It seems like ages ago when, coming out of the COVID-19 pandemic in 2022, developers were besieged with supply chain disruption and materials sourcing issues, skyrocketing construction costs, shortages of qualified workers, and interest rate hikes.
“It’s been a bumpy few years since COVID-19, and there were a lot of problems in the marketplace at that time that were affecting developer costs,” recalls John Holland, Affiliate Member, regional director of the Ottawa, Canada, office of global architectural firm and SIOR affiliate Ware Malcolm. “There were supply chain issues and shortages of steel, precast concrete, and joists, and everybody was pre-buying materials before the building was even designed. It was just a crazy time.”
THE NUMBERS – THEN AND NOW
Construction input costs – the cost of goods and services, minus labor and capital investment – for new nonresidential construction rose 42.5% from March 2020 to March 2022, according to CBRE’s 2022 U.S. Construction Cost Trends report. Demand for materials climbed sharply due in part to the increase in warehouse/distribution construction driven primarily by the spike in e-commerce.
Fast forward to 2025, and global supply chain pressures have eased (for now, anyway); construction costs remain high, but the Associated Builders and Contractors reports that overall construction input prices have stabilized, rising by just 0.5% through the first 11 months of 2024 (although much of that is attributable to a decrease in energy costs); construction employment grew 8.7% from February 2020, the peak pre-pandemic month, to August of 2024, according to a report by the Associated General Contractors; gas price averages (all grades) dropped from $5.03 to $3.17; and the Fed began cutting interest rates in September, with more anticipated in the coming year. In addition, industrial construction has slowed considerably since the COVID-era peak.
“I think pricing has stabilized for now,” says Melissa Alexander, SIOR, SVP/industrial brokerage at Foundry Commercial in Nashville, Tenn. “Construction costs and the supply chain are good right now – we’re not having to pre-buy dock levelers, HVAC systems, or items like that – and there’s a lot more surety that we’ll be able to get what we need.”
So, where are the pain points now?
LAND AVAILABILITY AND ELEVATED PRICING
One of the byproducts of the e-commerce boom was the rush to build more warehouse/distribution space close to population centers. The pandemic accelerated the e-commerce trend, with over 350 million square feet of industrial space delivered in 2020, over 400 million square feet in 2021, and over 500 million square feet in 2022 and 2023 – the two highest years on record – according to Commercial Edge. As vacancy rates have escalated, industrial development has slowed. Three hundred and 10 million square feet were completed through October this year, with only 69.3 million square feet delivered in Q3, but the number of available development sites has dwindled. With the additional demand for land spurred by onshoring, the price of land has soared since the start of the pandemic. According to a Newmark report, the average price per acre purchased for industrial development in the United States increased 36% from mid-year 2020 to August 2021. While it has come down somewhat over the last two years, it remains historically high. Finding developable land that is well-located and affordable is becoming increasingly difficult, especially with financing rates remaining high.
“The easy sites are gone or have been spoken for, so from a developer's perspective, every deal to one extent or another has some hair on it,” reports Geoff Kasselman, SIOR, CEO of Op2mize Energy. The lack of sites is driving some developers to consider environmentally challenged sites, especially with the current availability of state, federal, and, in some cases, private funds available for assessment and remediation. “Where in the past, you might not have wanted to develop a property with environmental contamination, today you might very well take that challenge on a risk-adjusted basis,” says Kasselman.
The increasing automation of warehouse/distribution facilities, the explosive growth of power-hungry, AI driven data centers, and the electrification of just about everything are creating a massive drain on existing systems.
In Nashville, industrial construction remains robust, with approximately 5.5 million square feet (SF) under construction in a market of 226 million SF, according to CBRE's Q3 report. The vacancy rate of 2.7% is less than half of the national average, but developers looking for opportunities to build will face significant hurdles. “The vacancy rate stays low because Nashville was never overbuilt in the first place, and there are so many challenges to building here,” Alexander explains. “Whether it be floodplain, topography, entitlement, water, sewer, capacity, or utilities issues, it’s just a really tough place to find a site – but when you do, you’re going to be successful.
ACCESS TO POWER
It’s a subject that has received far too little attention, but North America’s aging power grid is being pushed to the brink. The increasing automation of warehouse/distribution facilities, the explosive growth of power-hungry, AI-driven data centers, and the electrification of just about everything are creating a massive drain on existing systems.
“The most important thing to know is that (the power problem) is going to get worse before it gets better,” says Kasselman. “There are no quick or easy or low-cost fixes; everything that could address it on a commercial scale will take a long time and will cost billions and trillions. And for that reason, it's going to be a (huge) pain point for developers.”
Kasselman addressed the topic at the SIOR Fall Conference in Los Angeles, moderating a panel discussion entitled “The Electrification of Everything” You can view a recap of the session and learn more at blog.sior.com. The panel included Kim Snyder, president of Prologis’ West Region, and Jay Todisco, president of global design firm Ware Malcomb, who told the gathering that access to power is becoming the number one topic for clients building, expanding, or leasing properties.
Alexander says that access to power is already an issue in her market. Her firm is currently working with a client on a massive spec project, and the conversations ultimately come down to whether the power needs for the project can be met. “And it’s not just the power, it’s water, as well. If you’re doing some type of heavy manufacturing, you’ll likely need a lot of water because they go hand in hand.”
The lack of power and water is also hindering the onshoring of manufacturing, she says, “because we don't have the capacity in most of our municipalities to handle these requirements, and the cost to upgrade to these systems will require double-digit millions of dollars.”
It’s a problem that is affecting most North American markets. A report by the North American Electric Reliability Corporation (NERC) predicts that numerous regions in both the U.S. and Canada will face inadequate electricity supply to meet the surging demand and calls for the upgrading and expansion of power generation and transmission systems to accommodate that growing demand.
...Optimism for the coming year and beyond within the industry is high, both in his market and across the U.S.
IMMIGRATION POLICY AND TARIFFS
The administration has promised two significant shifts in policy: 25% tariffs on the U.S. largest trading partners —China, Mexico, and Canada (with an additional 10% on China imports) —and the mass deportation of undocumented workers. Immigrant labor, including documented and undocumented workers, makes up over a quarter of the construction industry, according to a report by the National Association of Homebuilders, with one in three craftsmen coming from outside the U.S.
It remains to be seen to what extent the new administration will follow through on its proposals, but those in the construction industry are raising concerns. In a recent article, Richard Branch, chief economist for the Dodge Construction Network, told Engineering News-Record that “developers appear to be concerned about how the economy will fare in the new year and seem unwilling to commit to moving projects forward…First and foremost on their minds is likely the concern over tariffs and immigration enforcement promised by President Trump.”
Kasselman believes that some of the expressed fears might be overstated and that certain tariff and immigration proposals could be seen as negotiating leverage for the administration. He also feels that industry leaders will apply pressure on the administration to mitigate some of the potential fallout from the proposed policies.
North of the border, however, there are concerns, according to Holland. “The situation with the tariffs is a total unknown, but it’s already disrupting how people are thinking,” he says. “People are asking, ‘What do we do if we can’t import or export to the U.S.? So, they’re preparing for any eventuality.”
Despite the challenges facing developers and the construction industry, Holland says that optimism for the coming year and beyond within the industry is high, both in his market and across the U.S. “I just came back from a leadership meeting in Irvine, California, for Ware Malcolm, and they're pretty bullish on the next few years,” says Holland. “In fact, they believe we're going to be in an upcycle for the next 10 years.”
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
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