Oil and steel prices have fallen in the past 12 months and are now plateauing, easing some of the pressure on industrial construction costs. But another headache is emerging: the availability and cost of labour.
Add that to rising land values, and industrial development is in for a challenge. The construction industry is, however, rising to the challenge through innovation and design.
An estimated 300,000 people left the building trade between 2008 and 2010 during the downturn. As the property market has picked up, competition from residential and commercial construction firms for workers has put further strains on recruitment and pushed up wages.
“The supply of labour is a very competitive market. You have to pay more to get good labour. And if you have a good labour pool, then you do everything you can to keep them. That’s critical,” says Len Rosso, head of industrial and logistics at Colliers International.
Construction costs in the South East and Midlands for an average sized, multi-let unit come in at around £60 per sq ft for a 100,000 sq ft building. The larger the unit, the cheaper the costs, so for a building in excess of 150,000 sq ft, costs are about £40 per sq ft, says Rosso.
During 2016-17, materials are forecast to rise by around 4% a year, while labour costs are set to increase by 5% a year up to 2019, according to Bilfinger GVA.
Land prices have also been rising, as much as 40-50% in prime shed industry locations. Developers are mitigating these rises by increasing rents where they can. In some parts of the South East, rents have increased to £17 per sq ft, from about £13 per sq ft around 18 months ago. SEGRO achieved £17 per sq ft for Park Royal in West London. In the Midlands, developers can achieve rents of between £6.50 and £6.75 per sq ft, roughly a 20% rise on 2014 levels.
Growth in prime locations is expected to continue, driven by the imbalance in supply and demand, according to the Industrial Agents Society.
But rent increases aren’t the only solution. Developers have also been looking at ways of maximising space for occupiers, creating more out of less. Rents are charged per sq ft on floorspace, so by increasing eaves height an occupier gets more space by volume.
This works particularly well for multi-let warehouses close to urban areas to where space is particularly tight.
Will Cooper, building and project consultancy director at Savills, points to value engineering as one of the ways developers can protect their bottom line. “Where we have cost pressures, we are looking for different, innovative solutions. Instead of piling the ground, we are looking at ground engineering solutions that are cheaper if done correctly and provide the same solution,” he says.
“It’s about being flexible with the design so contractors can come up with different uses.”
Another way of developers reducing costs includes hiring second-tier contractors, such as those looking to break into new sectors with smaller turnovers, but lower cost bases.
Tendering for two or three buildings under one project is another option because economics of scale can lead to lower costs. But there are risks attached.
The bleak times of 2007-10 may be over for industrial construction but pressures clearly remain for the sector. A failure to embrace those challenges by adapting and innovating could see some developers miss out on the growing opportunities available.
Facilities get an upgrade
Given the typical location of warehouses – away from city centres, shops and other amenities – occupiers are increasingly demanding higher-quality fit-outs of staff facilities such as canteens, toilets and break-out areas, and more of them.
“This is more paramount for each occupier, particularly at the larger end,” says Len Rosso, head of industrial and logistics at Colliers International.
This does increase cost. Some developers will include that cost and raise rents, but it tends to vary according to size of unit, location and occupier.
Some developers are even noting a change emerging in the use of staff facilities. Cooper says historically operators provided separate facilities for white-collar and blue collar-workers. But that is slowly changing.
Comment – James Kelway, director, Savills’ building & project consultancy
The 1998 Egan Report was about “rethinking construction” by improving quality and efficiency. This report was written 18 years ago and yet the topics, drivers and ambitions were the same for the UK industry then as they are today.
The report set out five key drivers for change, including “integrated processes”. Egan used this term to explain a process that utilises the full construction team, bringing the skills of all the participants to bear on delivering value to the client. It is a process that is explicit and transparent, and therefore understood easily by the participants and their clients.
That’s a great driver, but how did our industry respond? There were a number of approaches and concepts that were identified, developed, introduced and tested to provide solutions, which in time led to a government term, “integrated practice”, applied to construction.
Today, we might best recognise integrated practice as BIM, or building information modelling. This is an approach to design, construction, and facility management in which a digital representation of the building process is used to facilitate the exchange and inter-operability of information in a digital format. It requires a different way of thinking and working.
However, in the new-build private sector, the adoption of this way of thinking and working is still a hit-and-miss affair. Some clients view the BIM process as an unnecessary cost that protracts the design programme. Others instead see the benefits and are prepared to deliver their developments in this way for both themselves and their customers. But to what end?
A recent example was the delivery of DP World London Gateway’s Logistics Centre by Savills’ new-build project management team, where BIM was used from start to finish. By undertaking the design process in this way, the design and project team were able to provide a higher integration of all the different design packages involved, allowing problems to be identified earlier. This resulted in minimal changes and a far smoother construction phase.
This is not, however, where it ends. The data-rich BIM model can also be used by owners and occupiers in a building’s operational phase. DP World Estate’s team now use the BIM data in the management and maintenance of their building. Their facilities team are able to access data to provide accurate information on maintenance regimes and output data on the life cycle of equipment and assets. This in turn informs DP World’s planned preventative maintenance budgeting for their building.
More and more people are starting to see the benefits – so much so that the RICS has recently launched a BIM Manager certification. As a result, we are seeing the first wave of chartered surveyors using BIM in cost and project management. This is responding to the government’s construction strategy, which requires all centrally procured public procurement projects to be built using level 2 BIM by 2016. Large-scale infrastructure projects such as HS2 are now taking BIM from three dimensions to five dimensions, by adding cost and time into the BIM process.
It is about working smarter. Those in the industry who have embraced BIM see the value-added benefits. Those clients who will hold their assets once developed can use BIM to inform decisions based on long-term performance and will see how that can be optimised, rather than look at the most economic solution.
We’re seeing an increasing number of consultants and designing contractors with BIM capability. However, in the new-build private sector, BIM is not yet business as usual, though the future is definitely digital.
