Cold Weather Markets Now Seeing Severe Shortages Of Precast Concrete, And There Aren't Many Options
Supply chain hiccups, rising material costs and shortages have plagued the industrial construction market throughout much of the pandemic. And although some of these problems cleared up in 2021, a new shortage arose in the past few months that could set back the expansion of many product distributors.
In cold weather markets such as Chicago, new warehouses and distribution centers need insulated precast concrete panels. As the cost of transporting the massive panels is prohibitive, builders must depend on local producers, but the escalating demand for consumer products delivered through e-commerce means demand for new warehouses is also hitting a historic high, outstripping the capacity of local precast manufacturers.
“Typically, there was a four-to-six-week lead time for precast panels, and now the lead time is 14 to 16 months,” Cresa Chicago Managing Principal Ed Lowenbaum said. “Anybody who needs to put something up can’t do it until mid- or late next year.”
Markets in warmer climates like Dallas still suffer from the nationwide skilled labor shortage, along with shortages of roofing materials, electrical supplies and many other commodities, but builders there don’t need insulated panels, so the pieces can be poured on-site and then tilted up into place.
Industrial buildings in cold places, by contrast, need walls that include an internal layer of polystyrene insulation built by specialist manufacturers in their own factories. These panels are typically 12 feet by 37 feet, can weigh 5 to 6 tons and are shipped by trucks to the development sites. The cost of shipping these behemoths is prohibitive, so developers typically depend on local manufacturers.
“Precast wall panels are the most obvious of the [delays] in the industry, because without a building envelope, you can’t do much else,” Opus Design Build Regional Vice President Jim Caesar said.
The Minneapolis-based firm has projects underway across the Midwest, including the Chicago area, southeast Wisconsin and Michigan.
“We’re seeing precast lead times pushing past historic norms in every Midwest market,” Caesar said.
And precast firms can’t accept orders due more than 14 to 16 months away, Caesar added, because there’s too much risk such deals would fall apart due to market shifts or financing falling through.
“There’s a lot of risk for the precast builders that they haven’t had to deal with before,” he said. “We’ve had precast manufacturers say, ‘We can’t take your order.’”
Solving this problem won’t be easy. The demand for spec warehouses continues to soar, and expanding capacity isn't easy for precast producers. It would cost millions to do so, and such a capital investment could go to waste if warehouse demand returns to normal in 2023. That will force users to simply put their plans on hold and wait for space or go out on the marketplace to buy up available warehouses at premium prices.
There are four major precast producers for the Chicago region. Together, they typically fabricate and deliver about 10M SF of wall panels in a typical year, enough to handle the number of new warehouses that rise annually in Chicagoland.
“We’ve been chugging along, doing that year in and year out,” ATMI Precast Vice President of Development Mike Walsh said.
The Aurora, Illinois-based company produces about 60% of the precast panels needed in the Chicago region, he said.
But that 10M SF of wall panels is no longer enough. Even as the amount of new supply remained relatively steady, Chicagoland users set a new record in 2021, absorbing almost 46M SF, according to statistics from JLL.
“That’s more than 2019 and 2020 combined,” JLL senior associate Kate Coxworth said.
With spaces getting occupied as soon as they receive the finishing touches, it is a landlord’s market, with soaring rents and few choices for tenants, she said. The vacancy rate for the Chicago region sank to just 3.5% by the end of 2021, another record, and average asking rents rose 37 cents last year to $5.65 per SF, with new spec spaces near O’Hare International Airport garnering rents of up to $9. Prices like those have some users that normally use Class-A warehouses seeking out older Class-B and even Class-C buildings.
“We’re seeing rent hikes across the board,” Coxworth said. “And as long as somebody is willing to pay it, this will keep going.”
What's more, household names like Best Buy, LG Electronics, Home Depot and Walgreens, as well as parcel delivery companies such as FedEx, United Parcel Service and DHL, are planning further expansion.
Developers are doing their best to grow the region’s inventory. After several years when deliveries totaled between 20M SF and about 23M SF, nearly 29M SF are now underway across Chicagoland, according to Coxworth, and about 68% of that is on a speculative basis, meaning buildings that don’t have a signed tenant.
With so much construction material going toward spec projects, private companies that want to own their own buildings, or need to construct a customized building for complex uses such as food manufacturing rather than renting a simple box, may find it especially hard to line up deals, Lowenbaum said. The longest lead times for wall panels that he can remember were during the industrial boom in the early 2000s when it could take eight or nine months, instead of today’s 14 to 16 months.
“It’s been a long time since we’ve seen anything like this,” Lowenbaum said. “They’ve always had the capacity to serve the market.”
Walsh said his firm can manufacture several dozen panels every day. And a typical distribution building of 250K SF needs hundreds of precast concrete panels, each with several inches of insulation, which ATMI can complete in about 10 days.
“We can pour a panel on a Monday, and it’s ready to go to storage on a Tuesday,” he said. “There’s nothing off the shelf; everything is custom-made.”
He estimates Chicago-area precasters would need to produce about 17M SF of wall panels each year instead of the usual 10M SF to meet current demand. But ATMI is already producing as much as it can. Increasing capacity even further would mean expanding its plant, a big capital expenditure that comes with real risk.
“Is this a 17M SF market or a 10M SF market?” Walsh said. “That’s the $8M question.”
Companies like ATMI would get stuck with the bill if they expanded and developers returned to a construction pace closer to historical norms. Furthermore, there is still a shortage of skilled labor, Walsh added, so it isn't guaranteed that precast builders could even staff up their plants after spending millions on expansions.
Caesar agreed developers, suppliers like ATMI and tenants are in a tough bind with no easy solution.
“There’s really not any quick way to increase the capacity of a precast plant,” he said.
But Opus isn’t just sitting around waiting, Caesar added. The firm is starting to experiment with new construction methods, hopefully in ways that will speed completion.
At its Tollway Corporate Center in west suburban North Aurora, the company got a building underway last October that will offer 543K SF and a 36-foot clear height. Typically, Opus would first place a building’s precast walls as they rolled in on trucks. Once that was done, Opus would add the building’s internal steel infrastructure. But with the walls not set to arrive until February, the steel skeleton began rising over the site on Dec. 13.
It isn't a complete solution, Caesar said. It is just one way the company discovered it can get a project started and keep it underway even in the face of critical shortages.
“The way precast lead times are going, we have to be creative,” he said.
WBS Equities CEO Wendy Berger agreed developers have to rethink their construction process. Her Chicago-based firm, which specializes in creating food manufacturing and food distribution facilities, is developing a 28-acre site in Florida and doesn’t need insulated precast walls, she said. But numerous other shortages remain, so it is also trying out new materials with shorter waiting times.
“I do think we’re all getting more creative,” Berger said.
Even though some shortages look impossible to overcome, most materials are becoming more available as supply chain kinks get worked out and builders come up with workarounds, she added. There was, for example, a 52-week wait for steel in 2021, and that has shrunk to between 30 and 40 weeks now.
“There are bottlenecks everywhere, but it seems that at the core, things are getting better and better,” Berger said. “Overall, people are excited and upbeat, and this is in part because while the supply chain issues will be here awhile, the demand for space remains incredibly strong.”