Projects Today Come Down to Nerves of Steel and Realistic Expectations

Jason D’Orlando, Senior Managing Director, Life Sciences Project & Development Services, Michael Morehead, Senior Director, Industrial Project & Development Services, Cushman & Wakefield

Many sectors throughout the economy have dealt with significant disruptions, new or accelerated trends and setbacks through the pandemic. Two sectors that have arguably been front and center to this volatility are the life sciences sector and the industrial / logistics industry. While much of the retail sector and office spaces went on an extended pause (thankfully picking back up now) – life sciences and industrial went into overdrive, and in doing so, are leading the way in terms of the new realities of project development and new construction post-pandemic.

First, let’s look at the numbers. The forecast for North American industrial absorption from 2022 to 2023 is a healthy 855 msf. New supply—which trailed demand significantly in 2021—will revert to outpacing demand slightly over the next two years. New deliveries are projected to reach 932 msf from 2022 to 2023. Nonetheless, North American vacancy will remain low, ending 2023 at 4.1 percent— an increase of only 30 bps from year-end 2021. Despite the forecasted uptick, North American vacancy will remain 170 bps below its 10-year average (2012-2021) of 5.8 percent.

In the Life Sciences sector, the top 10 U.S. markets currently have 17.1 msf of lab space under construction. This represents 10.7 percent of current inventory in those markets. Currently, Boston (9.6 msf), San Francisco Bay Area (2.9 msf) and San Diego (2.3 msf) have the most construction in the pipeline. Although starting from a lower basis, double-digit increases in inventory are coming for New York City (26 percent), Chicago (14 percent) and Philadelphia (10 percent). New lab space is needed, especially in tight markets with sub-6 percent vacancy rates (e.g., San Diego, Philadelphia and Boston).

“The global landscape, materials shortages,and tight labor markets are pushing up costs-but there is also no indication that this will let up in the short or medium term”

Given the significant pipeline of new construction and projects planned, or in development, it is worth noting the common successes and failures in developing both these asset classes.

Hitting pause too quickly or for the wrong reasons

Given the frenetic pace of change, the uncertainty created by supply chain disruptions, labor shortages, alongside inflationary pressures, hitting the pause button is a temptation for many while developing new projects. This can also lead to having your perception not becoming reality.

And in most cases, that is the biggest mistake being made in these sectors, and across the commercial real estate landscape.

There is no doubt that projects in both sectors are going over budget. The global landscape, materials shortages, and tight labor markets are pushing up costs – but there is also no indication that this will let up in the short or medium term.

While hitting pause to reassess and re-evaluate a project is common, it may actually contribute to additional cost overruns if the inflationary and supply chain pressures continue.

Instead, companies in the early stages of a new project should be always trying to solidify a sound business case while building in larger margins for labor, materials and other costs to allow for quickly evolving market conditions. By setting a solid baseline, backed up by a solid business case, it will help companies anticipate and protect against schedule and cost overruns. The developer may actually save more money verses hitting pause and facing even greater costs a few months later.

While the pandemic, and ensuing troubles in supply chains and labor markets have made projects more complex, more costly and often more time consuming, the fundamentals still count – maybe more than ever. Pre-planning and getting to a solid baseline to measure performance is of critical importance which allows you to continue to build flexibility on materials, timing and budget for the current inflationary and economic time period we are all in. Most of all – don’t pull the plug or delay a project for the wrong reasons. Think it through ahead of time and plan your way to a successful project.