Construction spending is on the rise. A report from the U.S. Census Bureau of the Department of Commerce found that construction spending during January was estimated to a seasonally adjusted annual rate of $1,140.8 billion, a 1.5 percent increase from December 2015’s estimate of $1,123.5 billion. The month-over-month increase isn’t an anomaly as January 2016’s figure is 10.4 percent above the January 2015 estimate of $1,033.3 billion. This rise in spending is a caution sign for many franchisors looking for prime real estate—it can affect how construction companies operate as they may need to change dates of construction projects, and in turn, slow down the process for real estate site selection. Construction spending includes a number of factors, such as cost of labor and materials, cost of architectural and engineering work, overhead costs and taxes paid during construction. Blair McDaniel, founder and CEO of contracting company Alair Homes, said that a rising housing market can play a part in construction spending.
“A rising market, like we are experiencing in the U.S today, can be as dangerous or often even more dangerous than a slow market,” McDaniel said. “Controls and systems are vital for survival no matter what the market is doing. Running price escalations can destroy a traditional builder model faster than pretty much any other force in the industry that I have experienced.”
One of the services Alair Homes provides is helping businesses find new locations and remodel existing ones, including franchising reimaging.
McDaniel said there is a lack of skilled workers in the construction industry and this is causing project to take longer to complete. Because the supply of skilled workers is lower than the construction demand, McDaniel said companies need to plan for this. Companies will always plan ahead for a franchise remodel or commercial real estate construction job, but McDaniel said planning well in advance of a project can help franchises change course in case construction costs rise or there are any external factors.
“It is all about risk mitigation through planning. Projects need to take as long to plan as to execute,” McDaniel said. “Historically we have done very well in slow markets by being agile and operating in multiple verticals in the markets such as remodels, infill projects, commercial tenant improvement projects and investment projects. None of these markets move in tandem with each other exclusively.”
If franchises have difficulty finding freestanding real estate for their locations, they can try a number of new real estate approaches. Some can look to non-traditional real estate to help propel their brands. These real estate spots can be number things including franchises in big-box stores like Wal-Mart or even locations in airports, college campuses or under developed urban areas where the real estate costs are low.