Builders Playing 'Whac-A-Mole' As Construction Challenges Mount From All Sides

The ripple effects of roiling trade and immigration policy changes are reaching the foundations of commercial real estate, with developers and builders dealing with levels of uncertainty, unpredictability and changes to their financing sources on a level they say they haven’t seen before.

Now, developers and construction experts are trying to find every solution possible to ensure they can finish the projects they start, industry players said onstage at Bisnow’s New York Construction and Development event Wednesday.

Their solutions involve working more closely together, negotiating contracts to account for tariffs and figuring out how to mitigate financial risks throughout the chain of companies involved in creating a building.

“If you ever hear me talk about this in a private setting, I'm going to say it's Whac-a-Mole. Every time we think we've got a little bit of clarity, something else pops up,” Louis Martinelli, a regional business manager at construction supply chain manager SourceBlue, said at the event, held at Convene 360. “It's that constant ‘What's next?’ that creates more uncertainty.”

Supply chain woes, labor shortages and, to some extent, tariffs have long been part of the picture for development and construction companies. But the recent shift in how quickly those factors can change and by how much has stiffened up the capital markets, creating an environment where it’s hard and expensive to find financing for projects.

“The tariff conversation is now on every table and in every discussion, but nobody knows what band it is,” L&L Holding Co. Executive Vice President Kevin Hoey said. “On our side, we've got to come up with the money to cover that, and you never know how much money to come up with. And inevitably, it's never enough.”

Tariffs have helped drive up the cost of iron and steel by more than 9% over the past year and copper wire and cable by more than 13%, according to an Associated Builders and Contractors analysis released this week. 

Developers are reverting back to their pandemic playbooks, buying materials early and shelling out for storage space to protect against unexpected price hikes, Hoey said. 

“I'd rather have pallets of lighting sitting in the Bronx that I can use on any project that we deem appropriate than getting stuck, not being able to finish the ceiling, not getting people into the building,” he said. “It all goes down on our side of the table — not collecting rent.”

Some construction managers are trying to push the cost of tariffs onto developers via clauses in the development contracts, RXR Senior Vice President of Construction Jason Roberts said. 

“If you're in the middle of a job right now and tariffs — whether it's steel and aluminum from Canada, which has gone the last four months from 25%, 50%, 35% — you're getting stuck with that if you're in the middle of a contract, a lump sum deal,” he said.

Still, most developers and builders are working those situations out by coming to the table together, he said. 

“On the owner side, we have got to make projects happen,” Roberts said. “If there's a real hit, let's try to work something out.”

Developers and builders are now working more closely with one another than at any point in memory for Anthony Rinaldi, who has been in construction for close to 40 years and CEO of his own company, The Rinaldi Group, for 30 years.

“All too often, the developer and the contractor end up at odds just because of who we are,” he said. “I've never seen developers asking me to partner with them so much before.”

What’s been increasingly playing out over the past 24 months, Rinaldi said, is developers seeking joint ventures or partnerships with their construction managers or general contractors. The partnerships are unconventional, geared toward getting a project’s builders and developers aligned on the project timeline and costs to mitigate risk rather than asking for equity investments.

If contractors, especially subcontractors, are caught paying more for materials than they are being compensated for the job, it can lead to financial ruin. 

“We're in a time where we're seeing a lot of vendors and subcontractors go out of business,” said Charles Avolio, head of major projects at Shawmut Design and Construction. “It's working capital. That's the issue that puts people out of business.”

Shawmut is working on a large project with a university that’s close to the finish line, but it has had to manage three defaults throughout the process, he said.

The risk of default and bankruptcy is significantly higher than it was 18 months ago, said Rob Rapp, a partner at insurance and risk management firm The Baldwin Group.

Preparing for an unexpected subcontractor bankruptcy has become key for builders, Rapp said. He’s even seen some construction managers lease space in a subcontractor’s facility for material storage, but carefully wrap and label the materials so they can show up and cart them away on the day a subcontractor declares bankruptcy. 

“We've seen a significant uptick of subcontractor nonperformance issues, really driven by just the fact they don't have the working cap,” he said.