Philly's Construction Industry Looks Inward To Cope With City's Building Boom

The effects of Philadelphia’s permitting boom at the end of 2021 have begun to be felt in the construction industry.

Due to a change in the city’s tax code, permits for over 25,000 residential units were issued last year, and a major influx of national and institutional players laid out plans for life sciences developments to capitalize on the momentum of Philly’s cell and gene therapy industries.

Now, even as financial conditions have taken the wind out of the sails for many developers, enough plans have advanced to the bidding phase to give construction companies all they can handle.

“A lot of projects that got pushed back are coming to fruition now,” said Calvin Snowden, managing partner of local construction firm BDFS Group. “We’re getting more calls and emails to bid on projects than ever, enough that we’re projecting to have a strong first quarter next year."

A sizable portion of the 25,000-plus residential units permitted by the city last year will likely never be built. Plenty of developers submitted applications for projects with only an outside chance of ever happening to lock in the full 10-year tax abatement on new construction. Residential construction projects permitted after Dec. 31 only get one year without property tax payments upon completion, paying 10% in year two and an additional 10% each year thereafter, until paying the property tax in full after 10 years.

But projects developers fully intended to build when they applied for permits last year are much more difficult to start if those companies hadn’t locked in construction financing before the summer, when interest rates started spiking in earnest and lending dried up for many.

The National Association of Home Builders projected 2023 to have significantly fewer multifamily construction starts than this year based on the negative sentiment expressed in its Multifamily Market Survey for the third quarter released Thursday.

Meanwhile, though three major life sciences projects are set to deliver in the next few months in University City — 3.0 University Place, One uCity Square and the first ground-up building at Schuylkill Yards — the collapse of financing for pre-revenue life sciences companies nationwide has thrown into doubt how robust the next wave of those developments will be. 

“Have we seen projects pushed? Yes,” Turner Construction Vice President and Pennsylvania General Manager Jodi Rennie said at Bisnow’s Philadelphia State of the Market event on Sept. 29. “Smaller life sciences companies in particular can’t be that flexible, but larger companies are sitting on a lot of cash and can move forward.”

As a robust pipeline of projects wobbles but continues to flow, Turner and BDFS are both projecting business next year to be stable when compared to this year. But meeting the demands of those projects will force both companies to turn outward.

Even as materials prices begin to normalize, construction labor remains extremely tight and wages have risen through last year and most of this year. Skilled, experienced workers can “write their own ticket,” Snowden said, and are more likely than ever to leave a job for a better offer within weeks of being hired.

A worryingly high portion of the construction labor force is approaching retirement age. To the extent recruitment efforts launched years ago by construction companies have borne fruit, the new workforce is too young to take on too much responsibility.

“I’m very big on looking at my pipeline of talent and my succession plan, so I’m worried about how to make up for this [experience] gap,” Snowden said. “So I’m trying to figure out whether to acquire other companies that have skilled guys or do venture work with other companies that have skilled guys.”

To avoid bidding wars for in-demand workers, and with vanishingly few qualified workers seeking positions, construction companies large and small are breaking up contracts to share work with other firms upon winning bids. 

“For us, it’s part of being strategic in what type of job we pursue,” Turner Philadelphia General Manager David Kaminski told Bisnow in an interview. “We slice [contracts] up a little bit more to enhance the number of bidders and firms that compete and can help complete the project successfully.”

In addition to the benefit of meeting job requirements, sharing work in this fashion gives more access to women- and minority-owned businesses, the vast majority of which are too small to take on large-scale construction projects by themselves, Snowden and Kaminski agreed.

Building capacity among companies owned by underrepresented groups has been among the top concerns for trade organizations representing those groups, the city of Philadelphia and its major institutions for several years now. The past two years have produced tangible results in places.

Mosaic Development Partners, co-developer of the Philadelphia Navy Yard, has instituted a capacity-building program for diverse contractor partners lauded by the city, so much so that PIDC emulated it in its search for a company to redevelop the Family Court building.

The fastest-growing company in the last two years in Philadelphia has been Benchmark Construction Group, co-owned by Kenn Penn, the co-founder of African American Real Estate Professionals’ Philadelphia chapter, the Philadelphia Business Journal reports.

Momentum in the industry is building, Snowden and Kaminski agreed.

“We want to create the right environment at our projects,” Kaminski said. “When we have a workforce that looks like the community we’re building in, that makes for the right environment.”