Construction Cost, Risks, and Markets

0:00Hello, listeners, and welcome back to the Peggy Smetli Show. I'm your host Peggy Smetli. Today we're taking a closer look. Welcome back to the Peggy Smetli Show, your voice for hour and next in 2020 with your host Peggy Smetli. Hello, listeners, and welcome back to the Peggy Smetli Show. I'm your host Peggy Smetli. Today we're taking a closer look at the forces reshaping construction in the built environment as we move ahead into 2026. We'll look at refinancing shifts, the persistent skilled labor gap, and a design pipeline that's moving cautiously and an industry adapting and real time to kind of policy and geopolitical uncertainty. These are the signals defining this entire year ahead. RLB's Q 2025 North American Cost Report provides a very interesting look at the current cost, I think, risk and market conditions across the region. My guest today is well positioned to explain what these findings means for owners, developers, and contractors. Please welcome Paul Brasho, who is the president of RLB North America. Paul, welcome to the show.

1:10Morning Peggy, great to be here. It's interesting because as you and I were just talking before the show, there's so much happening in the space, and I thought maybe we could talk a little bit about, I think when we think about refinancing as we tick up the Fed's rate cut, but new starts didn't really follow, and I think what's interesting. What is this interesting conversation? Maybe I should preface for my audience talking a little about diving into the numbers a little bit, because I think when we look at construction, some of these big projects, I thought it's interesting. What does this tell you about owners, and are they actually feeling what they feel about heading as we continue on here in 2026? Because we've seen some are telling us the market's great, others are saying, not so well, you've done a report. What's diving to that a little bit? Yeah, so thank you. We saw a federal rate cut in December of 2025, and we were hoping that I'm lost a little bit more, but what we saw is that we didn't see the surge of new ground breaking that we had hoped, but we did see a lot of developers begin to finalize drawings, commence their permitting.

2:20So I think developers are cautiously optimistic or positioning their projects for potential further rate cuts, and that could increase the surge. It should be noted there was a small uptick in December of 2025 as it relates to new starts, but as you said, it was quite small. Yeah, it was a tiny one, and I look at that, and it's an interesting point that you say about developers, because the question should be now, is that because we're talking about data centers? Are we talking about really looking at the housing market? We know the president's been really trying to push for a lot of different things when we talk about the big market, what is it going to be? These big projects, as you said, so when we look at all of this and refinancing, does it mean more like firms are hitting pause a little bit, or are they repositioning for a different kind of economy? Because that's what I'm wondering, because again, when I talk to a lot of different people, they're saying, look, we're moving ahead. We've got all these infrastructure things we're looking at. And I think it sends a lot of different signals. I just talked to a gentleman yesterday who's know all the things we're doing are it's hurt us in a lot of ways, but we still have a lot of projects.

3:29But what does that mean down the road long term? It's certainly a repositioning. I think the pausing occurred in 2022 and 2023 after rates went with search so much higher, performers didn't work and developers were really cautious about investing in construction. Now with interest rates saying to come down slowly, people are repositioning. And as you said, certain sectors are doing incredibly well, infrastructure, mission critical or data center sector is going very well. Healthcare is going very well. So there's certain sectors that are really progressing very quickly, while others are a lot more cautious. So we talk about this. Everyone used the line about the labor part of this is people say we're putting money into training. If I talk to the labor pool, they'll say, no, we're not. We just need more labor. Everyone says we need to invest in our training. What is really happening? There's there seems to be this gap right now is the gap closing. What's the real sticking point?

4:30We hear a lot of people say I can't find the people I need. Others are saying there's a lot of jobs out there, but what's the real thing we're talking about is the money being put into training? Is it a lot more talk? It's running the gamut again. And I'm concerned that we're going to have this big divide as we continue to move forward when we talk about construction. Yeah, certainly there is a there is more investment in training and which is a great thing and then needs to continue to be more investment. But the bigger problem is the season workforce is our retiring over 40% of our workforce were retired by 2031, which is a significant percentage. When you think about only 10% of our workforce is under the age of 25. So you've got this large amount of people retiring and a small amount of people coming into the industry. We saw a similar trend out during the global recession, where a lot of people back in 2007 through 2011, a lot of people retired from the industry. But at that time, we had a lot less construction in the industry at the moment with so a large amount of demand, but we've got a lot of people retiring.

5:35So on the one hand, yes, the investment is important, but it's getting people interested in the industry, the young people interested in the industry and bringing more people into the industry. So let's split the discussion split the baby a little bit here on the on how we talk about that because it's interesting we say that we have the older generation retiring are these those skilled trades that we're talking about that have that experience that we talk about because I think when we talk. Talk in general about this, I think that's where people get confused because there's some really good skills that are required in the field. Are we talking about that those showing up in on the job site that we need because there's some jobs that are always going to be required and then there's that training that we talk about that's a little bit different. Can we talk about what that means and then I think then we can understand what are we defining as this labor shortage. So it is that skilled labor it is that that skilled people with 20 30 40 years of experience in the trades in the field running for is making sure that the product is delivered in a timely way.

6:42And they're the ones that that will be retiring over the course of the next five to six plus years and we do need to do a lot of training and bring people into the workforce to be able to replace them. It's difficult to replace that experience. You cannot skill as quickly as possible, but experience is a significant part of what they do in the field and we need to be able to replace them. That's where that's where it's hot up. Here's the challenge I've had we've known about this and we've talked about labor shortages and manufacturing construction for years. This is not like something all the sudden that says, oh, the light bulb just went off. It's very frustrating to hear an industry that knew they were going to have now all of a sudden we say, I came in and it's hit them all of a sudden a little bit harder. But this is not something we've had now since COVID the ground we made with women being in the industry a little bit more we lost that 2% gain we made is this. I guess I'm trying to understand is why is construction not getting it that they should be encouraging K through 12 to want to be to start understanding constructions the way there's some really high paying jobs here.

7:48These are some things for jobs. Yeah, they are great jobs and it is about educating as you said the K through 12 and so forth not everybody has to go into university and go into the trade schools. And then there is good training programs that are out there in the trade schools and it's about getting those people and encourage them to go into the industry. I think in 2026 they're saying that they'll need over 350,000 additional workers just based on the volume of workload. That's a lot of people to additional people to bring into the industry, especially when you consider the number of people who are retiring. Have we done enough to try to keep that pipeline going if you're saying 350,000 already you have to get those people interested and then here's the other challenge I have you go into one construction company now you're fighting within your own industry to keep them within your company and not to be paid higher you train them and then they go to another one. So maybe you get them in the pipeline and you start training them and now you've got to worry within your own industry. Are they going to stay there and go within another company or there's a whole mix of things happening.

8:52There is and that's what pushes wages up, which ultimately is a good thing for the industry. Probably not a good thing as a relates to development. It just makes it more expensive to develop that it will push a bit of does keep it does keep people in the industry keeps them excited about it. And I think it has come a long way in the last 10 to 15 years. It's just taking some time to get to to basically get the experience get that experience to to be able to continue and push forward with the crews. One of the things I've been doing a lot of work on and I've done a lot of interviews on and where we are with collaboration the design work they be I the architecture building index is below 50 that tells us a lot. What's the level of caution now when we think about this the next wave of construction starts. Because I think that tells us if it's below 50 we have to have some concern. Do you agree? Don't agree? What's your thoughts on this because I think we can talk about getting more people interested in the industry. There's also the idea and correct me if I'm wrong.

9:55We believe we've been talking about if we start going into 4D and we get more interest and you don't have to have this higher level education because now we can collaborate in a lot of different ways and there's a whole lot of host of things that can happen. We can educate in a lot of different ways. So again, that's what you said there's a whole lot of things that can happen. How that keeps that pipeline going and gets more interest in the industry. Those are the things that happen. Let's talk about all these moving parts that are happening in the industry overall. Firstly, with regards to the ABI it has been below 50 now for 38 months except for a couple of months. It's been below that 50 thresholds which has been concerning. Don't get me wrong. I think the industry has adjusted and so forth. The first thing about the ABI is it measures the billings and as you said with all the new technologies and so forth it's allowing design work to be done more efficiently more effectively and therefore that pushes down the billings and don't get me wrong.

10:55There's certainly a silver lining here in that you were also watching the inquiries and the inquiries are above 50 which shows a good sign for the industry going into the future. We're watching the inquiries then the contracting and then the billings and hopefully we can slowly get all of those about 50. The other point to the question is with regards to what does this mean for future construction. As we talked about earlier, there's a lot of adjustment to different sectors and certainly many of the sectors that like the mission critical, like health care, like pharmaceutical, these are all these are all significantly skilled projects. The workforce that are doing the work has to be very skilled to get this work done and then it's going to be important as the industry continues to slowly retire as well. So do you think if we look at the as we look at the ABI right now and the index is low. Is this telling us right now that we have to we're talking about data centers and the design work there, whatever might be the case.

11:55Is that are we going to see maybe it go up or we still have to wait and see if we're looking at the design work overall. Do we think it's going to hover there or do you think no there might be some other things coming down that we don't know yet. There's a lot of again I'm trying to understand if we're going to just continue to hover we've been there at 38 weeks up and down is there potentially or our concern is no it's going to stay there and we keep getting more efficient. It's not going to move. It's just going to be where it is. So I actually personally believe it is going to go about 50 for several months in a row, which we haven't seen in 30 plus months. I do believe it's going to go up there. I do believe that if we see some more federal rate cuts, that's going to be enough to stimulate the industry. Yeah, that's going to push it and it's not so much the sectors that we've been talking about. It's going to push the other sectors. It's going to push commercial projects, hospitality projects, residential residential is one of our biggest markets. But it's just been it hasn't done anything in three four years.

12:55And once residential starts to uptake, that's when you see more and more people come into the industry because residential is such a huge pod. But again those rate cuts have to come down before residential really kicks off. That's what I was trying to get to is right now we're just we're stock. We seem to be a little bit and maybe that's over exaggerating. It seems there's a lot of opportunity, but again, it's regional. I mean, you look state by state and that's where and residential seems to be very regional as well. Would you agree? I would totally agree and we're talking a generality, but you look at the Midwest there at the ABI has actually been above 50 for a couple of months now, which is a great sign. But yes, we are a little bit stuck but I would say it's more as we spoke earlier, repositioning and adjusting for the market. One thing that the industry has shown over the last even since COVID is that with the industry has had to reposition constantly because of financing costs and uncertainty and pricing escalation, long procurement timelines to buy materials, all of these things that had to be adjustments and the industry has just slowly been making those adjustments.

13:59And I think there'll be more to come. So that's an interesting thing when we talk about materials and other things like that change and the president's been doing a lot of terror things and changing all of that from foreign relations. When the pipeline is moving, even slowly, how should contractors and owners read that because I think it's it says a lot about the market, but even those little shifts. Are they thinking about it again regionally should they think about it nationally says how do you interpret the market then it's a little bit of a challenge. It is for us one of the things we look at is the backlogs of contractors, how many months of backlog work do they have larger contractors tend to have a longer backlog with smaller contractors tend to have a relatively short backlog. No, when it comes to financing projects when we talk about hospitality commercial projects and so forth. We certainty allows the financial institutions to say this is what we want and developers can adhere to that.

15:00When there's uncertainty, where's the economy going, what's happening with tariffs and those sort of things that that uncertainty causes the financial markets to adjust what they need as it relates to financing. And therefore construction has to adjust as well. I guess in an answer to your question, several things we look at we watch the backlog of contractors, we watch the API and we watch just what developers are doing as it relates to putting their projects in the best way to be able to get started again. So the construction industry has a long memory they've suffered through many recession. So as you say that you're looking at this, are they going to continue to be cautious. They like to sit on the sidelines because they're fearful. A lot of construction trades went out of business. That was a tough thing for them is this one of those that they're teetering saying there might be projects, but I've got to be careful while some are seeing success. I'm not really seeing that success. Do they have to worry about that a little bit? You're exactly right. There are many contractors who are positioned in one direction, example hospitality and then more cautious because they don't see the pipeline where other contractors who have concentrated on data centers or pharmaceutical are being more aggressive, hiring more.

16:13But you are right. We've got a long memory. We've been in the industry a while and most importantly, there are several lot of contractors as our developers that are just very cautious about the next steps as we move through 2026. So as you think about that, which I guess I'm trying to figure out for our listeners who are trying to figure this out which sectors are most exposed to maybe even maybe we can narrow down to maybe some of these policy swings that we are talking about right now. And which seem to be holding their ground because if we look at again, what happened in the 80s and the late 90s and things like that, are there some that say I've got to watch. I don't want to make big investments or I still have a lot of my pipeline. So I'm OK. But these large companies work with these subs and they're nervous. It's got to balance that. I think as always, to most exposed, I think commercial and hospitality and residential is probably the ones that are. That's everybody's portion.

17:14And I really think they're the industries that are looking for those those rate cuts to make their performance work. I do believe that'll come down the road, but I would say that they're the industries that are more cautious at the moment as opposed to the healthcare industry pharmaceutical portions of manufacturing and advanced technology. That are really pushing forward expeditiously to get their projects through design into procurement into permitting and ultimately into construction. Now we've seen that permitting changing dramatically. There were slow. There was lagging. That's changed. So are there cost companies that you talked about adjusting to procure procurement and scheduling to stay ahead of some of these risks. Now that you mentioned that. Certainly with regards to procurement of after covered and we saw the long lead times in association with so many materials. I think contractors have have broadened the number of people they reach out to and likewise they've built into their schedules more longer. Longer durations to be able to buy out and get materials, manufacturing delivered to site.

18:18So certainly the industry is adjusted and just any industry creating relationships and the procurement chain line is really important to understand where your materials are at. And more importantly, if there is a problem, you've got a you've got a vendor B or C or D that you can you can go to to not slow down their projects. Something constructions had to learn like manufacturing. You can't be in a silo. You have to collaborate and that whole relationship is very critical. When you look at this right now, how has that changed? We changed construction in the way that they've had to learn to use technology to make them even more successful not only in the office, but in at the job site. We used to say push to talk. They were the ones who brought that to the field to all of us using cell phones, but changing just in general. How has that changed considerably? It has changed considerably and to the benefit of the industry and certainly people coming through the industry now is a lot more advanced than they were when, for example, when I started in the industry. And I think that has made us more efficient. We just have to make sure that efficient efficiencies run the entire way through the through a construction cycle, meaning that it's not just the people who are buying the materials.

19:28It's also those people who are putting the materials in place. On that very standpoint, that's a really great point because it makes me think now based on what you're seeing, how fast is the industry pivoting? I guess is the question I want to get to from regulatory geopolitical is risks pop up because I would imagine it some ways that they're happy about it, but other times it puts them has concerns for them. And there's no question that raises concerns. All of these certain is the most is the nicest thing in any industry, but it's particularly the construction industry. It certainly allows us to to go out and hire people. It allows us to move forward that as you and I have discussed, this is the industry has seen so much over the last several decades. So there are a little bit more cautious than many. And as such, we that they make small pivots as opposed to going out and doing bold things to change the industry. Now looking at your report, was there anything in the report that you produced that was shocking that you said we were a little surprised by that kind of we have to look at things differently in 2026.

20:36I think that probably the industry thought that more would happen in 2025. And I think that was probably the me one of the most shocking things that it was more caution, it was more cautionary and small changes. We thought that we would be potentially larger changes as rates started to come down. The people are more cautious than we thought. I think that was probably the biggest shock in 2025 is that we've got to get we've got to get there, but we'll get there a lot slower than we had originally thought. So what advice, what's the takeaway you want people who are listening to our interview today to really think about is the months continue and we see the industry progressing a little bit. And you see us maybe in chop over 50. What are the some of the advice you want to leave them with? I think the industry is going to have a good year as a whole. I think it really depends on on where as a developer or as an architect as a contractor for your position. But I think several other several of the industries that perhaps haven't as aggressively grown in 2025. I think there's some great opportunity there, but a lot of it will depend on on interest rates and the federal cuts.

21:39How critical will it be for these developers to understand the owner market to understand all the players in collaborating here that it no longer is those islands that the owner dictates as the developer comes in there that everybody has to work together so that you're reducing the go to market to complete that the risks are minimal. The projects are completed on time. There's no delays all of these things that we've talked about in order to make these things happen as we're talking about because we don't have the people and we've just talked about those that are retiring that we have the skills that we have to get these projects done on time. One of one of the things that we've seen over the last three, four years is because the design durations have been extended so much as projects are not quite ready to start. We've seen a lot more collaboration between owners and architects and engineers and contractors, which I think has been good for the industry because it's allowed everybody to understand each other a little bit better, which I think always helps in the long run. But that's only a portion of projects other projects have gone to markets so fast and there hasn't been that collaboration.

22:44So I think as we continue to grow and continue to go into 2026, I think we'll see more learning from one another and more importantly, just making sure that we all get to the finish line in a collaborative way. There's something that you've seen now from 2025 or previous years that you've said, look, this is where you see the market had it. We talk a lot about technology, we talk about what the developers are doing. Have you seen anything over the years that says, look, this is a trend that's going to change the industry that's going to pull the industry faster than they've anticipated. I think again, because the industry does tend to move relatively slow as it relates to bringing on new technology and so forth, I wouldn't say there's a big thing. I think we've all had seen industry changes, but they've been very slow to keep coming on. I'm very fortunate that I get to look at the industry across multiple countries and talk to my peers in the UK and Europe and Asia, and it's interesting to see where their industries are going. I think we collectively get this together, but we all do it increasingly, increasingly at a time.

23:47Final thoughts, what would you like to leave our listeners with that we haven't talked about today, anything? I think we've covered all the points. I'm optimistic about 2026, adding the industry is going to do well. I'm hoping the rates come down so the residential market gets going again. I think that's really important, not just for the construction industry, but for the economy as a whole. We all need houses and this shortfall over the last few years is going to be creating problems for our economy overall, and so if we can get the residential market up and going again in a positive way, I think it'll help the overall economy. I'm with you. I hear a lot that if the residential market interest rates come down, we'll see a lot more on the construction side and those residential contractors and developers who want that to happen are hoping the same thing. Paul Brasel, President of RLB, North America, thank you for your time today. Where can our listeners go to find the reporter to talk with you or anything else we've talked about today? Thank you, Bay. They can follow RLB on LinkedIn or Instagram or they can go to RLB.com. All right, Paul. Thank you so much for your time today.

24:47Thank you so much. Okay, listen to that is all the time we have for this segment. Make sure to share and subscribe to our episodes each week. Share your thoughts with me at X at Connector World. Follow me on LinkedIn or YouTube and continue the conversation there. Please check out our website at ConnectorWorld.com or show website at PeggySmedleyShow.com. This is the Peggy Smedley Show, your voice for our Connector World. And remember, with great technology comes great responsibility.