Subscribe
Share
Share
Embed
The Punch List is the definitive weekly briefing for the leaders, investors, and developers shaping the future of the AEC (Architecture, Engineering, and Construction) and Real Estate industries.
In an industry that is "the second largest in the world but very small at the top," staying ahead of the curve isn't just an advantage—it’s a necessity. Join our three expert hosts as they bring their unique "different stakeholder" perspectives to the table to discuss the three biggest news topics of the week.
[00:00:00] TK:
Costs are highly unpredictable in these places. You go there, you open up a wall, you find something. I mean, you can have all the environmental reports in the world for that building thinking you've captured all the costs, but you really never know.
[00:00:19] Kanav Hasija:
A lawyer makes about 150K a year when they start, but they are in a debt of about 150K as well. A unionized electrician today can make about 150K because of a shortage in their centers. Their education debt is 10K, right? And whose job will AI replace first? The lawyers. not the electrician, right? So I think we just need to make these jobs more sexy again.
[00:00:39] Jon Wright:
Welcome to the Punch List Podcast, The leading podcast for architects, engineers, and contractors. today we've got exciting topics. gonna talk about copper prices and, relationship to the AI data center build-out. We're gonna talk about where are all the skilled trades and who's going to replace them when we have a massive retirement. And finally, office to residential conversions and adaptive reuse, the promise, what's actually happening on the ground. All right, so I'll kick it off. TK, let's talk about copper
[00:01:09] TK:
Yeah. So I mean, just last time we were talking about red copper is no different than any other material. It's really exposed to escalation. A lot of it actually comes out of China. I mean, what's gonna happen really is, as GC sees these prices coming up, unfortunately, a lot of the cost will be passed on to the owners, right? A lot of the contracts will be written in a way where all this escalation, what John loves to call the padding, that's gonna happen. I won't call it padding. It's a realistic evaluation of the risk and, contractors covering for that risk. One thing I would suggest with my construction hat on and en-engineering hat on, there should be some movement towards using aluminum more than copper for wiring. it's not as robust as copper. but we are-- we started doing that in commercial buildings. It's a safer material from an escalation perspective. It comes out of Canada mostly. I don't know, Kanav, if you have any thoughts on this?
[00:02:03] Kanav Hasija:
I mean, uh, we're already seeing the dependency of rare earth minerals from China on building chips. but this is different. This is copper for data centers. it's-- prices are all-time high. I'm seeing like, you know, if I look at a one-year comparison, it's gone up from middle of five, $5.5 per pound, gone all the way up to like 6.6.
It's a huge jump, like a twenty percent jump. I think it's just gonna go-- it's gonna go even higher. So having a lock-in, upfront is required. will there be a, a big change in how these data centers are made, and how can they remove copper from it? Potentially, yes. But the problem is they don't have time to experiment.
They want to build data centers at speed. if a plan is set to make a data center in ten months versus twenty-four months, and that ten months requires copper, and that plan has been honed out a lot, they won't change that plan. They want to build at speed. So will they replace material so fast because of escalation in prices?
I don't think so. so John, what do you think?
[00:03:09] Jon Wright:
Supply and demand, I don't see this going anywhere but up in terms of cost. And, so you engage in the contingency and the padding, which happens, or in more extreme cases, you enter into forward contracts or some type of options hedge, which is complex. I mean, you know, you're basically,doing that as a...Even a large developer, you're going to have to really, you know, have an outside team help you with that. and it also means that you're concerned enough about a core product that you're going to do it. But I'm not saying that it's not being done by the larger developers. But, for a mid-size and small developer to engage in some forward contract or options hedge, is not done a lot. It's more about just praying and hoping, and adding enough contingency. So, but I don't see this getting any better as long as the demand is where it is today.
[00:04:06] Kanav Hasija:
I think you're absolutely right, John. We can see in the prices. I was just looking at it. The raw copper prices have gone up 20%, but the copper futures have gone up 36% in the past one year. So that clearly says people are already forward booking contracts for the future
[00:04:24] Jon Wright:
TK, have you ever, had a forward contract or something like this on timber or steel?
[00:04:29] TK:
n-not really. I mean, I have not seen, like you said, owners engage in something like that. so they'll basically lean on the subcontractor to provide that, like to assume that risk, so to say. So subcontractor will come back and say, "Okay, well, if you sign within 60 days, 90 days, I'll go put an order in and control that."
I really think, long term there is-- US has a lot of copper too. Nevada has a lot of copper. I mean, th-those mines are stuck in EIR and all that. as a nation, it's probably a good idea to look at that option. I mean, it is environmentally not the most sustainable thing to do to mine copper.
I don't know all the details of it, but US has it in the ground. and long term that might be a better play here. So
[00:05:19] Jon Wright:
All right. next up, the trades. This has been a topic of conversation as long as I've been in the business. we have an aging boomer workforce that's, really makes up a lot of the skilled trades, and, you know, who's going to replace them? are millennials taking these jobs? What impact is that having on performance and price and cost, across the industry?
TK?
[00:05:42] TK:
Yeah, we see that all the time. I mean, I'll, tell you anecdotally,so a lot of superintendents in construction come from the trades, and they would tell me like, "Listen, when I was in high school, when I was in classmates, with my classmates, the general tendency," and these are like more Gen X generation, like the one before the millennials. The-- a lot of the tendency was to say, "Oh, go to college. Do you wanna be a construction worker? You know, do you wanna..." it was in a way looked down upon which, which transferred through to future generations. And i-i and if you think about what it takes to be, say, a union carpenter, right? You have to join a union, pay your dues, do 6,000 hours as an apprentice, which is hard work, showing up 6:30 AM every day, Monday through Friday, working with your hands all day. It's a lot of work to become a journeyman, and that's when you start making money. It's almost trying to get a co- getting a college degree. But I think in this new AI world, that might start changing because I think those blue-collar jobs, they still pay well, they're valuable, they're needed. and I don't know if college degree you're getting as good a salary as you were getting in the '90s or 2000. But anyhow, that's the period where we had the attrition that we will have to pay for now and, and deal with now because that's what's causing the aging workforce.
[00:07:05] Kanav Hasija:
Not just pay well. I would even take it to the next step, TK, and say A lawyer makes about 150K a year when they start, but they are in a debt of about 150K as well. A unionized electrician today can make about 150K because of the, of a shortage in their centers. Their education debt is 10K, right?
[00:07:24] TK:
As an apprentice, they actually get paid too when they're doing their hours.
[00:07:28] Kanav Hasija:
Yeah. So the debt is almost zero. and they get paid like same as a lawyer today. And whose job will AI replace first? The lawyers. not the electrician, right? So I think we just need to make it more-- make these jobs more sexy again. and they're just being looked down, down upon for no reason.
[00:07:49] TK:
I had a friend, he's an estimator. He told me his daughter are looking at two options. She's 18. either to become a welder or go into AI researcher. However, she's picking the right fields.
[00:08:02] Kanav Hasija:
Would you tell your son or daughter to go into the trades right now if they were old enough, Yeah. Yeah. trades, I mean my daughter loves dinosaurs and I was like, she's three years old by the way, so she's too young for that. But I was like, "If you want to be a paleontologist, go for it because that job is not going away." you know, and if she wants to be in trades going forward, go for it. The physical world is gonna meet the digital world pretty soon and the people who operate in the physical world are gonna be rarer to find. physics, engineering and sciences coming together in applied engineering is gonna be the future
[00:08:38] Jon Wright:
Yeah, I-- every generation it seems like the narrative is that, the generation below them doesn't work as hard or- Yeah, that's true ... doesn't wanna go through the same process. But I don't think that's necessarily true. I do think as an elder millennial, that we have been drilled into us since the very beginning to go to college and get a white collar job. That was the path to success. And so I think that's had an impact on the trades and who is doing what and the supply unquestionably. but I look at this as, And look, I'm not on the job site coordinating this. that-- TK, you're on the job site cordinating, coordinating this. I'm the developer putting the demands and pressure on, and that's not gonna change even with the workforce shortage. Owners and developers are still gonna be wanting to go faster. So I kinda look at this as an opportunity for millennials and Gen Zs coming up in terms of, business acquisition, or consolidation of, current companies. if there's a shortage, then the cost is going to go up and the demand is gonna stay the same or go up. And so this is an opportunity not just to be someone working in the skilled trade or as a skilled laborer, but to be an owner of a business or a co-owner, co-owner of a business. There is a massive retirement wave happening with boomer-owned businesses. Look into that, step up, acquire the business, that you're working in now, or acquire others who are struggling because the… You know, it just seems like it is, not just an opportunity for private equity roll-up, but also for people who are in there now doing the work to become the owner or become a group of owners. Have you seen that, TK, within the subcontractor community?
Are you hearing anything about that now?
[00:10:25] TK:
Not directly but indirectly. I mean, I see a lot of these, small, like the-- we call them small local businesses, the SLBs, which I do notice going through that transition. And like they-- I mean, these guys like to call themselves like they've been through the school of hard knocks, right?
That's the quote from that, Clint Eastwood movie, right? The-- And I mean, I find that these guys are-- they're very good businessmen. They really understand how the work is done, and that's why they're able to build successful businesses because to plan a construction project, you just have to go through it.
Like e-even now when people say, "Oh, just-- let's just go ask Claude this and that," sure,we can do that, but that experience of being through actually installing stuff allows you to predict and like, like Jon, you're saying, you can put pressure on getting things done, but someone who has built it really makes a key difference.
So every successful project, I lean more on having a super strong superintendent to help us with pre-con.
[00:11:24] Kanav Hasija:
And Jon, to your point, this is not even just a US phenomenon, this is a global phenomenon. And it's a real busi-business opportunity for people who are listening in because So let me share two stats here, right? I mean, one is if you see, in countries like China or Japan, which is, which are aging more than, India or US, there's a negative growth in labor workforce. US is almost flat. Germany declining, France declining. So what that leads to, and this, a-a-and this is McKinsey's prediction.
This, th-this is by the way, a one and a half year old report, so this is not even recent. But if you see, it's already, predicting pretty well. If you add all the trillions of dollars of construction cumulative from twenty three to twenty forty, the world needs about two hundred trillion dollars of construction in those seventeen or eighteen years.
the supply to fill that gap is only one sixty. There is a twenty percent shortage of labor to fill that demand, and that's coming because the workforce is not even, being refilled properly. So this is a big b-business op-opportunity for people who are listening in. It's a global phenomenon
[00:12:37] Jon Wright:
Alright, next up, adaptive reuse office conversion. Lots of hype Are there projects? Does it work? Kanav, what's your take?
[00:12:50] Kanav Hasija:
Yeah, I saw this starting in where we live, right? San Francisco. this-- the city became a ghost town, post-COVID. People were not coming back to work. They're all working remote. buildings-- The market value of buildings slashed down by seventy percent. We saw some buildings selling at a seventy percent discount, already to cover their books and losses.
Some are still sitting on the books trying to see if it re-it rebounds. And I always see this, dichotomy when the developers and the financiers are saying, " Let's just ride it as long as we can and see if it rebounds." While the city is saying, "Why can't we convert that to residential or..." It's tough.
converting office to residential is almost like incurring a loss, on a project. But if a building is already too low on, on the price, you might think about it. That's one option. And, second option is, which San Francisco was doing pretty well is convert them to labs. biotech labs may give you more money, on the dollar compared to office buildings.
So converting office to labs was a good idea. But there's not enough demand for labs as compared to the office that was-- that were depleting. So it's a very tough pr-problem to solve. I don't know the answer to that. But I would say it's, it just depends on the, the economics of the building per se, not the city, on how deep the financiers are, how long can they ride it.
And, the big question for the cities are, is, do they want to divide their cities and do they want to give some discounts or some hit on their city's balance sheets to recover the city back and, a-a-and pass on some benefits back to the developers.
[00:14:27] Jon Wright:
Yeah. There's so many dimensions to this. There's financial, there's physical, there's zoning. So let's just, element one, financial. So if you're sitting on a B or C office building in San Francisco or a major metro, one hurdle is that coming back, and how long is that debt going to allow you to hold on to it?
And there's been a lot of, like, what they call extend and pretend extensions, since what has been a massive demand shift and reduction since COVID. And San Francisco is like ground zero for this because, some people think, "Oh, the Bay Area, it's all work from home, coddling employees." No, I think it was just very tech forward, and we typically, the Bay Area leads trends.
And so experienced this, very acutely here. So let's stipulate that, as a owner of that office building, you're ready to get out. you need to get out. You're being forced out. you know The next hurdle is this kind of standoff that occurs between the buyers and sellers because oftentimes, that land value is really reduced and maybe even near zero, in terms of a conversion if you're actually going to do a conversion or a teardown. That's kind of the next hurdle. I would say the third, and, I've looked at this loosely, and I know people who've looked at it a lot, and the physical conversion of an office building to residential is very tough. It typically doesn't pencil out and work. They just weren't designed in the same way you would design a residential building. The ones that, are, kind of typically are working out are side core buildings where the core of the building and the elevator and the mechanical shafts are on one side, and then you've got, you know, an office extending out from the other side, and you can kind of chunk that up. and the mechanical systems are ran in s- such a way where you can, change it and alter it.
And I know this is happening in New York and I know these things do happen. I think they're probably heavily subsidized somehow by some mechanism because out in the private market, you're not seeing it a lot. and then the last hurdle is the zoning. So then you've got to get that jurisdiction to change the rules.
And even if, it's the new thing in planning and everyone's motivated, it still takes forever for, cities to act and do things. And so there's a lot of headwinds here. I think everybody looks at it and thinks that's a really great idea, and as do I. I mean, we have too much office. We have too much old office.
And I think the conclusion after all of this cycle washes out is we're not gonna convert them, we're gonna tear them down. We're gonna tear them down, and we're gonna build high-rise multifamily you want to talk a little bit about the physical restraints on conversion?
[00:17:06] TK:
Yeah, absolutely. I mean, so just breaking it down, like high level, right? Strategically s-speaking, the office to residential pipeline sounds like a great idea because, you know, there is demand for housing. People need housing, and you have these office buildings. A lot of them are sitting empty, commercial space is not being utilized.
So logically, it seems like, hey, that's a great conversion. I mean, like you said, John, just for example, residential, you need a lot more toilets, a lot more plumbing because, office is not like that, right? Office is, you got bunch of restrooms on one corner, you got offices on one side and it's just a different beast, compared to residential.
So the other thing is, and this is what-- owners understand it more so now that we've been through a few iterations of these. Costs are highly unpredictable in these places. You go there, you open up a wall, you find something. I mean, you can have all the environmental reports in the world for that building thinking you've captured all the costs, but you really never know.
There are a lot of unforeseen things, especially older the building it is, worse it is,for these kind of transitions. Because not only zoning, permit will upgrade you to the newest code. That's just a fact. you can't,you can't grandfather things in,on a scope of this magnitude, especially when you're basically refitting the building.
And getting to the new code, depending on whatever you're inheriting, costs are gonna be unpredictable. So I mean, like you said, John, sometimes it's easier to just demolish the building and build a new one. but then that doesn't fit with the strategic logic of repurposing a building and reutilizing.
I mean, we saw that with hospitals a lot, new California law says that by twenty-thirty, all hospitals need to be up to,SB twenty-thirteen law, which says it needs to be up to new code. It allows you to repurpose an older hospital into a medical office building. People are still not doing that.
They're just tearing it down and building a new hospital instead.
[00:19:06] Kanav Hasija:
Well, there's a systemic thing to be looked at here, right? Again, let me share my screen and look at some charts here. So this is from Cushman Wakefield. the office vacancy rate, if you see, right, is going up from 16% to 20% nationally in the US, right? so it's not a huge jump, but I think even a 4% is a lot to kind of move things around. If you look at by cities, right? I mean, this is another report by someone else, on April 26. But if you look at the cities here, the rates are going up in, in some ci-cities where there's a lot of traction happening like, Atlanta, Nashville, New Jersey. But if you look at the high occupancy, the high vacancy rates, so 23% San Francisco, it's going down, the price per square feet.
San Diego, you know, Boston, the rates are going down, but the vacancy is low.
[00:20:03] Jon Wright:
I think that's really a, you know, in those coastal cities is a correct, kind of a return to from a really post-COVID high, versus... So maybe we're starting to see a little level out here on what the, quote, "new normal will be," which is going to drive what the d- what the supply needs to be
[00:20:24] Kanav Hasija:
But the interesting trend I saw is in the Class A office construction volumes. So if you see in the Class A office construction volumes, you know, Boston is l-leading the chart, which never used to happen before. So this is the new normal that's happening where Manhattan is number two, which was never the case. and Bay Area is like all the way at the bottom, right?
[00:20:44] Jon Wright:
I think, people don't want to return back to their father's office, if you will. drop ceilings, old school. people wanna come back to something new and nice. And so, you know, we're seeing demand for things that are new and nice or redone. and I think people fundamentally do wanna come back to the office at least some percentage of time, three, four days a week.
They don't want to do the commute. The commute pain is over. No one wants to... If you guys remember that, 2019 and before, it was awful. and so... But people do want to be in person. People do like to leave their homes, and I think it's just the bar for where they wanna go and what they wanna do, and the time that they're going to be there is different now.
And so I see, I think you're seeing that reflected in new product being built in some of these areas, but then we've got a lot of old product that's gotta cycle out. the consensus is that's going to become residential
[00:21:43] Kanav Hasija:
And Jon, do you think it's also the way the cities were designed and zoned before the requirements have changed, which is we have uptown where we have high residentials and we have downtown where we have commercial and, retail. That has changed to saying, "Well, we need commercial and retail all over the place, in different parts of the city and we need, a- an apartment living and we need,a townhouse living next to each commercial district."
[00:22:09] Jon Wright:
Yeah. Typically, the mixed use is where modern planning is now returning back to. I think the difference is no more apparent than like a San Francisco versus a New York. New York really grew organically as a collection of different uses. And so, and you can live there, and you can live in Manhattan, work in Manhattan, send your kids to school in Manhattan, and live there forever.
I mean, there's just access to that. That's a little bit different than San Francisco, which really the Bay Area kinda grew as a hub and spoke. not to say that, you know, original San Francisco was a collection of uses. It was. But in modern times, it's really migrated to where there's bed- more bedroom communities in the suburbs and you're commuting in, and the downtown hasn't had as much of a mix.
And you certainly, have to make an affirmative choice to send your kids to school in San Francisco. People do, and people do it successfully, but it's just different versus these, cities that have older and have grown up with a different set of uses. So I think that, yeah, the commute in to a downtown that's primarily office is there's a high, there's a high hurdle there.
So either you're close in or your employer's making you do it a certain amount of time, but if you have a choice, you're, you don't wanna slog it away in traffic five days a week. S- no one's doing that.
[00:23:30] Kanav Hasija:
Funny thing you said about New York. I was, one of my friend asked me this question is like, "Why do you think New York is the most capitalistic city in the world? and it's doing so well." And as I, I started to say, "People have smaller houses. They don't want to stay in the house. They want to be out in the city.
they work in an office building on the seventh floor. They come down and walk to the subway. They buy their meal back home, while walking. they go to a retail store, they spend some money." make the money on the seventh floor of the office building. They go down and spend their money, and they don't want to stay in the houses.
g- go to the house to sleep because it's too small. And the money just moves every day from making money in the office building to, to spending on the streets.
[00:24:16] TK:
Maybe now you're hitting on something because, I was about to th- say, I mean, maybe it's a construction thing. there's something about having a house with a backyard and a front yard, which cities... that, like John's point, the hub and spoke model, the good thing is, I mean, I see this in construction.
People are living in Tracy, Hollister. Like most of-- This is the other thing about the tradesman workforce thing. Typical tradesman wants a house with a yard. You're not-- This is a more Bay Area problem. This is not a national problem, but you can't afford that in, within proper Bay Area. Like you gotta go to Hollister, you gotta go to Tracy or farther away.
So these guys are commuting in from faraway places and getting to the work- workplace at six thirty. so I always feel as a human being, and I don't know if this is generally true, you want a bigger house, and then the exchange is that means you're not in downtown, that means you are commuting in, and that means if you have a choice to work from home, you'd work from home.
[00:25:14] Jon Wright:
Yeah. I think this combines with our discussion of the trades. it's fairly... Some of these have-- guys have very miserable commutes, and that's all a factor in this. And I think this points to a discussion at a different day around industrialized construction and factory construction could be a little more functional for these guys, so they don't have to drive two hours to a site to work, then drive two hours back through the grinding commute.
I think it's probably gotten marginally better post-COVID, but certainly was good during COVID. I think, I, both experienced that, heard that from those guys. but yeah, no, the commute is another factor if you're thinking about doing this for a living and you wanna be where there's work in a major metro, you're slogging it.
You're slogging a commute that's even if you're leaving early, it still kinda sucks
[00:26:02] TK:
There's no work for, from home for tradesmen, I'll tell you that. But I did enjoy,now that I'm a tradesman, but I did enjoy the commute during COVID. It was like empty freeways. I'm like, "Oh, this is how it's supposed to be."