AZ Big Media Here’s a breakdown of the current home improvement market in Arizona


AAsk just about any contractor in the Valley about the status of their current deals and projects and they’ll tell you this: Business is booming! But as fertile as the Arizona construction and development market is throughout Metro Phoenix, it’s not without its challenges.

Right now, Arizona contractors are like a little brother who just got a large batch of LEGO kits – build your own Death Star, T-Rex and Batmobile. But little brother finds a catch – his older sibling wants all projects to be completed within the usual allotted time, yet some key LEGO pieces are backordered at double the normal price, and so are his two best friends work on own projects. Another buddy can help with the build, but he charges 30% more for his work than the best buddy would have.

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Currently, LEGO parts are much easier to source than the building materials required for a plethora of developments, especially for such a diverse mix of projects. Despite the resulting fallout from rising inflation, contractors rely on their ingenuity and adaptability to meet supply chain and labor issues, rising costs and time delays.

Demand (and costs) double

With an influx of projects and a multitude of missing essentials, how are Arizona builders adjusting?

“2022 is expected to be DP Electric’s strongest year in terms of revenue,” said Danielle Puente, DP Electric’s CFO. “There are still many opportunities today for projects that will be completed in 2023 and 2024.”

James Murphy, CEO of Willmeng Construction adds, “The pace of project opportunities we are seeing has not slowed at all and may even pick up as we hit mid-2022. This could be because more overseas developers are seeing the value of building in this market and seeing the natural opportunity that Arizona offers for corporate locations, industrial competitiveness and a business-friendly climate.”

Data collected by the Greater Phoenix Economic Council (GPEC) corroborates Murphy’s insight regarding out-of-state locations. According to information collected by GPEC from January 2021 through June 2022, 73 companies from across the nation and around the world have relocated to Arizona, with the highest percentage (26%) tied to international companies.

But despite corporate brain drain and continued interest from global destinations like Canada, Taiwan, and Germany (the top three international locations) in nationally based companies in California, New York, and Washington (the top three examples in the States), several challenges remain in the game. And a very real and prevailing conundrum facing the construction sector in bringing these projects to fruition is time.

“Rarely does the phone just ring on a project, but that’s what happens in today’s market,” said Grenee Celuch, CEO of Concord General Contracting. “We have repeat customers who call us to start projects and we ask about the timeline they have set for construction. If it doesn’t fit within our staffing availability, we decline or discuss the possibility of postponing the project for a few months to ensure we can successfully complete the project.”

Challenges of the inflation cascade

Timing adjustment is an important factor for clients and contractors in the current market. Labor shortages and supply chain issues have significantly lengthened project lifecycles. To counteract these inflation-related outcomes and to accommodate extended delays, many projects are booked well in advance between companies and builders.

“The bad part is that owners and developers are trying to proactively hedge against inflation and price their project wherever they can to combat the rising cost of inflation and the impact on their project performance,” said Derek Wright, President of Suntec Concrete. “So they’re trying to set prices earlier than we’ve ever seen on projects — 8 to 12 months in advance.”

According to Wright, projects were fully booked between three and six months before the current rise in inflation.

Associated with time-related challenges are exponential increases in material costs. In June, the Associated General Contractors of America (AGC) released a report that revealed double-digit increases in industry-wide price indexes: diesel fuel rose 84.9%; liquid asphalt increases by 80.5%; Steel mill products and aluminum mill molds are up 32.9%, and architectural coatings (like paints) are up as much at 31.6%.

“The pipeline of new work has been very robust and is causing stress in the supply chain, while the supply chain has not necessarily been able to keep pace with growing market demand,” said Tom Dunn, president of the Arizona Builders Alliance (ABA). “Supply chain, which is not just materials, but also flows into the labor and equipment side of things.”

The rising cost of materials, freight and transportation combined with labor shortages put contractors in a precarious position.

“We’ve seen costs increase by 19% to 21% and more over the last two years, and that’s affecting how far our customers’ dollars can flow to build their future project,” says Celuch. “Additionally, lead times for certain materials are forcing us to look at our construction process differently, through multiple Guaranteed Maximum Prices (GMPs) that allow us to order materials well in advance to ensure they are on site when needed.”

Murphy adds, “Materials are a big challenge, and early sourcing is a must if you want to keep your project on schedule and on budget. We are fortunate to have a strong stem team that anticipates trouble spots and acts early to secure those material deals. You have to work together throughout the design process to find alternatives to the material issues.”

Creative solutions from contractors

Two words that Celuch and her industry colleagues use – and find critical in the current building climate – are “creative” and “communication”. “We can’t build like we used to in terms of budget or schedule anymore,” she says, “and the whole team has to accept that we’re moving in a different world than we’ve ever been, and it requires open communication and creativity when building a project.”

Justin Dent, senior vice president of McCarthy Building Companies Southwest, has observed how creativity manifests itself in a shift in owners’ interest and willingness to use methods of collaborative project delivery. This allows for early collaboration with the general contractor during the planning phase, which allows materials to be purchased early in the project, he explains. In turn, lead times and budgets are managed more effectively.

Dunn explains that one such collaboration option for owners is to order materials ahead of a project start date and stock them. While storage obviously comes at an additional cost, it can be worth it in the long run. “Securing a price early is a known variable, waiting until later in the process carries the risk of the unknown,” he says. And waiting in a volatile, fluctuating market could bring with it the possibility of both skyrocketing costs and significant time delays.

“Those who go this route also benefit from innovation and collaboration between the design team, the contractor and the owner, resulting in a better project,” notes Dent. “Many of those who have taken this path will stick with future projects because of the good results.”

When it comes to communication, Wright explains that transparency is key. “Shared risk and transparency with owners about where things really are is essential,” he says. “‘Here’s what we can do, here’s what we can’t do.’ This is not an equation where one guy can win; You have to share the risk and win or lose together.”

Notes on the Horizon

Even in the midst of the inflationary bubble, there are visible bright spots.

“When you look at the variety of projects that are coming to Phoenix or are already under construction, that variety of projects and the employer base that comes with it represents a very different change in dynamic than Arizona has experienced in the past,” says Wright, “and that’s a very positive bright spot.”

For 2023, Wright predicts that the continued expansion of the technology, manufacturing, and e-commerce distribution sectors will contribute to the diverse activities he is referring to.

California-based Viasat, a satellite communications company, is one such example entering Arizona’s technology sector. The first phase — as part of a 300,000-square-foot project — includes the development of 135,000 square feet near the center of ASU Research Park, scheduled for completion in June 2024. Bespoke Manufacturing Company (BMC), also of California, added its ranks to Phoenix Metro’s manufacturing sector. And musical instrument and pro audio equipment supplier Sweetwater is joining the Glendale e-commerce market with its fulfillment center set to be fully operational by October 2022.

Additionally, Dent points to numerous infrastructure projects on the horizon. “We have seen a steady increase related to critical infrastructure projects including water/wastewater, renewable energy, healthcare, schools, data centers, airports and transportation projects. And with the expected funding to support these and other infrastructure projects,” he says, “we expect these projects to continue to be the most commonly planned and built projects.”

Transportation in particular has boomed and will continue to do so, with investments such as Gov. Doug Ducey’s $400 million allocated to widening Interstate 10 (the Wild Horse Pass Corridor) between Chandler and Casa Grande. And if Proposition 400 is passed, the dedicated half-cent sales tax funding for transportation investments will support projects like State Route 30 as well as the ongoing progress of Loop 303 (which is taking place as part of the original Prop 400 program).

While transportation and infrastructure projects are certainly necessary, particularly in fast-growing demographics, the mix of private and municipal projects brings added stress and competition to an already lean supply chain.

“The whole aggregate, all these supplies have to come from somewhere,” says Dunn. “Everyone is chasing the same thing — especially when you’re competing with the government at the federal level or at the state level. But when the private development market competes with the government market, it’s difficult; The prices are rising.”

Until the market levels out, owners, developers and contractors are doing their best to navigate a landscape of limited proverbial LEGOs and builders. And it can take a while for the climate to adjust to a more balanced baseline.

Puente concludes, “Global economic indicators are beginning to show signs of a recession or slowdown over the next five years. However, we believe Arizona could do better due to population growth from surrounding states and growing manufacturing and industrial sectors.”


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