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May 11, 2018
Specialty: All sectors of commercial construction
Management: Pam Stewart, CEO; Larry Stewart, president; Justin Stewart, executive vice president
2017 revenues: $55 million
Projected 2018 revenues: $60 million
Projects: 403 Dexter, 98 residential units in South Lake Union; Drivers Club and Metropolitan Auto Park, an automotive club in Redmond; Cheatham Street Flats, 245 student beds in a modular building in Texas
Justin Stewart, executive vice president of Synergy Construction, answered questions from the DJC about his firm and trends and issues in the industry.
Q: What are the most important issues in your industry?
A: The rapidly rising construction costs and the industry-wide labor shortage are clearly the most widely talked about topics. However, I would say they are symptoms of another significant issue, which is a general lack of innovation compared to other industries. People are understandably attracted to innovative, forward-moving industries where they have greater opportunities for upward mobility due to growth, and that is simply not the case for most of the construction industry.
Construction costs will continue to rise as long as the economy creates more demand than the current workforce can supply.
Q: What’s an interesting trend, and what does it mean for your firm?
A: The one I am most excited about is full volumetric modular construction. While construction costs continue their dramatic rise, by working extensively with leading modular off-site construction providers we now have a single-source contract, fully vertically integrated delivery model that is bringing overall costs back down. This is really making an impact on projects that commit to modular construction early and are optimized for off-site construction.
I believe we will see this continue to grow into a mainstream method of construction and I am happy to lead that charge. Ultimately, this is how I see the industry solving the affordable housing crisis and engaging the younger workforce.
Q: Which sectors are growing and which are slowing locally?
A: As a GC we are largely at the tail end of that information cycle, but I’m happy to share what we see. Our preconstruction activity continues to be very strong in the multifamily sector, which after years of strength is in completely uncharted territory at this point. Student housing seems to be in a frenzy competing for land. Self-storage and commercial tenant improvements are on a strong upward trend. Industrial demand is strong but there is limited available land, and there is still a lot of action in hospitality.
Sorry to sound too positive, but there isn’t a lot of negative information out there from our perspective, despite the tightened commercial lending (lower debt to equity) available in many of the above sectors.
Q: How are rising land costs in Seattle affecting what gets built?
A: In commercial real estate development, everything comes down to simple math. On one side, you have land, soft and hard costs. On the other, you have the expected net operating income: the completed asset’s revenue minus the ongoing operating costs including debt service. Any increases to the development cost have to be offset in the net operating income or the project won’t get built.
So rising land costs are no different than higher construction costs, impact fees and other costs. They require higher rents or increased unit counts/density (or other offsetting factors such as property tax abatement) to make the same development deal work again at a higher cost.
In general, land is priced at the maximum revenue that can be generated from the property, so in strong economies, the “highest use” of the land is typically what gets built or it wouldn’t provide an adequate return on investment to get funded in the first place. In contrast, in weaker economies land sellers are more willing to work with creative developers to get a deal done.
Q: Has your firm gotten into new project types recently, or do you plan to?
A: Our firm has grown to include teams that perform across a range of project types over the last 28 years, including medical, office, retail, multifamily/mixed-use, hospitality and occupied renovation. However, recently we have seen an increase in self-storage, commercial tenant improvement, engineered steel buildings, warehouse renovation/TI and hospitality projects, specifically using full-modular construction methods.