Scott Lyons 0:00
The nature of commercial construction is, you know, usually when you’re heading into a recession, we’re just speaking really on behalf like, kind of an industry thing. Generally people have backlog and that backlog is and we’ve got ample backlog we’ve we, in both commercial and the company such that we’re, we’re in a really good spot through colic q3 of 24. And so, through our lens, we’re when we’re pursuing work. And there’s still great work out there in the commercial world. It’s just, you know, less opportunities than before, we are really zeroing in on those projects that could break ground at the end of 24. First part of 25. And so so from that perspective, we’re pretty, we’re pretty darn stable plus, you know, as a company, we scaled quite a bit over the last four years, even through COVID. And we’re really, in this kind of concept of marching in place is a good thing for a year or two. And so we’re not trying to scale another 25%. So this there’s called a silver lining to this a little bit of a slowdown is is okay for us.
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J Darrin Gross 1:40
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.
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Today, my guest is Scott Lyons. Scott is with the global commercial construction firm DPR. And that’s where Scott is the national commercial core market leader where he is directly responsible for understanding the needs of DPRs customers and delivering predictable results. And in just a minute, we’re going to speak with Scott about leading your commercial construction team through these volatile economic times.
But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find this on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Scott Lyons Welcome to CRE PN Radio.
Scott Lyons 3:30
Morning Darrin.. Pleasure to be here.
Well, I’m delighted to have you and looking forward to our conversation. But before we get started, if you could take just a minute and share with listeners a little bit about your background.
Sure. I’ve been in the industry for about 26 years the the first 16 years of really rotated around the southeast building large commercial projects on various cities. The following 10 years I reside in Central Florida within Orlando, and I lead our Orlando and Tampa offices here at DPR for the last decade. And really kind of a growth mode and through a couple of challenges, but really had a lot of fun doing that. And about a year ago, I rotated into leading our commercial market here at DPR. And so as you mentioned, you know, commercial is really it’s one of five markets that DPR operates in. We operate in life science market health care, higher ed in advanced technology and commercial and so I head up a team that really just connects a lot of dots across the company in our commercial market.
Gotcha. And just to be clear, is DPR strictly a general contractor or do you guys have any kind Out of a portfolio.
We are a general contractor we operate in, in the United States as well as abroad in Europe and Southeast Asia. But we are we’re a builder at heart and primarily a general contractor.
Got it? And in the construction world, especially as a general, is any of that? Are you doing any of the the construction directly? Or if most of this, hire out the subs and you guys manage the construction direction of the project?
That’s a good question. So we’ve been in business for 33 years. And really, Darren, when the company was founded, we always wanted to be a builder first and not a broker. And so we do self perform a lot of the trades primarily concrete, drywall, and a lot of other things. And so maybe paint a picture differently. So we’ve got 10,000 employees or a little over. And more than half of those are skilled craft. In other words, people that put the work in place in the field. So that’s something that we we embrace and support and really trying to change, change the world and the industry by way of doing that.
Yeah, no, I know. There are those that are strictly paper. And it’s I like the ball. I mean, it works different for different projects in that, but it’s always nice to know that you’ve got some sort of direct controller, or you’re performing actual saliva. So in the asset classes, you you will focus on you mentioned there’s five commercial life science, health, healthcare, education. And was there one other one
advanced technology that is primarily data centers? In this day and age?
Got it? In? Are you 100% new construction? Or do you also do any kind of tenant improvement betterments?
Good question. Yeah, we do. About 15 to 20% of our business every year are projects really kind of under the five to $8 million range. And, and a lot of those fall into a tenant improvement, kind of project type. And there’s a strategy behind that, really, we want to be able to service customers for both projects, large and small, which, depending on where the market is, that helps us stay pretty nimble. So we do do ti is a good part of our business.
Gotcha. And as far as, you know, construction, I’m always kind of amazed I, you know, just all what all is involved in construction. I mean, you drive by these large buildings and, and every day and and assume that, you know, they’ve been there forever kind of thing. But, you know, from optioning, the ground to, you know, getting the plans that permits financing material labor time. Seems like it’s quite the hurry, I guess what it asked you is, What’s your perspective on the time it takes to build something and I guess even back up just one more step is the size of the projects that you guys are doing. These don’t sound like they’re, they’re smaller projects. There’s one like they’re significantly larger projects? What’s a what’s a small building for you versus a large and then kind of what’s the sweet spot?
So, back to your first Yeah, the larger projects, obviously, do take a significant amount of time and momentum before it breaks ground. But, you know, a small project, again, I think our average size project, because we do so many, is probably an $8 million range, you know, as a company. But that’s because we churn a lot of the smaller ones just on an ongoing basis for existing customers. You know, call it a sweet spot is, you know, 50 to 100 million in really any of our markets, that’s, it’s a spot where projects of that scale, tend to get built once once there’s a decision at some level within a customer organization. And then, you know, you can kind of churn through those in an 18 month timeframe fairly regularly. You know, the larger projects, Darren, and these are the ones that we’re seeing, you know, kind of hit pause over the last 18 months, especially the very large ones, right, because because of just the amount of an investment and say, a $500 million project and the commitment, the planning and the entitlements, like there’s so much that goes into making those project just To get to a groundbreaking in in our economy today that that’s caused a lot of our customers to pause right and reevaluate for for a multitude of reasons. But when they do hit the ground, I mean, it’s they’re phenomenal projects, they’re the 500 million or a billion dollar project is a different animal than a 70 or $80 million project. It’s kind of a, almost a business within the business and we thrive on him, we very much enjoy him and think we’re doing pretty darn well.
So going back to kind of where I was trying to get to, and you kind of hinted at is the time that’s involved before you even break ground, if it takes 18 months, approximately, to to go from the first shovel of dirt to the completed project. How, how much time are we talking from, from that option of the ground before? Before the first shovel? But what would you expect? In a go forward? economy as opposed to kind of where we’re at right now?
Yeah, sure. So for you know, an 18 month project and I’ve got several in my in my head bouncing around, it takes a year Darren kind of like to get some alignment around hiring the design, firm hiring the contractor, evolving the design over the course of various iterations to get from a concept all the way to construction permit docks. And so that takes a year to 14 months for a project of that scale. And, you know, you didn’t ask at all for anyway, one of the critical things that’s happening, which, you know, COVID, really exacerbated was just supply chain issues that we’ve all heard about. And so during that timeframe, there’s certain pieces of the building that need to get ordered and released before even hit, before you put a shovel on the ground, just because of it takes electrical gear to show up these days. And that’s, and that’s critical to finishing your building on time. And so some, some activities do actually happen during the design timeframe.
Now, it’s, it is crazy. And just, again, I think the, I’ve always had the picture when I have the contractor coming to my house to do some work or whatever liver model or something like that, that he’s going to show up with the toolbox in the morning. And they’ll be done. You know, by the time he the end of the day, maybe the end of the week or whatever. And, and next thing you know, there’s a backhoe on my front yard, and there’s piles of dirt, and it’s like, Oh, my God. And just that that time element is something that I think a lot of people don’t necessarily consider when we look at big project. So we’ve we’ve been through COVID. And I assume we got the bell rung the other day that we’re officially done with COVID. But what are some of the biggest changes that you’ve seen in the commercial construction? Prior to COVID, as opposed to what we’re looking at right now.
As we started off, it’s these are interesting times. In so you know, pre COVID, Darren there was, depending on what geography you’re talking about, there was a lot of ideas in developers, you know, a lot of momentum behind the so called new office, corporate customers that were thinking about new headquarters buildings. And, you know, a lot of that has been put on pause to the extent, like, we measure it pretty rarely. But you know, since the beginning of 20, to 50% of our awards are in a holding pattern right now. And I’m really talking strictly about commercial office, right. So the changes are, you know, multifaceted. I think corporate America is trying to figure out their workplace strategy and their work from home, are they going to, you know, require people to come back five days or three days or, you know, certain customers maybe not very much at all. I think the other challenging challenges that are presenting themselves really not COVID related is if you look back back in the 80s, just there was a ton of office building development right? In just zero in the Reagan area era, there was a lot of tax changes that really incentivize massive amount of development. And so all those buildings are now you know, 4045 years old. And so there’s this, you know, this, unfortunately, you know, all of these buildings are going to be obsolete, right? If they’re a Class B, class C, office space, when when corporate America renews their leases that are coming to over the next several years, there’s probably this decision to, you know, either downsize their footprint to move to, you know, call it what we call, like, the trophy office buildings are really Class A, which we do see a continual trend that those projects are, are getting built, and there’s momentum behind those, those trophy office buildings, but it’s gonna be tough. You know, if you’re, if you’re a building owner of those, you know, 4050 year old buildings, class B, class C, and just what do you do with it? Right, if you can’t reposition it, if you can’t really, you know, invest in it, but the amenities in there that, you know, the the companies and in the talent think they want in an office building, it’s gonna be a tough couple of years, I think it’s just gonna take some time to really turn through what happens in the office market over the next, what we’re thinking it’s going to take, you know, three to five years to kind of get through it.
Yeah, this dramatic view that change. I mean, there was a, being, like I said, before, COVID. And in going back to the 80s, I remember, growing up in the Midwest, how these big suburban office parks were kind of the rage and, and massive Instructure I mean, just all the square footage, and, and but kind of a neat, little setting, as opposed to the downtown office kind of thing. But now, I was just in one here in Portland here. Just last week. And I mean, I think I walked, you know, a couple miles to get to the, the party I was trying to meet and I was amazed at all the empty square footage. You know, it’s like, it’s, it is kind of a it’s just a weird thing. And like you said, if if the if the, you know, corporate America decides they don’t want that or cannot be repositioned or I mean, it’s, it is it’s it, it’s just, I can’t conceive what, you know, would they knock these things down? Do you think that’s that’s potential? Or is it do you think it’s more of, like, reposition into a different asset class? Or is that even a possibility?
Well, I do think it’s probably going to be you know, it’s going to be a little all of the above you know, so if, you know, if you’ve owned the building for quite some time, and you’re forced to, you know, refinance it here in the next you know, 12 months, but the valuation is gone down and you don’t really your tenants aren’t, you know, resigning their leases or your vacancy rates are incredibly high you might not have the cash flow you might have to give the building back to the bank and that’s unfortunately probably going to happen right? Yeah. Depending on how much you read or listen to the the concept of repositioning buildings is you know, think Pacific Northwest think your gateway City, San Francisco, New York, definitely. I mean, there’s a lot of towers there that people are, you know, studying really hard to see if they can, you know, turn those into converted office to a multifamily and for some it works. Because maybe like the floor plates small enough, but you really can’t have apartments without windows, right. And so a lot of these office towers are designed such that the space just doesn’t really work for a conversion and so and so that’s tough. So necessarily answer your question, but really, I think it’s just gonna be you know, Can Can Can some landlords just wrestle through it and refinance and maybe you know, reduce their rates just to kind of keep keep the cash coming in and then get on the other side of it and let interest rates come down and be in a better position on the other side, so it’s gonna be multi.
A lot of different things are going to happen. And I, you know, your your perspective of time and just You know, it’s a matter of time to figure out hey, what, what are the people want and and whether or not you can hang on to your building. If you’re, you know, if you are facing refinance situation right away that’s that’s going to be kind of testy time if you can empty building so interest rates, have they affected a lot of your work than to or is it more a matter of? Well, let me ask it this way. Do you think the 52% of your work that’s on pause right now? Is that more interest rate driven? Or is or do you feel like it’s more of a COVID? Work? Relationship? situation?
That’s a great question. Because I think it’s both. The it’s almost obvious, I think, to our customers, who put their buildings or I’m sorry, the projects on hold. Obviously, everybody has a different crystal ball, and nobody’s really exactly sure you know, how high the Feds gonna go, but generally speaking, what our crystal ball is saying, is that, okay, you know, they’re gonna cap out maybe at some point this year, and they hopefully start coming down at some point next year, and say, say it’s, but this time next year, we think that ahead those those 50% of the projects that haven’t started yet, you know, a good portion will go. And we think we believe that because they’re, they’re more of that call it the trophy product. They’re positioned in cities and locales, that, you know, it kind of checks all the boxes, it’s live, work, play. And so the adjacencies of foodbev, retail, fitness, and all the amenities, you know, the indoor outdoor space, the sustainability built into design, we think there’s going to continue to be an appetite for those buildings such that, again, corporate, I mean, those who signed leases are gonna, there’s still a war for talent out there. And so they’re going to want to move to the to the building with the phenomenal views right? Now, it’s not going to be all of them. And so. But we, we just are anticipating that by the middle of 24, back after 24. Some projects are going to crank up again, and we’ll get on an upswing. And luckily, because our business isn’t solely based off of commercial, it’s really 1/5 of what we do, or other markets are really there’s several that are up right now. And so it’s kind of just this cyclical thing that we’re hopeful that it bounces back, you know, back half of next year.
Got it. And I failed to to ask you, the commercial segment. Commercial to me, it’s kind of a broad spectrum. Are you going strictly warehouse or big? What’s a I mean, office warehouse?
Commercial for us there? Yeah, you’re right. It’s it could be defined different ways. For us. It’s really office and hospitality projects. So hotel projects are something that we do we do a little bit of residential multifamily. In primarily Texas, but primarily office and hospitality, we don’t really do much retail unless it’s part of, say an office tower. Right. Right. We do some industrial in terms of warehouse, but it’s not a main focus.
Got it? And on top of some of the challenges, we’ve discussed the supply chain COVID and interest rates, are you finding are the banks? Are they hesitant to loan on projects that are ago? Or is is that even an issue right now with projects kind of in a pause?
Well, they’re their restrictions and probably haven’t been tighter, since, you know, maybe 2010 or so. And I think banks are requiring more and more equity. And they’re, they’re asking for executed leases or you know, at least 50% of the space is kind of the environment that we’re seeing and the banks are seeing the same thing we are you know, who’s going to come back to work and
in how many and so it’s it’s going to be tight for a while. Yeah,
yeah. So let me ask Skin and all this, you know, you mentioned DVRs employment force of 10,000. How, how are you? Are you able to keep everybody busy in the commercial sector? Are you do you have enough work to retain your, your staff and, and, you know, keep the pipe full of projects.
Yeah, the, you know, the cult and nature of martial construction is, you know, usually when you’re heading into a recession, we’re just speaking really on behalf like, kind of an industry thing. Generally, people have backlog and that backlog is massive. And we’ve got ample backlog we’ve we, in both commercial and the company such that we’re, we’re in a really good spot through call it q3 of 24. And so, through our lens, we’re when we’re pursuing work. And there’s still great work out there in the commercial world, it’s just, you know, less opportunities than before, we are really zeroing in on those projects that could break ground at the end of 24, first part of 25. And so, so from that perspective, we’re pretty, we’re pretty darn stable plus, you know, as a company, we scaled quite a bit over the last four years, even through COVID. And we’re really, in this kind of concept of marching in place is a good thing for a year or two. And so we’re not trying to scale another 25%. And so this, there’s called a silver lining to this, a little bit of a slowdown is is okay for us.
Yeah. And you mentioned that you guys operate nationwide and even over in Asia. With that ad, or those markets, where you you have offices, is that primarily where you see most of your work? Or do you have like a distinct kind of distinct footprint where you guys try and do your work?
Right, so in, we’ve got 28 offices here in the US, we really love to operate in a called 100 mile radius of those offices. 50 is even better, we, we want our people to sleep in our own beds at night. And so. So maintaining that discipline is important to us. We know, for certain customers, we will go to remote locations, but that’s called the exception not the rule. Really same thing over in Europe, I’ll be at Europe is primarily an advanced tech market for us in some life science, but so for instance, we’re not really doing commercial work in Europe, we’ve, and we’ll see what happens, you know, over the next decade, Darren, but that’s more of just being very strategic and to markets at this point in time.
Got it? And in the as far as the demand, are you seeing certain regions that have more demand than others or or he or pretty much all of your offices equally busy?
They are in depending on the market. So if we’re talking about commercial commercials fair to say is, you know, down obviously from say two years ago, you know, across the board right there’s there’s some micro economies in Austin and in Tampa, and you could argue that Dallas still has some pockets that that are still going strong. But you know, California is pretty pretty slow right now in the commercial market and Pacific Northwest or northwest, I should say is, is has been it’s been a tough six months up there as well really across a lot of markets. But we think that’s just take a little bit of time to work through and it’ll bounce back next year.
So let me ask you that the you know, the nature of commercial construction least from my perspective there, there’s a boom bust kind of cycle to it. When when you know rates are good and demand is good. Then it’s you know, cranes everywhere and, and build, build, build. And then you reach to a point where it kind of like where we’re at now where there’s uncertainty Interest rates are high demand, not so much. I wouldn’t say it’s necessarily a bust. Yeah, but we’ve talked a little bit about potential for, you know, excess square footage, either be returned to the bank or pre positioned or whatever. Do you anticipate when things do settle? And then we get figured out that there will be kind of a, a boom of sorts? Or do you think it’ll be kind of an ease into kind of a steady, go forward?
Well, obviously, we think it’s gonna be more of a man, even if it’s developer, they’re leasing to Fortune 100 type companies that we believe like corporate America is pretty passionate about putting their people in a phenomenal place to work. Sustainability is probably finally becoming more front and center than it probably ever has been moving forward. And so again, we think, call it the class A plus the trophy Office product will still be out there. It will be a boom cycle. And so we’re probably gonna be building because the amount of the market and and we and so we’ve seen this before, and we’re seeing it, again, to an extent where hospitality projects are starting to do okay, and they’re coming through probably more than they were last year in terms of opportunities moving forward. And we also honestly see this repositioning market Darren, where we’ve done a decent amount of them, but we think over the next decade, these repositioning, it could be warehouse to Office, it could be office to hotel. We’ve done all the above that that’s going to be probably a larger chunk of what we build moving forward.
Yeah, I? Well, I’ve seen a lot of a lot of pushing big box retail stuff, either be demoed or, or repositioned. Kind of thing. And I just, I’ve always kind of had the concept of God, if you get four walls and a roof is or not a way to repurpose the, the building is posted to DOS and start over. And I guess it’s always a matter of, you know, whatever makes the most financial sense. But, well, it sounds like there’s there’s work you have worked. Now you’ve got, you know, it sounds like there’ll be opportunities in the future. And, and I guess we’ll all kind of find out, you know, what, what the office looks like here in a few years, and, and who’s who’s in an office and who’s working in a back bedroom? And I guess we’ll figure that out.
It’s gonna take some time now.
J Darrin Gross 32:58
So, Hey, Scott, if we could, I’d like to shift gears here for a second. But my day, I’m an insurance broker. And as such, I like to ask my guests a little question about risk. When I work with my clients, I try and assess risk and determine what to do with the risk. And there’s three strategies that we typically considered, we first looked to see if there’s a way we can avoid the risk. When that’s not an option, we’ll see if there’s a way you can minimize risk. And if we cannot avoid or minimize risk, and we look to see if there’s a way we can transfer the risk. And like I said, as such, I like to ask my guests, if they can take a look at their own situation, could be the market, the Fed your clients, tenants, supply chain, what, whatever it is that you are focused on as far as a risk where the biggest risk? And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Scott Lyons, what is the BIGGEST RISK?
Scott Lyons 34:14
So I think the biggest risk for us Darrin is is is making decisions around in kind of moment of duress, and let me kind of explain what I mean there. So what you won’t get imagine that, hey, you’re going into a recession will or we think there might be a recession? Maybe it’s soft landing, who knows, but guess what interest rates are up there and a whole lot of is many projects opportunities out there, we better sell a bunch of work. We better just, you know, be the squirrel that goes out and just grabs, you know, every night that we can. And that rarely works out. And so what we’re doing to mitigate risk really, Darren is just like, radically just discipline decision making. And so in other words, don’t go out and overextend ourselves, don’t go remote, don’t take on projects, for customers whom we don’t know. And because histories, you know, history is a great teacher, and just a lot of times that doesn’t work out. And so what we’re trying to do is, stay the course, be disciplined, make great decisions, work with customers, whom we just value and really can deliver for and who wants to, you know, and that’s, you know, the risk is just panicking. And so we’re not, we’re not going to do the opposite of that, and just stay steady. Because of the macro factors, you know, of interest rates and economy, hopefully, this debt ceiling deal gets, you know, done by Congress. We can’t control that, but we can control our decisions.
I love your answer that I’ve that’s one I have not heard, but it’s probably the most. I mean, it makes the most sense, in the standpoint of, you know, in a panic around with hair on fire, it’s not exactly a good way to respond. But if he can slow down and and think it through and make a good, a good decision that, you know, will not sink the ship or will allow you to continue that’s, that’s a great answer. He’s got where can the listeners go if they’d like to learn more or connect with you? Sure.
My email is Scottly@dpr.com S CO T T L Y at dpr.com can also track me down on our website and our leadership email@example.com. And yeah, be happy to connect and certainly appreciate the opportunity to chat with you this morning.
Now, likewise, Scott, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.
Sounds great. Appreciate it.
J Darrin Gross 37:34
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