BEXperts Deliver Midyear Update on Arizona Construction

By Roland Murphy for AZBEX

More than 150 attendees gathered in the auditorium of the Arizona Heritage Center in Tempe this week for the latest news on the shifting Arizona Construction market from two of the state’s leading experts on both the long-term history and day-to-day happenings in the sector.

The 2023 Midyear Update on Arizona Construction was a first-time program for BEX Companies, serving as a follow-up to January’s annual Construction Activity Forecast Event, which has quickly expanded to become one of the “must see” programs for industry insiders trying to keep their fingers on the pulse of the rapidly changing market. (AZBEX, Feb. 3)

Given the national tumult and plethora of headlines ranging from, “The Sky is Falling,” to, “What, Me Worry?” BEX decided to update the market halfway through the year using the same set of data sources. Since it is difficult-to-impossible to summarize a presentation developed through crunching six months of current data and years of historical information into a compelling narrative, we will leave you with only the highlights bolstered by a few images and relevant quotes.

The key takeaway from BEX Founder and President Rebekah Morris and DATABEX Manager Lya Parrish’s detailed presentations was this: Yes, the market is changing, but—at least for Arizona—that shift is a normalization rather than a doom and gloom collapse.

The Macro Details

As she does with most major BEX events, Morris kicked off her presentation with an update and review of the macro factors affecting the Arizona Construction market. Key findings from her review include:

  • With a current total of 3.107 million jobs reported, nonfarm employment in the state is up 16.54% versus its 2007 pre-recession boom rate of 2.679 million.
  • Construction employment still lags significantly behind its 2006 peak, however, currently reporting 186,700 jobs versus 240,300 previously. The state is still adding construction jobs, with 2022 seeing a 9% year-over-year growth.
  • Construction activity has generally not been harmed by the lower employee numbers. Beginning in 2017, construction activity hovered at an annual change rate of around 10% year-over-year, with the notable exception of 2021. 2022 witnessed a booming resurgence of more than 20%, and 2023, though having calmed slightly, is projected to hit 16.63% growth.

Talking about how the market still saw slight growth even given the problems of 2021, Morris said, “We grew by about 1.9%, which is still really good considering all the issues that we had. The market actually was kind of scrappy. We still had to get stuff done. We had to work twice or three times as hard to deliver the same amount of production, the same amount of revenue.” She added, “In 2022… the chains came off. We grew by 24%, and then the data we have so far for 2023, we’re up 16.63%… The industry, the market for Arizona is still going very, very strong.”

Morris explained that BEX follows three core areas (Public, Housing and Private) across nine primary sectors in construction to make up its market overview. While activity levels have seen a generally even one-third, one-third, one-third distribution between the three, recent years have shown a dramatic shift, with Private far outpacing the other two cores to arrive at current rates of Public at 20.4%, Housing at 27.2% and Private at 52.4%.

Public Sectors

Having gotten the audience up to speed on the overall state of the market, Morris jumped into updating activity and projections for the various components of the Public sector.

K-12

For 2022, K-12 accounted for 1.98% of the total market, reporting activity of $489.7M. Morris reported the number of active players in the owner, design firms and contractor segments have declined due to a lack of bond funding, a lack of interest and participation from the market and the impacts of cooperative contracting spreading opportunities for work among fewer firms.

The near future, however, could be very different for K-12 due to a resurgence in bond requests. There are currently 18 districts with bond requests planned for the upcoming elections, with a total request volume of $3.2B. More requests are expected before the deadline to file expires.

Even though bond requests have had difficulty securing voter approvals in recent years, and it is a certainty that not all this year’s requests will pass, the sheer volume of requests being made ensures enough will be approved to have a noticeable funding increase.

Largely based on that expectation, BEX has maintained its 2023 activity projection of $398M but increased its forecasts for 2024 and 2025 to $528M and $698M, respectively.

Public Spaces

Cities are flush with cash and eager to invest in public spaces, Morris said. Revenues from sales and property taxes are high, and municipalities are benefitting both from increasing tax bases from in-migration and ongoing monies from federal stimulus and infrastructure investment programs. Cities are also showing renewed interest in pursuing bond requests to fund new projects.

While there are multiple entry points for companies interested in opportunities in Public Spaces, one cautionary note is that organized resistance group activity has spread out of its traditional focus areas—usually concentrated on multifamily housing—and frequently begun questioning public projects, including new facilities and even parks and recreation projects that traditionally encountered little to no opposition.

In January, BEX projected the 2023 volume at $1B. Based largely on the increase in anticipated activity volume, the projections for 2024 and 2025 have been revised slightly upward.

Transportation and Parks

Transportation and Parks projects account for 9.99% of the market at $2.475B. In Transportation, Arizona saw 67 project starts and 41 completions in 2021, 110 starts and 99 completions in 2022 and 113 starts with 95 completions in 2023.

The elephant in the room for the sector is the current battle to put a renewal of the Proposition 400 Maricopa County half-cent transportation on the ballot for voter consideration. Former Gov. Doug Ducey vetoed widely supported enabling legislation for the request last year, and since then a block of Republican senators in the Arizona Legislature who oppose the current transportation plan’s emphasis on transit have stalled efforts to advance a new bill with similar program support.

If the tax is not passed, the impacts on transportation projects in Maricopa County and around the state will be significant, and projects currently in various stages of planning and development are already suffering setbacks.

Because the renewal question has not yet been resolved, projections have been revised downward. 2023 is now expected to see activity of $2.445B, with 2024 and 2025 now projected at $2.4B and $2.68B.

Housing

Following Morris, Parrish took the stage to update the audience on the state of Housing development in Arizona, particularly in the Multifamily sector. She explained Multifamily accounts for 22.24% of the market, totaling $5.51B.

The impending doom of Multifamily has been the topic of countless sensational headlines both nationally and regionally. “What we’re seeing is not what ‘they’ are seeing,” Parrish said.

While several factors have combined to slow the dizzying rate of growth Multifamily experienced during and after the pandemic (increased NIMBY activity, increased capitalization costs, new developers with unrealistic timeline and cost expectations, multiple re-pricings and changes in project team members, Build-to-Rent developers focusing on finishing existing projects before pursuing new opportunities, etc.), the market remains robust.

Parrish explained that the exceptionally high rates of rent growth and property valuation increase from the post-pandemic boom were unsustainable and that it was foolhardy to expect double-digit rates to continue indefinitely, adding what we’re seeing with the current slowdown is merely a normalization, rather than a collapse.

The volatility in the current market, she said, is due to funding and supply issues. Current project data show there were 41 projects on hold around the state in December. At the end of May, there were 67, but 36 of those projects were also on the December list. The encouraging news is there were 319 projects shown in the DATABEX project database as Under Construction in December, which has climbed to 328 as of May.

The market balancing will continue for the near future, as will the trend of developers taking their projects through the entitlement and permitting process and then selling them to other developers as the original projections become harder to pencil out.

Parrish reported the 2023 activity projection has been revised slightly downward from the January estimate of $6.9B down to $6.4B due to the normalization. She reminded the audience that volume is still $1B greater than 2022 activity. As the adjustments continue into 2024, the estimate has been revised to $6.2B from its original $7.2B. Parrish is expecting an increase in 2025 up to a total of $7B, rather than the initially projected $5.5B, but she said that will likely continue to roll over.

“The projects are there,” she said, “and new submissions aren’t slowing down… We haven’t slammed on the brakes; we’ve just eased back on the gas.”

Industrial

Industrial development has been the golden child of Arizona construction in recent years, swelling to a current sector valuation of $11.8B and making up 47.61% of the total market.

Parrish said the market has seen a slight softening in demand as delivery volume remains high. Vacancies hit 3.3% in Q1, up 0.3% from Q4 2022. Q1 saw deliveries of 5MSF, but square footage under construction reached a new high for the quarter as well, hitting 45.8MSF, a year-over-year increase of 72%.

Regarding the changes in projected activity since the January forecast, 2023 will remain a peak year for construction volume, but the estimated total has been revised downward by $1B to $13.9B. The 2024 prediction remains the same, also at $13.9B, and 2025 has been revised upward by $1B to $10.9B.

Key factors to keep in mind for the sector include increasing data center announcements, semiconductor manufacturing and supplier activity continuing to focus heavily on north Phoenix and Pinal County, and an ongoing move toward greater balance in the market, including a movement away from 1MSF “mega developments” to smaller projects in the 250KSF-500KSF range.

Conclusions

Taking the stage back from Parrish, Morris quickly summarized activity in some of the less prominent markets and then turned her focus on the big picture takeaways for the audience. The key points she gleaned from the compiled data were:

  • If a national recession hits, Arizona will weather it better than most of the rest of the country;
  • The Federal Reserve’s interest rate hikes appear to be working to slow the economy;
  • The market has mostly accepted increased construction costs;
  • Labor and supply chain problems are both easing and balancing each other out, and
  • The industry has been too passive in the face of increasingly organized opposition to important projects. Construction needs more advocates who are more vocal and more willing to stand up for both the projects and the process.

BEX April Event Focuses on Major Public Works Projects

Nearly 120 people descended on SkySong this week for BEX Companies’ April Leading Market Series event. The session’s theme was “Upcoming Public Works Projects.” 

Sundt served as the event sponsor. 

After a brief introduction from BEX Founder and President Rebekah Morris, the panel of leading public works officials wasted no time diving into their current project lists, along with some spirited discussion on the state of the public project market, challenges and potential solutions. 

The panel was comprised of: 

  • Moderator Jeff Hamilton—VP of Transportation & SW Region Business Development Manager, Sundt; 
  • Lance Webb—Assistant City Engineer, City of Mesa
  • Susanna Struble—Assistant City Engineer & CIP Manager, Town of Gilbert; and 
  • Eric J. Froberg—City Engineer, City of Phoenix

Phoenix 

After settling in, Froberg led off the panelists with a rapid-fire presentation of more than 25 upcoming projects in wastewater, water, aviation, and street transportation. Among the projects mentioned were: 

  • Cave Creek Water Reclamation Plant Expansion, $365M, 
  • 91st Avenue Wastewater Treatment Plant 1A Rehabilitation, $60M, 
  • Large Diameter Sewer Rehabilitation Program, $100M, 
  • Water Main Replacement Program, $150M over five years, and 
  • Phoenix Sky Harbor New Crossfield Taxiway U, $260M. 

Taken together, Froberg said Phoenix has $3.78B in water/wastewater projects, $1.7B in aviation projects and $949.9M in street projects. 

He then dovetailed his presentation into a brief overview of Phoenix’s planned $500M General Obligation bond request. The current bond recommendations provide funding for eight different project categories, including $38M for Economic Development and Education, $64M for Parks and Recreation, and $81.5M for Streets and Storm Drainage.  

Gilbert 

Following Froberg was Gilbert’s Susanna Struble. Using materials prepared for an upcoming Capital Improvement Plan stakeholders’ meeting, she walked the attendees through an overview of the 421 projects currently included in the upcoming Fiscal Years 2024-2033 CIP. The total includes 105 newly added projects. 

The project breakdown for the CIP consists of: 

  • Municipal Facilities: 42 projects, $371.6M; 
  • Parks & Recreation: 68 projects, $919.2M; 
  • Redevelopment: 23 projects, $194.1M; 
  • Storm Water: 13 projects, $46.6M; 
  • Streets: 88 projects, $1.172B; 
  • Traffic Control: 33 projects, $136.6M; 
  • Wastewater: 60 projects, $578.7M, and 
  • Water: 94 projects, $1.466B. 

In addition to recapping the CIP project suite, Struble said Gilbert will probably start discussions for a new General Obligation bond request in 2024. 

Mesa 

Following Struble was Mesa’s Lance Webb. Webb summarized Mesa’s current 13-section five-year CIP approved budget and pointed out the funding allocations for each section. Key among them were: 

  • Water and Wastewater, $753M, 
  • Transportation, $390M, and  
  • Gas, 137.6M. 

For Fiscal Year 2023/2024, Mesa has initiated 16 non-utility and eight utility projects. There are 15 future authorized non-utility projects and six authorized utility projects. Among the projects noted were: 

  • Mesa Public Safety Training Facility Improvements,  
  • Police Department Headquarters Renovation, and 
  • Signal Butte Water Treatment Plant Expansion

Webb closed his recap by telling the audience there may be a 2024 General Obligation bond request coming from Mesa as well. The key project areas would fall under Parks, Recreation and Community Facilities; Library; Transportation, and Arts and Culture. 

Challenges and Solutions 

Both during their presentations and in the question-and-answer period Hamilton led afterward, all of the panelists touched on the challenges their cities face in moving projects from planning to construction to delivery. 

Webb said, and the other panelists echoed to varying degrees, the key challenges are: 

  • Cost overruns and construction material delays, 
  • Increased labor costs, 
  • Inflation impacts commodities, services and contracts, and  
  • Keeping up with growth while maintaining current infrastructure. 

Froberg said he needs pricing to “deescalate a little” and asked vendors to do what they can to share the pain of the current problem set and work with officials to ensure projects can be begun and finished. 

He also advocated splitting projects into more manageable components when possible and issuing early letters of intent in advance of procurements to ensure materials are available when needed.  

Struble said Gilbert has taken a close look at value engineering for its various projects and has been assertive in shifting project timelines so that projects can be delayed, if necessary, without having to be canceled entirely. 

Webb agreed that reevaluating projects, adjusting timing and reprioritizing based on needs is essential in the current environment. 

All three emphasized that designers, builders and other vendors need to act as partners with the cities providing the work to the fullest extent possible. Struble recommended that firms should get to know their municipal partners, come to them with ideas and share their project visions and recommendations.  

Webb admonished vendors to evaluate their capacities and timelines correctly, to communicate consistently over the entire course of planning and development, and to let the project owner know about any potential problems or complications as early as possible. 

First Look: BEX 2023 Forecast Event

For the first time ever, demand for the annual BEX Forecast event was so high we had to plan two separate presentations. Now that the first is in the books, we wanted to give our readers a glimpse into what our research shows for the Arizona construction landscape.

On Weds., Jan. 25, BEX Founder and President Rebekah Morris and DATABEX Manager Lya Parrish summarized construction activity across all the sectors we track in a whirlwind two-hour presentation before a capacity crowd at the Arizona Heritage Center. Based on current trends, the duo also gave their predictions as to what will happen in terms of volume for the year to come.

You will have to wait until next Friday’s issue for a full recap. After all, we don’t want to spoil the surprises for those attending the second presentation on Feb. 1. We do, however, want to give you a quick peek at some of the more interesting findings our culling, curating and scrubbing of 12 months of operational data revealed.

The Arizona Construction Gold Rush

Even with all the market headwinds from supply chain constraints, material cost increases, labor shortages, inflation, interest rate hikes and capital market constrictions, Arizona construction had a banner year, hitting $22.4B in 2022, a 24% year-over-year increase in market activity.

Because some sectors were much more active than others, the number of firms launching, designing or building projects varied. Some counts stayed the same; some contracted or consolidated. Like bees to flowers, however, those market sectors that were in full bloom drew a massive increase in participants, with new players showing up as owners, design firms and general contractors for projects across the state.

The following table will give you the at-a-glance has to how many players are making their mark in Arizona in 2023.

Take a look at both Industrial and Multifamily. It’s no surprise that pretty much anyone and everyone wanted to get into those sectors in Arizona over the past two years, but those numbers are just staggering when you stop to think that those are all individual companies working on individual projects.

They were a veritable gold rush, drawing new firms in like prospectors hoping to strike their own mother lodes in the burgeoning desert.

That’s all we’re going to tease with you with this week, though. To find out who’s doing what where, you’ll have to wait for next Friday’s issue.

Even better, come see for yourself. Tickets are still available for the Weds., Feb. 1 presentation.

Arizona Universities Talk Projects, Process at BEX LMS

The last BEX Companies Leading Market Series event of 2022 – Higher Education – was also one of its best attended as a sold out crowd filled ASU’s SkySong Building 3 Synergy II meeting space Tuesday morning.

After a brief welcome from BEX President and Founder Rebekah Morris, moderator Cassie Robertson, Southwest regional prefab leader for DPR Construction introduced the panel.

Appearing in person for Arizona State University was Alexander Kohnen, VP of facilities development and management. Attending virtually were Peter Dourlein, associate VP of planning, design & construction for the University of Arizona and Stephanie Bauer, assistant director of facility services for planning, design and construction at Northern Arizona University.

Arizona State University

Kicking off the panelist presentations, Kohnen said ASU has six projects headed to the Joint Committee on Capital Review for the Arizona Joint Legislative Budget Committee in the immediate future. He stressed a great deal of ASU’s upcoming work focuses on projects dedicated to lab space to accommodate the university’s exploding student growth and demand in research-focused fields. ASU currently has more than $700M in funded research, he said, and needs space to deal with the volume.

Job Order Contract request focused on laboratory work is expected to come out in the spring, he said, advising attendees to be on the lookout.

He also explained that the university’s student growth has contributed to already high demand for housing. Since ASU has a policy requiring all first year in-person students to live on campus, large volumes of students have been temporarily housed in area hotels for extended periods while they wait for space. Adding to the need is the fact that much of the university’s housing stock is out of date and in need of renovation to make it current and appealing.

Lastly, Kohnen turned his attention to the ASU Polytechnic Campus in Mesa. The first building in the ASU School of Manufacturing Systems & Networks, Polytechnic Campus plan is currently in design, and the second, he said, is coming soon.

University of Arizona

Dourlein said the current year has been one of reemergence from the pandemic and focusing on growth. The current student body is approximately 52,000, while the research portfolio exceeds $800M and is projected to hit $1B.

Much of Dourlein’s presentation covered the UA Capital Improvement Plan and Annual Capital Plan. Given that UA has a large number of old buildings that need upgrades, renovation and revitalization projects are front of mind for the university at the moment. Many projects in that space will be managed as JOCs.

For larger projects, he said UA is leaning heavily on Design-Build delivery methods, although there may be Construction Manager At Risk projects as the need arises. “We’re having great success with Design-Build right now, so we’re continuing down that road,” he said.

He then launched into a rapid-fire recap of projects included in the Annual Capital Plan that have not yet been awarded. These projects include:

  • A remodel of the Shantz Building, currently reviewing the submission,
  • Mining Mineral & Natural Resources Education Museum Renovation, expected to be announced in Q1,
  • Arizona State Museum Renovation RFQ is expected in Q1.

Another project on the list and currently out for procurement is the College of Agriculture and Life Sciences Food Products and Safety Lab Renovation and Animal Feeding and Resource Capture Facility.

The first year of UA’s recent Capital Improvement Plan has no new projects, as most of the work was covered in the Annual Capital Plan. Dourlein again recapped several projects, noting that projects become moved from the wish list into reality when they receive funding.

Projects included in his CIP recap included an overview of the UA Center for Advanced Molecular and Immunological TherapiesCAMI has two buildings, one of which may be undertaken as a public-private partnership while the other, larger building will be a more traditional Design-Build delivery. CAMI will complete UA’s “superblock” in downtown Phoenix. The RFQ is expected in Q1.

UA’s housing needs have generated two projects expected to release for consideration in the near future, one of approximately 1,000 beds and another of 800.

The remainder of the projects and focuses Dourlein mentioned dealt with campus infrastructure, including:

  • Deescalating the use of historic Centennial Hall and creating a new 2,500 performing arts venue,
  • A new art museum, and
  • A new student engineering design center.

Northern Arizona University

When her turn came around, NAU’s Bauer told the audience the university is currently working on its first Campus Master Plan in 12 years. As a result, major capital project identification and planning are on hold until the master plan is complete.

Future development focus will center not so much on adding new space, but rather in optimizing existing space and reconfiguring uses. The draft plan is expected for release in summer 2023.

In the interim, the focus will fall on deferred maintenance, facility improvements and renovations. Most of those projects will be procured as JOCs.

Q&A

With time running short, Robertson pitched a series of quick questions to the panelists. The first question concerned what has worked and not worked in the universities’ project development and procurement efforts.

Bauer said NAU needs contractors and design firms to be innovative and patient and to help guide the university around some of its historically self-imposed roadblocks. Dourlein agreed, saying innovation and adaptability are vital in managing UA’s projects. At ASU, Kohnen said the need is for better time management and understanding from providers that budgets are locked in place. He said providers need to explain how they will secure partners to complete projects.

When Robertson turned to the audience for questions, the one that grabbed everyone’s attention was a request to explain how sustainability goals are impacting construction budget constraints.

Kohnen said sustainability adds to costs, but that students demand it and it is part of the ASU brand. He added that there is, by necessity, a tradeoff between sustainability focus and program scope. “We’re going to have to start looking at the program and say, ‘Do we sacrifice sustainability or do we sacrifice program?’ We need direction from the leadership on which way that’s going to go. It used to always be program was sacrosanct. I think that’s going to shift this year.”

Bauer said NAU has struggled with maintenance and is looking at how to manage the demand for improved sustainability while keeping projects on pace. She added that it is causing planners to focus more clearly on their future projects and new construction direction to achieve sustainability goals. “We have a lot of different ideas from our Climate Action Plan that we need to choose a direction on how we’re going to go. That will inform how, when we do go forward with new construction, what components will be in those buildings in the future.”

Dourlein said UA is working on a comprehensive sustainability and climate action plan, which is focusing on decarbonization of the campus.

“Some of the trends that I’ve noticed is the long-term cost of maintaining a building or heating and cooling it isn’t being benefitted all that much from getting the LEED certification. We’re already doing all that to a high degree. The LEED certification keeps escalating, and it’s adding cost that we’re not necessarily seeing benefit from. It’s probably sacrilegious to say, ‘One day we won’t build to LEED standards…,” but I think that’s part of the ongoing discussion and uncertainty.

“We do need our buildings to be maintainable and cost-efficient over the long haul… I think there are some things that are evolving there that I don’t have an answer to that I think are going to impact sustainability and design and construction. It’s going to have to be a little more of a value proposition.”

BEX Public Works Conference Delivers on State of Public Infrastructure

Contractors, design firm representatives and other public infrastructure development watchers from around Arizona were treated to a smorgasbord of Capital Improvement Plan and other details October 18th at the BEX Companies’ 2022 Public Works Conference.

This year’s half-day event was held in the conference center at the DoubleTree by Hilton Hotel Phoenix Tempe. Following brief introductory remarks by event emcee Amanda Elliot, redevelopment program manager for the Town of Gilbert, the presentations, panels and information flowed at a fast and furious pace for the next four hours.

Top 10 Capital Improvement Programs Across Arizona

Kicking off the event, as she usually does, BEX Companies President and Founder Rebekah Morris let attendees know early on that even though overall construction activity in 2022 is on track to surpass 2021 volumes by more than 20%, Public Infrastructure has fallen to just 22% of the overall volume, compared to 45% for Commercial and 33% for housing.

Just a few years ago, she said, the pie chart was evenly split between the three sectors. Even though public infrastructure spending is a smaller percentage of the overall market, Morris reported CIP totals were up 15.22%. She also pointed out the broad spectrum of projects under consideration across agencies, from the perennial roadway and transit projects to expanding investments in parks and recreation and water infrastructure for many agencies.

Next, she broke out the Top 10 Capital Improvement Plans by total amounts. As has been the case for the past few years, City of Phoenix once again took the top spot, remaining ahead of former long-time front runner the Arizona Department of Transportation by nearly $3B for this planning cycle.

She also pointed out that nine of the Top 10 CIPs this cycle totaled more than $1B. The only exception – Town of Queen Creek – was a surprise newcomer to the list, knocking out City of Chandler by a mere $13.1M.

Also of note was the fact that eight of the 10 entries’ plans increased over the prior cycle. Maricopa County’s plan went up a modest 2.81%, while Queen Creek’s soared by a “whopping” 87.2%. Valley Metro’s plan fell by 30.48%, largely due to the number of projects on the agency’s books that are transitioning from development to maintenance statuses.

Wrapping up her segment, Morris reminded attendees about the more than 15% increase in CIP totals this cycle even though Public projects continue to be a smaller portion of the overall construction market. She then whetted their appetites by highlighting the fact that CIP projects are almost all front-loaded in terms of funding allocations. “The next two years should be very strong for publicly funded infrastructure and public projects in Arizona,” she said.

In her general outlook for the Public sector moving forward, she reminded both the public representatives and private industry staffers in the audience that construction price increases are not going away anytime soon.

She also said firms simply must be given more time to bid projects. She said contractors are declining to bid on projects because short submittal deadlines do not give them time to get quotes and information from subcontractors and materials suppliers they need to adequately prepare bids. Concurrent with the need for more time, she said, is the need for flexibility in the current volatile environment in terms of dealing with potential supply constraints and materials complications.

Expanding Transportation Systems

The afternoon’s first panel discussion dealt with the state of transportation systems expansion in Arizona and where the sector is headed in the near- and mid-terms. The panel consisted of:

  • Albert Santana – Ardurra client services manager (Moderator),
  • Jesse Gutierrez – Maricopa County Department of Transportation deputy director,
  • Henry Ikwut-Ukwa – Capital Development-Capital Planning director for Valley Metro, and
  • Kini Knudson – City of Phoenix Street Transportation Department director.

After giving the panelists an opportunity to briefly introduce themselves and their agencies and to explain their funding sources and major project focuses, Santana launched into the question-and-answer portion of the panel discussion. He first asked them to describe what challenges they are seeing in the state of the skilled labor market, both in their operations and in the market in general, particularly as it impacts deadlines and project deliveries.

Gutierrez said that from the internal side, MCDOT was experiencing problems recruiting enough skilled personnel to handle its workloads. On the external side, he said, the agency was experiencing difficulties in getting enough bids on projects. “We’ve seen jobs with only one bidder,” he said, “and several jobs with only two bidders, in fact. We’re seeing that more and more. It makes it very difficult, obviously.”

He added that when they do get teams on board, they show “tremendous effort” and dedication to getting the jobs done.

Ikwut-Ukwa agreed, saying the current tough state of the skilled labor market is a crisis across the entire economy and said he has seen some positions remain open for more than a year. He praised partnership efforts between contractors and others in the development community working with resources like community colleges and other education programs to develop trades training campaigns, saying they were needed contributions to the future of skilled labor development.

He cautioned, however, about the overall state of labor at the moment. “If this continues much longer,” he said, “it’s going to affect how long it takes to deliver projects.”

Knudson said it has become an ongoing challenge to manage expectations, particularly with a 24% job vacancy rate at City of Phoenix. He said he reminds his staff regularly that Street Transportation is known for its ability to deliver. “We can do a lot of things in the short term. We have a reputation for delivering projects and for getting things done, but you can’t live like that forever… It just isn’t healthy for our staff. It isn’t healthy for how we do things or how we want to do things.”

He added that the pressures are great but that he takes a degree of comfort in the fact the labor problem is not industry specific. With all industries experiencing variations of the same problem, there is more understanding than there would otherwise be.

Santana then asked the panelists for their thoughts on construction cost increases.

Knudson said he had to wonder if the current state of 20%-30% increases represented “a new baseline” in the project development world. He added the situation is a balancing act. “We have to plan, but we don’t want to overreact.”

Gutierrez said MCDOT is seeing increases in the area of 30% and is responding by phasing some previously planned projects that were to be built all at once into smaller segments, swapping out some materials for others when possible and trying to maintain flexible schedules for materials and project component deliveries.

Ikwut-Ukwa said Valley Metro was fortunate that its two major current projects were locked in with Construction Manager At Risk providers before the pandemic, although he acknowledged the pain the vendors are experiencing as a result and stressed his agency’s flexibility in working with them to mitigate the impacts where possible.

For new projects like the Light Rail Capitol Extension, he said he is seeing cost increases of 30% more than the original estimate in 2020. He appeared to speak largely for the entire room when he said, “Prices are out of whack.”

Powering Up Future Economic Development

The next panel, Powering Up Future Economic Development, dealt with the changing state of Arizona’s power supply needs and delivery systems as providers move to achieve aggressive sustainability and environmental goals without sacrificing reliability. The panel consisted of:

  • Diane Fischer – Kiewit director of generation services (Moderator),
  • Karla Moran – SRP principal economic development analyst and
  • Kelly Patton – APS economic development manager.

Both panelists in their introductions talked about the exponentially increasing needs and demand for power mega-users in the current development cycle.

Moran pointed out SRP currently has 251 active Greater Phoenix Economic Council prospects, 13 semiconductor projects, 39 “mega projects,” and more than 9,100MW of potential new load on the SRP system. SRP’s historical growth area includes the Price Road Corridor and Mesa Tech Corridor, with major potential new growth areas around the Loop 202 South Mountain Freeway and the Superstition Vistas area southeast of Apache Junction.

Patton’s economic development impact summary included 219 active projects, 15 pending locates, 26 locates so far in 2022, and a phase one potential new load of 6,100MW. Major APS activity areas include Buckeye, the Loop 303 Freeway corridor, north Phoenix around the TSMC plant, and major swaths west of Casa Grande and east of Eloy.

When Fischer posed the question, “What’s the hardest part about sustainability?” both panelists were off and running. Patton explained education and understanding of process has to come before policy. She used the example of Arizona’s exceptional hunger for solar projects, given the state’s climate and volume of sunny days per year.

She pointed out that solar, by itself, is not a 24×7 solution and that issues like storage and transmission of generated energy are every bit as vital to the process as the solar energy capture, itself. She said people need to understand that, at the operational level, a 100% renewable energy supply is not possible.

Moran piggybacked on Patton’s statement and explained growing resistance to solar development in particular areas – like Coolidge’s recent moratorium on solar development in agriculture-designated areas – compounds the problem.

She said it is possible to build developments farther and farther away from population centers, but the farther out they are built, the greater the need for transmission infrastructure development. She also said building on vacant desert land, particularly federal land, requires addressing an ever-increasing load of permitting and environmental impact issues that lengthen production times and add still more costs and technology-related issues.

When asked how the energy provision landscape has changed in the last five-to-10 years, Patton said the level of activity has seen a massive increase, with utilities going from having a couple mega projects on their plate then to now having a few dozen.

Moran said the big challenge has been in educating clients about issues like cost shifts, project premiums and cost acceleration for high-priority projects. She stressed clients need to understand that every new component must be created and implemented, and that these needs require investments of both time and money.

Fischer closed the session by asking what advice the panelists would give to builders working in the power sector.

Moran said SRP is outsourcing a great deal of work, with workloads going up but resources not following suit. As a result, partnerships and expertise are vital.

Patton said 50% of APS’ distribution and transmission work relies on vendors. She urged everyone to understand that utilities are suffering supply chain impacts just like every other industry, and that partners can help to educate companies about timelines and managing expectations. “Help us help you,” she urged.

Show Me the Money!

The third panel, entitled “Show Me the Money!” focused on funding sources for transportation and infrastructure projects, including recent federal stimulus monies, regional transportation tax measures and bond propositions. The panel was made up of:

  • Patti Olds – Kuniklo economic impact advisor (Moderator),
  • Audra Koester Thomas – Maricopa Association of Governments transportation planning program manager,
  • Kristine Ward – ADOT CFO, and
  • Casey Ambrose – Town of Gilbert senior project manager.

After the panelists introduced themselves and their agencies, Olds started the questioning by asking them about their funding sources.

Ward immediately started off by passionately explaining the Infrastructure Investment and Jobs Act allocation for Arizona was not the $5.3B lump gift many people and reports seemed to believe. She explained allocations are set for $1.3B over five years and pointed out there are numerous different programs and requirements attached to funds.

She specifically differentiated monies that are awarded through program grants and those awarded through competitive discretionary grants. She added that discretionary grant applications are made more attractive by a number of factors, including the ability to provide dedicated matching funds.

She praised the fact that the Arizona State Legislature has begun allocating funds for ADOT and called it “a big deal” that the Legislature approved nearly $1B in ADOT appropriations in the most recent session.

Koester Thomas then explained the current challenges facing MAG after Gov. Doug Ducey’s July veto of a bill that would have scheduled the current Proposition 400 half-cent sales tax for a March special election renewal vote. She pointed out that Prop 400 monies are a significant source of matching funds for transportation projects and that projects are now in jeopardy and facing significant delays because their sustained funding source is now uncertain.

(AZBEX NOTE: We recently covered the veto of the Proposition 400 extension, known as Prop 400E, in detail. To learn more, please go hereherehere or here.)

Ambrose gave attendees a historic overview of Gilbert’s use of transportation and infrastructure bonds and recapped the 2021 Streets, Transportation and Infrastructure Related Bond passed by Gilbert voters with a margin of just 162 votes. She explained that in putting the request together, officials structured it so that monies were available to categories of projects, rather than individual efforts, which allows for greater flexibility in allocating funds.

Later in the session Olds asked about the competitive nature of project funding. Koester Thomas explained that discretionary funding is competitive, and that the competition is fierce, with roughly eight times as many requests as there are awards available. She added that competitive awards require a local match, and the more matching money a request can guarantee, the more attractive the project becomes, with a 40% match being a general target. She then reiterated that the half-cent sales tax that has funded so much of the Valley’s transportation and economic development since its first approval in 1985 is the source for the area’s local matches.

When asked about the implications of the veto, she used the current state of the State Route 30 – Tres Rios freeway as one example. A portion of the project had been out for design bid by ADOT. After the veto, that solicitation was pulled because of questions over future funding. Estimates now are the project segment will be delayed by two years and cost $300M more than it would have if the process flow had not been interrupted.

Ward agreed and said the half-cent tax has been a key economic development driver for the Valley and the state and that there are tremendous impacts associated with possibly losing it as a revenue source.

Olds then segued into asking the panel about inflation and project cost increases.

Ambrose pointed out the Gilbert 2021 bond was worded around project categories rather than funding for specific projects. She expressed gratitude for the foresight in structuring the request that way, but concern that not all the items that need to be addressed will be handled as fully as they could have been without the current state of inflation.

Koester Thomas said MAG is seeing bids come in at 20%-30% more than estimates. She said, however, that one upside of relying on a sales tax versus a bond is that sales tax revenues also increase due to inflation.

Ward said the impact is that ADOT will have to do less because, “Dollars don’t change. The value of dollars does.” She said when the amount of money is fixed, there is no option but to do less.

Olds closed the session by asking the panel what industry can do to support planning and funding efforts.

Ward said it is important to battle misinformation and to define expectations. She asked attendees to look at what the Department is actually doing and to trust that it is working to get funding in place as far across the board as possible.

Ambrose urged vendors and service providers to help cities and agencies find ways to save. She urged them to “give us information and options.”

Upcoming Water Infrastructure Projects

The day’s final panel was an overview of Upcoming Water Infrastructure Projects. The panel was comprised of:

  • Jaren Murphy – McCarthy Building Companies director of business development (Moderator),
  • Marc Ahlstrom – City of Mesa assistant city engineer, and
  • Troy Hayes – City of Phoenix water services director.

After the panelists introduced themselves and explained how their operations were funded, Murphy asked them to address the impacts of recent federal funding and stimulus availability. To the obvious surprise of some attendees, Hayes said that because of the degree of red tape and extensive requirements lists, Phoenix found it both easier and cheaper to bond for projects internally.

Murphy then asked how the labor shortage was impacting operations and project delivery. Ahlstrom said a key challenge has been finding and retaining engineers. He said job postings have gone from receiving 50-60 applications to receiving just five or six. He said there were similar problems finding plant operators and that recruitment and retention was a continuous problem across all positions.

Hayes said Phoenix has encountered similar issues, but he expressed optimism and appreciation for the various apprenticeship programs available to partner with for labor development.

In terms of how the industry can help cities with their current difficulties, both panelists urged partnership, involvement and information sharing. Ahlstrom said agencies rely on providers’ expertise and urged contractors and other vendors to deliver alternative ideas on items like design and materials. He also urged them to get involved in the process as early as possible.

Hayes reminded contractors that they are on the so-called “front lines” and urged their help in identifying unknowns and potential pitfalls agencies may not yet be aware of.

The BEX FY 2022-2023 CIP Special Report

As is part of the Public Works Conference every year, the event coincided with the release of the BEX FY 2022-2023 CIP Special Report. This year’s is the 12th annual edition and contains detailed descriptions and line-item breakdowns of major projects from agencies around the state.

Every March, BEX Research staff begins tracking preliminary CIPs from more than 25 agencies around Arizona and spends the next six months assembling project information, cost and timeline details, and contact lists for agencies and major projects.

This year’s CIP is available through the BEX website here.