, and after.

• DEVELOP A REALISTIC SCHEDULE. There will be rain, or snow, or ice, or wind, or hurricanes, or tornadoes, or [insert your favorite weather here]. These conditions will impact your schedule and are absolutely beyond your control. Most building materials have restrictions on the temperatures during which they can be installed. Some materials may even become discontinued or end up in short supply. Yet buildings are constructed every day in extreme environments with all kinds of materials ALL OVER THE WORD. How? Because they have sensible plans and realistic schedules. Contingency is not just useful when it comes to how much money you need to spend. Schedule contingency is critical when it comes to the number of days you have budgeted. Anyone that has experienced permitting delays or missed appointments from inspectors knows what I am talking about. Stuff happens. Plan the best you can for the unexpected.

• SIGN A CONTRACT WITH A MARGIN OF SAFETY. If your budget is $5MM and you sign a contract for $4.95MM, that does not leave you a whole lot of room for error. Humans suck at estimating. Spend some time with your design and construction team to understand the story behind the numbers. Until you do, it is just a number on a page. If you ever hear about marketers talk about product market fit, you know that having the right sized contractor on your project will help to ensure the best fit for subcontractors, suppliers, materials,etc. The same contractor who is building a 300+ unit low-rise multifamily is not necessarily the same contractor you need to build a highrise class A office building.

Whether its 2018 or some year off in the distant future, you may find yourself in a tough position due to the lack of seasoned talent in the construction industry. That’s ok.

Be resourceful, diligent, and thoughtful, and you can increase your chances of a successful outcome.