Crystal ball for 2023 shows cranes in the sky while battling the usual suspects

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Developers in Wisconsin have laid the groundwork for more projects despite construction problems like labor shortages, supply chain issues exacerbated by the pandemic and increasing materials prices. Industry experts said they saw a growing market and steady demand for public and affordable housing projects going into 2023.

The latest Associated General Contractors of America analysis found growth for both commercial and home construction, new orders and employment, but growing backlogs and slower supply deliveries still trailed behind. The industry also faced a price hike for diesel fuel and was short of electrical components, concrete and transformers – all essential when building housing, manufacturing facilities and offices.

The cost for building construction is up by nearly 20% and rents haven’t gone up to meet the increase, Wangard Partners Chairman and CEO Stu Wangard said. Interest rates have risen rapidly, doubling since June, and a tremendous shortage of skilled labor hounded the market.

“Construction workers are well paid, but not enough people want to do it,” Wangard said. “Suppliers and contractors’ wages remain elevated, but there’s not enough labor to build at an economical cost.”

Despite having to juggle these different challenges, experts said Wisconsin’s market grows with its population and there’s still a demand to get cranes in the sky. While problems with finding labor and supply chain problems persisted in 2022, they weren’t unique to the construction industry, nor did they deter companies from building.

“From the standpoint of project preparedness, looking outward at available workforce is something people will always keep an eye on and hearing the concerns there isn’t new, even if it has taken a slightly different shape,” Milwaukee Department of City Development Commissioner Lafayette Crump said. “We haven’t heard anyone say they wouldn’t move forward with their project because the construction workforce isn’t available.”

Instead, stakeholders sharpen their pencils to jab at the supply chain issues, Crump added.

“They might look at sequencing or work on one project before another. Putting a hold on projects that are already underway isn’t something we’ve seen.”

Critical components delayed, developers explore contingency and local leadership needed to boost projects 

While some products are readily available and prices for certain materials are stable again, 2022 started off with many bumps in the road for construction supplies. A lack of electrical switch gears, for example, was the culprit behind some building project delays, Wangard said.

Even international crises like the Russia’s war in Ukraine and pandemic shutdowns in China have slowed some products coming into the U.S., Wangard said. Hurricane damage and fires have damaged the country’s largest oil production plants and high concrete prices affected residential construction.

“Our firm is involved in multifamily, industrial and office projects,” Wangard said. “The same issue affects all of these projects.” To meet rising costs and missing parts, developers must bring more equity to the table when working with contractors and owners, he added.

Everything in the planning process, from contracts with construction companies to engineering plans to cut costs without the sacrifice of stability, is changed before crews break ground. Developers also plan in anticipation of price increases, and Wangard said his company keeps more in its reserves to be ready for surprises.

Joe Alexander, president of The Alexander Co. in Madison, said pricing has been up for the last several years at 8% a year and his company was underwriting in anticipation. His firm works on adaptive reuse projects, and he assumed a 10-12% price increase for each building cycle.

“If people are making a mistake, it’s pricing things in a way to get a better deal,” Alexander said. “Right now we’re underwriting at 6-1/2 percent.” Support from local government, sometimes in the form of tax credits, helped developers move forward with widespread affordable housing projects in expensive Dane County, he added.

Wangard said he felt positive about Milwaukee and praised its leadership.

“They have fresh leadership; they have an engaged and focused Common Council. Both are trying to aggressively address the needs of our city,” he said.

While the city is focused on housing residents, officials are interested in getting more property on tax rolls and increasing the values of existing properties, Crump said. Both are important as Milwaukee County and the city got closer to the edge of a fiscal cliff.

In Dane County, the Affordable Housing Development Fund committed more than $31.6 million to Madison-area projects since 2015. The rate of project permits through the Milwaukee Department of Neighborhood Services, which was heavily involved with the Ascent development, are expected to outpace previous years in 2022, Crump said.

What’s next, what to watch out for next year

Multifamily housing and affordable housing are among the most popular future developments in Wisconsin and the rest of the country, experts said. Public projects like schools and safety buildings were on the minds of voters in the last election cycle also.

It’s unlikely there will be more tall buildings in the Milwaukee area, because those projects take longer to lease all the space and a long time to build, Wangard said. Wisconsin also has the advantage of being a climate haven, not facing issues like drinking water shortages like in other areas, he added.

The demand for affordable housing will probably last for another decade as landlords ask for major investments for lower returns, Wangard added.

“I don’t see prices going down anecdotally,” Alexander said. “Every place has a demand for affordable housing. It costs the same to build here as it does everywhere else. The question is if you can stretch to get the higher rent.”

Alexander said he hoped to see interest rates stabilize or come down in 2023. He also saw an emphasis on public projects over private projects – evident from the overwhelming number of referendums approving school improvement projects during the last election.

Meanwhile, Milwaukee still had major projects underway like 333 N. Water St. and the Couture and future projects like Thrive On King and an FPC Live venue on the way, Crump said.

With major companies like Fiserv and Kohl’s moving into Milwaukee’s downtown, Crump predicted other companies will have a similar interest to follow suit. For large building construction, developers proposed plans for the 15-story mass timber tower The Edison in January, an example of previous buildings like the Ascent sparking more ideas.

“Nationally, companies are talking about not expanding office space, talking not about getting people back into the office and supporting workers who provide services in the downtown area,” Crump said. “We are experiencing that interest in Milwaukee.”