Industry Focus – Builders & Developers

Despite rumors of a looming recession, construction zones seem to be on every corner throughout Nevada. And while this surely signifies growth for the Silver State, builders and developers are facing serious challenges. They grapple with a scarcity in workforce, strict regulations and challenges in financing. And yet, despite these challenges, the experts are hopeful about the future of the industry and what it means for business in Nevada. Recently, a group of builders and developers met at a roundtable sponsored by City National Bank and held in Las Vegas to discuss their industry including its challenges and its future in the Silver State.

Tarah Richardson, editor-in-chief of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together different industries to discuss issues and solutions.

What Labor Issues Do You Grapple With?

Bryce Clutts: In 25 to 30 years [there will be a] generational gap of skilled trades. In 2031, which is only seven years from now, 40 percent of the workforce in construction is going to retire. This is not just an issue; it is a crisis.

Robert Potter: I do not see much help [for the labor shortage]. We have interviewed lots of people that claim they can do everything, and they pretty much can’t do anything [regardless of] level.

Kevin Burke: Construction is at 4.8 percent unemployment. [Nationally] we are 540,000 trades short going into 2024.

Reed Gottesman: During the pandemic, [many] people retired and the staff has not been replaced.

Clutts: We have a problem now, but if we lose 40 percent of our workforce [due to retirement], hundreds of thousands of jobs will be needed. This is going to be a problem.

Potter: There is a shortage of skilled workforce and we do not see it [improving] in the industry. These kids today, if they can’t do it on a computer, they do not want to do it and I do not know if they are capable or not.

Clutts: Many other industries have pivoted to AI and robotics, but we are the last frontier in terms of industry. There is only so much that can be done by robot. We still need men, women and tools. [And we need] a large labor force. Maybe we will at some point in the future, but we are not going to be able to compete with other industries in terms of utilizing AI and robotics [now]. We must solve the [workforce] problem.

Larry Monkarsh: Automation is not the answer. A robot can hang drywall, but they can’t do it like a human.

Erik Skogstad: Supervisory personnel is another problem. As we move into [integrating] AI, there are a lot of computer skills that are going to become necessary. We need that group of people [who are skilled with computers] to be coming into the trades, and we are lacking that.

How Do You Get Kids Interested in This Industry?

Monkarsh: My son is 19 and his age group right now is a lost generation. Many 18 to 20 [year olds] are in limbo. They are living in their parents’ house with no motivation to do anything. We are missing the boat with [students] coming out of high school and telling them that if they do not want to go to college, there is another avenue [in the building and development trades].

Erik Skogstad: There is a lack of interest in wanting to pursue the trades. [It] is not appealing to a lot of teenagers and young adults.

Lisa Brady: There is still a stigma of working the trades and there should not be. [Trade work] is skilled labor. It is no different than anything else. But in high schools, [college] is pushed. [Students] need to look at [college and trade work] equally and see where there is real merit and weigh it individually.

Glen Martel: Getting into the middle school and junior high level is important. A lot of interest [in future careers] is already set when [students] get to high school.

Clutts: The focus has been at the high school level, which is important and where skills really get honed in and developed, but we need to go deeper and teach kids that there are options.

Skogstad: [People] do not realize the amount of money they can really make in construction. By starting out in these trades and working their way up, they can make a tremendous amount of money [compared to] some of the other jobs that are out there.

Are Projects Still Being Affected by Disruptions in the Supply Chain?

Potter: A lot has been solved as far as the supply chain disruption. We still have issues with larger mechanical units. Switch gear [is also an issue] because it is built for a specific job and usually [arrives] close to when they say it will or later. We still get lied to consistently on the delivery dates for mechanical units. We have not run into much difficulty with the other pieces and parts that were substantially difficult to get during the main supply chain disruption period.

John Ramous: [Prices] are balanced out again. We saw an opportunity [with switch gear]. And if a certain customer, like Amazon, wanted it, they were going to pay for it and they moved forward with their projects. The point is, [the supply chain] is driven many times by the customer and what the customer is going to pay for it.

Clutts: As builders, we have adapted over the last three years to early procurement, getting creative and trying to meet our customer’s needs. We understand for our developers that time is money and so [we try to] get ahead in the preconstruction process and order the materials [in advance].

Monkarsh: You have to be innovative. If you know that an [evaporative] cooler is going to be a problem at the air conditioning warehouses, you have to start planning for it a year or two years [in advance].

Clutts: We are seeing pricing somewhat level off, but inflation is still 2.5 to 3 percent. Costs are still going up; they are just going up slower. The key variable is labor. Labor is still very expensive for us and is only getting more expensive.

Skogstad: Everybody is paying $10 and more an hour to try to get people on job sites. And that is contributing to costs. We can’t seem to keep up on the labor end right now.

Monkarsh: There is nothing being generated out of Las Vegas. We are an island and everything is more expensive when you import it. It is still a problem that things get imported and the trucks go back empty. Until we can balance that in our world here, [these issues] are going to considerably escalate because everything keeps getting imported and fuel is going to go back up.

Skogstad: Even if [the cost of] material comes down, labor has gone [up] considerably. The overall price [of a project] is still going up because labor costs are catching up with inflation and everybody is trailing [behind].

Ramous: In the grand scheme of things, the overall project costs are still going up, and I do not know if we will ever see that pricing substantially come down. We are past that. Things are adjusting.

Is This Industry Encumbered by Regulations?

Burke: From a construction standpoint, we should give [Nevada] a lot of credit because we still have reasonable regulations. We are pro-business. In California it takes four to five years to get through entitlements.

Alan Molasky: There are reasons [for regulations]. The problem is that [they can] increase the cost to build a building, the code gets harder, the fees get higher and real estate taxes get higher. [Overall] the cost is getting higher from a regulation standpoint and yet [legislators] want to cap rents at 3 percent. It is hard to have an intelligent conversation about rent caps. They are talking about a rent cap, [but you] can’t even build a project right now. They are well intentioned people, but they do not really understand the costs.

Clutts: The more regulations [that exist] the more staff we need to manage those regulations. Whether it is storm water mitigation, dust mitigation or safety regulations, they are always changing. The key is that you have to have the staff to keep up with [the changing regulations] so that you are at the forefront of them.

Potter: The fines [from regulators] are going up considerably. However, there is not a builder or developer at the table that does not consider the health and welfare of their employee more important than the fine.

Clutts: You can raise the fines all you want, if you are safe, you are safe. Although the justification for why the fines are going up may be debatable, we are all dealing with needing more staff on board just to deal with the continued regulation. And arguably, there are more [regulations in southern Nevada] than there is [in northern Nevada] but they are coming.

How Does Financing Affect This Industry?

Ramous: [Challenges with financing are] stopping some projects where we do multi-phase. It gets down to relationships. A lot of group CEOs and developers have good relationships with banks. The ones that are having challenges coming into the market do not have the wherewithal or long-standing [relationships with the banks].

Clutts: It depends on the market. For example, our multifamily division has almost come to a stop. For 18 months [we had] two midsized projects and two large projects up north ready to go [and they were shelved]. On our industrial side, if we were going to build two or three, now we are going to build one. But manufacturing is full board. It really depends on the market and the appetite of the lender.

Gottesman: The availability of capital [is a challenge]. New construction is not at the top of [a lender’s] list. They would rather loan on a stabilized industrial project. Banks have higher equity requirements now, so there is not as much capital available for these types of projects.

Monkarsh: We are seeing difficulty on the other end. As a merchant builder, when you have a finished product and there is a 40,000 square foot building that ten months ago people were scrambling for, now they can’t get financed. That is a huge problem for us. Clearing the inventory and financing on the end user side is becoming an issue.

Ramous: Size of the loan [matters]. [The lender’s] risk level or tolerance is open, but it must be a smaller scale project. We are doing several different projects in northern Nevada [that were intended to be] two or three phases, but [the lender] wants to [only] do one building right now. The appetite is there for the next one, but they want to manage the uncertainties over the next 9 to 12 months. [There are also] less lenders. There were maybe ten, [but now] there are maybe a solid two or three.

Phil Ralston: It also becomes an investor issue in some cases. On some deals the motivation is to go through a construction process, stabilize and, even though you are not selling, your intent is to take a perm loan. From that perm loan, which will be in excess of the construction loan, you are able to make distributions to investors. But now those decisions are being delayed. We have a project where we are delaying that decision because we do not want to take a perm loan at the price of debt today. [The question is] should we stomach a mini perm for two years in hopes that rates go down a little or will we be better off waiting twelve months to do a perm loan?

Ramous: Customers do not want the unknowns. The expectation [for interest rates] is that they will come down, but the most important thing is to have some stability to know where the future lies. If we can better predict that, we are in a much better situation and will see more activity.

What Tenant Concerns Is This Industry Facing?

Ramous: We are starting to see a consolidation with some of the corporate users. They are looking to position themselves [in the case of a recession]. Before, it was just [continued] growth but now we are seeing more methodical planning going forward. Consolidations have started to become more of a norm for the logical reasons of planning.

Potter: There is no demand for tenants to move in right away. Now they are starting to go out to bid for tenant improvements because during their heyday they did not have to. They just rolled right in and just kept moving forward.

Ramous: Pre-leasing was [on fire]. [Now] we have normal conditions [that are] pre pandemic.

Gottesman: We will do a certain amount of pre-leasing or leasing and then start on the next building. We do not have the need, based on our financing, to move forward at any particular time. We move forward when we are ready. And we have several projects that we fully plan on full steam ahead. But we are being a little bit more deliberate than we were in the past.

Monkarsh: We have to start looking at new ways to build, at new building materials, and looking at how it is going to make us competitive to a tenant. [For example,] if somebody comes to one of my buildings and they want to air condition it, I do not have to insulate it, because it is already insulated. [We must have an] innovative and competitive nature now.

What Is the Outlook for This Industry?

Clutts: I am optimistic, especially in northern Nevada, because I see what is happening up there. It looks like it did [in southern Nevada] 25 years ago. The potential lands are an issue, but we will work that out just like we worked it out down here. I have never been more optimistic, inspired and excited about being a builder than I am right now.

Monkarsh: I think the next two years are pretty bright but beyond that it is uncertain. In general, this is a positive industry. It is a good industry.

Ramous: I have seen the industry dramatically change over the years. We are moving forward with some major paradigm shifts [including] data centers and so forth. Optimistically, Nevada is in a very good position. [It is] very promising on the logistics side. [We expect] challenging times over the next 24 months, but [there is a] good outlook.

Skogstad: We are cautiously optimistic. At the beginning of last year, there was talk of heading into a recession within the next six or nine months and we have the same talk going on now. But when you look around, you see there are still a lot of projects. There are a lot of plans that are still moving forward. We are still bidding on a lot of work.

Brady: We just had a large land acquisition, and are still seeing strong demand. What happened during COVID was kind of a strange blip. We are more normalized and have returned to healthy growth.
Martel: [There is] a whole lot of opportunity over the next few years. Yes, [there may be] a little recession and some pullbacks here or there and some readjusting. But overall, I see the next ten years being absolutely fantastic to be a Nevadan.

Skogstad: Most people are still optimistic about moving forward with projects. There is a lot of capital in the market right now that was not there in the last recession. So even if [a recession does occur], it is going to be much lighter this time around.

Gottesman: Over the next couple years, we have financing we need to rectify, but that is going to create opportunity as well as some pain. The overall demographic outlook is strong. As we get through some of these financing challenges, I think [the industry future in Nevada is] very optimistic.

Brady: Nevada is maybe in its sophomore year. We are a young market. We just started building big boxes in mid 2015 and 2016. We have a long way to go.