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Ray and Marlon discuss commercial and residential real estate development delays with Duan van der Merwe, Associate Director in the Contract Solutions Group at Altus Group. In this episode Ray, Marlon and Duan tackle the growing impact of construction delays in Canada, the major contributors to creating those delays, and what scheduling challenges may be on the horizon for Canada’s real estate industry.
Welcome to Altus Insights Podcast Series. This podcast brings together some of our leading brainiacs at Altus Group to discuss, debate, and on occasion complain about the evolving state of Canada's residential and commercial real estate. Join Ray Wong, Marlon Bray, and Avi Zelver for monthly podcasts covering the latest market and construction cost trends across major markets in Canada.
Welcome to Altus insights podcast series with Ray and Marlon hosted by me Avi. This podcast will cover monthly market updates and construction cost impacts across major markets in Canada. So today's podcast, we're going to be talking about schedule delays, which is always a fun topic. I had a great schedule delay myself, just flew in from Halifax last night at 4 AM in the morning. So that extremely tight as much as I'm wearing the tropical Jersey. It was warm, but it rained all day yesterday. So today we're going to change things up a little bit. We ditched RV again and now we have Ray and then Duan and we're going to be talking. I'm focusing specifically on schedule. So maybe, Duan, you want to do a quick introduction to yourself as you're the new guy around here? Yeah, sure. My name is Duan van der Merwe. I joined Altus about a year ago. I I've been working across many different regions of the world. A lot of that time was spent in the Middle East on megaprojects. And what usually comes with megaprojects is mega delays and a lot of claims. So a lot of my expertise were in forensics schedule, delay analysis, and that sort of landed me in Canada about five years ago or so, realizing that projects are no different over here. They all suffer from various different issues that lead to delays. And I've not looked elsewhere since. So you're having lots of fun, especially in the current market, because we know that I'd say that 90% of all projects are delayed by a certain level of minutes, and there's a hell of a lot of projects that are significantly delayed. So I think today we're going to start talking about how big the problems are. What sort of delays have been plaguing these development projects. And it really is a national issue. I know that certain cities suffer a little bit more. Toronto would be a good example. Based on my trip to Halifax, the definition of slow, based on the four days I watched the site there, and then what sort of strategies are we going to talk about whatnot? So Duan, we'll start with the first question, which is what sort of impacts have you seen from the delays? And then why are we seeing widespread project delays? And then we're going to talk about cost escalation, stuff like that. But how about just the general delays? Then maybe I'll touch on escalation and Ray can talk about the business side of things. Yes, I think the pandemic has given us various issues that we have a norm or that isn't usual to the construction market. So there are issues such as supply chain, and it's not necessarily a major component. It might be raw materials that go into main.m components that are affecting construction. So at the beginning of the pandemic, for instance, switchgear was a massive issue with the shutdowns in Europe. Those were just building components. But then in recent times we've been seeing things like heat pumps being delayed on projects in Alberta, but not because of the components inside, like the heat pumps or the manufacturing of the heat pumps. But it is the actual metal sheeting required to build it that prevented them from being manufactured. So many of these things have delayed projects across the board. And here in the gta, we've had a major strike in the house building sort of construction labor market. And then there's the other strike that I think is happening or has happened recently with the operators. And on top of that, we still have uncertainty with COVID 19 impacts. We seem to be out of the pandemic, but you never know, especially with monkeypox around the corner, it might be pandemic 2.0. Yeah and I think it's things like that. We're currently seeing that's affecting projects that are out of the norm. I mean, per permit I guess is the other one. I mean, permits traditionally have always been an issue with most projects that break ground early and they don't get the documentation in place to. Go above ground level and superstructure. But municipalities and even the utility companies are taking much longer to turn around the documentation required to build. And I think that we are seeing a lot more projects that are sitting in sticky situations where they can't go beyond the excavation or they don't have crossing permits for utilities and things like that. So so it's. I would say more extreme than what we've seen in the past. And also the I think it's a bit more unpredictable in terms of when we can expect paperwork to be turned around or permits to be issued. Ray well, you seem from your side to that. I'll touch on the cost side of things. You brought up the whole thing about the pandemic. So especially on the office front, as owners try to get people back into the workplace, there's a lot more sort of increased demand for different amenities and different attributes of the building, especially with new safety protocols on covid, as well as from ESG standpoint, whether or not there's more environmentally friendly materials on the construction. Are you seeing any of that that's contributing to some changes to the requirements of some of these new projects that are also contributing to the scheduling delays in the way of trying to make the buildings a little bit more adaptive to the post-pandemic, sort of, especially in the last year or so. So, I mean, I've certainly seen where the health and safety requirements certainly impacted schedule. So at the very beginning, I'm not too sure that I've come across material change or anything like that. But we have seen from an actual social distancing point of view of physical distancing that projects were disrupted. You can't have the same amount of labor in one area. So we did see that, you know, like splitting shifts. So you would do one activity in the day and one at night where possible. But certainly from a health and safety standpoint, there were impacts. And we have seen on other projects where interior layouts have been, you know, sort of redesigned with a physical distancing in mind. So people are focusing more on movement of human traffic pinch points and where people are likely to congregate. So so, yes, I think that there certainly is changes coming through. And I guess in the settings that are more sensitive to the volume of people passing through, or if we call it human traffic, I'm expecting to see many more changes in the pipeline, I think because we haven't really been as conscious of the challenge before as we are now. And that's showing up in actual especially when you look at the office sector with respect to leasing demand. But we're getting a lot more lease activity in the newer buildings versus some of the older buildings. And in Toronto alone, the office vacancy rate, especially downtown, is a lot lower with newer structures allowing for these amenities. As well as this sort of social distancing aspect of it. So some of these delays and some of these increase in costs are actually showing up in better performance with some of the newer buildings as well. And I believe and I believe with the new bill, you still have an opportunity to, you know, cost effectively amend or make changes to your interior design. I think with existing buildings, the challenge is, you know, things that have already been built, you can't really change structural elements around. And because none of these things were ever in mind at the time the building was built. So it does make absolute sense. And I think tying it into the cost side, I mean it's been a bit of a broken record this year on the subject, but we actually view time as the biggest risk to a project. And the reason we've time is the biggest risk is escalation exists over time. Therefore, the longer the delay, the larger the cost impact, be that before construction or during. And you touched on one of my favorite subjects, which is municipal approvals and planning approvals. And realistically, that is the largest risk. Yeah, that is part of the big challenge. Now when we see escalation in the double digits in a number of locations, time's going to be the biggest killer. One of the things that often surprises me is I think people are more obsessed over cost escalation, price increases, changes, the smallest stuff on a pro forma per se, and the little line sometimes, like people are willing to argue for an hour about how much a structural engineer should get paid. Yeah, but I find oftentimes not as big a discussion as you would think when it is so, so essential to that performance of the Pro forma and the everyone tends to just go, OK, I did, I did a project 10 years ago. It took 36 months. Let's just throw 36 months because 10 years ago I do today and I don't know about your opinion on this. I think productivity has been plummeting. And I think there's evidence, too, that productivity, especially over the last seven years, as the market's been so volatile. And I guess productivity is dropping, is that a direction you're seen as well? Realistically, construction is just slower. It's one of those things. Yeah, so absolutely. And I mean, we haven't really got the data to back up. What I believe is happening. But certainly what we are seeing is that there is a lot more work than there is trade and they're very quick to start the next job and sort of lose sight of their priorities. And I feel like that they are shifting between projects and piecemeal. And you don't really see that anybody sort of focuses on one project from start to finish. It's almost it's almost as if everybody's working when they have some time available or when the, the squeaky gear gets the oil to whichever project makes the most noise. That's where you find the trades and. I mean, I've been on quite a few sidewalks myself and it certainly feels to me as if there is almost a slowdown in construction. I mean, none of the sites really give me a sense of urgency. Again, I'm I don't have the data to suggest it. But I do think that at the moment, you know, it's a trade market in the construction industry. At the moment. And I think they it's almost as if, you know, the projects that are more interesting or has as the biggest scope is the project that everybody wants to work on. Then having said that, I think that with a lot of the permit delays, a lot of so let's just say, for instance, we break ground early, but you already bought out all of your trades and everybody's expecting a certain date to start work out. We are seeing as part of claims where permits get delayed or let's just say utility crossing. So if it's not a municipality and now the utility company isn't allowing you to cross over there, you know, their existing utilities then, you know, we've seen from instance, where assuring contractor would say, OK, well, we've missed the time slot, we're no longer available. We've started on another project and now all of a sudden you're seeing a claim or for there sort of lost opportunities and a delayed mobilization. I mean, it's a. It's becoming more and more common that trades more than likely to sign a contract and hope for, you know, for a date that they started. But in the meantime, they go out there and they go find the next job. And I think if the schedule allows them to go ahead, then they start that work and try and figure out how they start the work on the other project when it's ready to go. Yeah, I was at lunch today and there was part of the discussion wherein the almost seems to be a degree of too much comfort in the market, a degree, a slight degree of complacency. And that's having an impact. I mean, if you look at the municipalities, do they care if they don't approve something on time? No, there's no impact to them. If anything, actually, they get more money the longer it takes. DCS keep going up because someone thinks that's a great idea for housing affordability. Yeah, so delays actually generate more money. So why are they in a hurry? And then if you look at the trades, they have so many projects like you say that in essence it keeps the crews busy. And again, you're trying to manage the crew, so you're going to go work for the guy that can start on time. You know, he's going to pay you on time and it's going to probably a fairly straightforward well run job with a seasoned superintendent. Right now. The challenge is with that comfort level, like you say, it's almost like the projects almost feel like some of them are going slow, some of them are going full gangbusters. You look across the street from each other, it's like, what's the difference between that project and why is their format going at like almost three times the speed as this guy across the street? And I think, again, avoiding data because who wants folks to ruin a good story? I think everybody can see it. And it's I still remember 10 years, governments all we can do a four day cycle these days it's well we may be able to do seven days like that. It just feels slower. Yeah so I certainly can certainly see that obviously different contractors have different methods and some are more organized than some. But I think I think you are right to you know, it's and I believe that if we do look at how the various claims that we've looked at lately is put together. So typically when the market is slow, you will see more claims for lost opportunities. So, you know, with a subcontractor is unable to perform the work for whatever reason, they are going to try and recover the money for the business they've lost, you know, for not being able to go onto different job sites, but for that they have to prove they actually incurred a lot. So they turn down work with the hopes of starting a new project. The project is delayed and they have to demonstrate that, that now they've incurred a loss. But when the market is booming and they have more work on their books and plans. They do so submit the lost opportunity claim or an unobserved head office costs that they believe they've lost but they can't prove it because their books are overloaded with work. So I think that it might be a good leading indicator of a market that. Has more work than it has skilled labor. But we all know that we're about to go into a bit of a lull in the construction industry. I mean, I know that you certainly can talk about that. I mean, from a claims perspective, it's a period of time where people are looking to recover more money. So people have to be a bit more money savvy. And for situations where they'd be probably less inclined to submit a claim for additional compensation. It's usually during recessions when everybody's clawing back as much as they can. So I think it's an opportunity to actually look at the data and see what the data from the various claims that we'll see over this slowdown is going to tell us of what's happening in the market. And I suppose, ray, over to you before. I mean, generally the feeling is things are going to slow down. Every time I look on LinkedIn, you keep saying how good things were in Q1 and Q2, but where do you really see Q3 and Q4 going? I know you don't have the information to support that yet, but I mean, what's your gut feeling on where the market's kind of heading? Because that does tie into schedule what Ryan was saying about increased claims from trades and stuff, which I want to talk about in a SEC as well. Well, you know, mala, your favorite line with respect to the performers and even before this perhaps the interest rate hikes and everything else going up was a concern with higher costs for land. In addition to what the construction costs are. And then what's sort of bearable on a rent side, especially on the industrial side, where rents have gone up by 20, 30% in the last couple of years. And whether or not that will continue. But if you look at the increase in service land costs like in Mississauga and you're looking at North of 3 million acre, if you can even find land. So there is more strength that way. But what we're seeing across the board is not so much a slowdown, but perhaps a hesitation in scrutinizing numbers a lot more closely. What are the performers, what are the rents that will justify certain projects? And then from the developer standpoint, should certain projects or certain launches be delayed when things stabilize a little bit more or things sort of change a little bit more, so a little bit more, more certainty? So the challenge we're running into now, even though all the numbers are still pointing with especially very strong investment activity in first quarter and going into second quarter, we won't see until about third or fourth quarter the real impact of investment volume. But at the same time, we'll keep saying over and over again the amount of capital that's looking for real estate remains strong. But now the different factors when you look at costs, interest rates and few other things that may cause sort of a pause with, especially with some of the price expectations for the vendor and purchaser standpoint and to justify some of those acquisitions based on certain the price expectations that we're seeing in the marketplace. So maybe we might be seeing a bit of a slowdown coming up, but we're starting to see a little bit more concern from the investors. And definitely everyone is paying more closely closer attention to the inputs and the numbers. Yeah so tying the two things together, you've been talking about a potential slowdown in the market. And when was talking about contractors as things start to slow down, trying to claim back money. And I think that heads over onto the cash flow side of things to a degree before we start talking about the solutions side. And we've already seen Pirates Kitchens go into liquidation. We saw Armstrong flooring go into bankruptcy protection in the US. It's all around cash flow and cash flows directly linked to time. And I think at one point. There's a number of people have probably bid stuff now struggling material prices, equipment prices, everything's increasing rapidly. They may try to claim, but they only have so long to go, especially in an environment with interest rates increasing, trying to obtain money. So I suppose the next question is as projects go on hold, we know there's going to be a degree of cancellations where that's going to be. The question is then on the schedule side of things, how long before we see more trade challenges if a performance on side or potential liquidation or financing challenges? My personal opinion is we're going to start seeing a ramp up of that starting around now. And I think, dwane, to your point about claims, it seems to be anecdotally you are starting to see a change in the aggression on claims and stuff, which could be an indication that there is some sensitivity around that, not necessarily doom and gloom, but there's definitely signs of a potential storm on the horizon. I know. Yeah and I'm certainly I mean, I don't view a claim as a negative thing. The purpose of a claim is to recover damages. It's not an opportunity to make more profit. You know, it doesn't fix your failure to estimate your work properly. So in my mind, if you are using the claims process to recover lost money, it's completely fine. I mean, you're legally entitled to it. Yeah no, but I mean, if they can prove that they've made that they've contractually incurred additional costs, then obviously they'll be entitled to it. There is a change management process which, which isn't used very well I think across many projects in Canada from what, from what we've seen. So you'd see that most change scope or, or change orders do evaluate the direct cost that is, you know, for whatever the change is, whether it's material, labor or whatever. But they fail to evaluate time. So more often than not, we see the change orders, you know, potentially having a time impact on the schedule. But the executed change order will say 0 days. Nobody has nobody's sort of evaluated the amount of general conditions or any of the costs associated with time on that change order. And then we see down the line where we have this cumulative impact of change that people are coming back and reopening up the books on these already execute the change orders to try and claim time. And I think that so that is not the correct way to go about it because as an owner, it gives you complete uncertainty in your project in terms of your final cost for completing the work and also gives you a lot of uncertainty in your schedule. So this change ought to add 3 months to my schedule or did this change order really have a zero day impact? Or we were able to shuffle things around. And the issue is, is that if you know upfront that a change order has some time associated with it. And the change might be further down the line, you have an opportunity to try and figure out if there is a way to mitigate that time impact, whether it is fast tracking some scopes of work, whether it is freighting or air freighting, some components. But if you weren't given the opportunity to actually evaluate mitigation options, so if your change orders that there's zero day impact, you throw all of that opportunity out the window and you know, you end up in a claim situation because everybody says, oh, you know, we ought to have known that there was an impact. But you know, this or the sub trade or the contract or the construction manager might not have evaluated that. So they misuse the change order process. And I think that my message would be that. Seeing less claims if they change the change management process and the most contract is used as they're intended. So thank you for joining us. Thank you, Duan, for joining us. And ray, as always, I mean, we're going to split this subject into two topics. So today was the doom and gloom. We sort of covered the bad side. The next podcast, we're going to start talking about some of the solutions which were as Dwayne was starting to touch on towards the end. So we'll talk to you soon. And thank you very much.