Building a Mystery: Construction Amid Uncertainty and Inflation

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Spencer Levy
If you build it, we will come on the air and talk about it. And that's exactly what we're going to do now. On this episode, we get down to the nuts and bolts of building. We cover a construction industry that's navigating a time of historic uncertainty.

Ken Colao
Change is a part of life. And I think one thing that is different that continues to be different is the rate of change.

Spencer Levy
That's Ken Colao, President and CEO of the CNY Group, a large scale developer and one of the biggest construction managers in New York City. Ken has more than 40 years of experience in the construction business. He's been recognized for his leadership on ESG practices and more. And for CNY, his work on major new construction, renovation and restoration projects all around Manhattan and beyond.

Rebecca Homkes
Uncertainty means a series of future events which may or may not occur. Whether or not those events are good or bad depends on what we're trying to do and how we're set up.

Spencer Levy
And that's Rebecca Homkes, a growth strategy specialist and lecturer at the London School of Business and Duke Corporate Education. A great thinker with whom I've sparred on numerous panel discussions, Rebecca is also the author of a forthcoming book with advice for business recovery called Survive, Reset, Thrive. Coming up, a conversation on construction. The business of building in a world that's still putting itself back together. I'm Spencer Levy, and that's right now on The Weekly Take.

Spencer Levy
Welcome to The Weekly Take, and this week, we're going to talk about construction, the cost, the methods, how it's changing. Ken, thanks for joining the show.

Ken Colao
Thank you. Nice to be here, Spencer.

Spencer Levy
Great to have you. And then my old friend and debate partner, Rebecca. Thank you for joining the show.

Rebecca Homkes
Spencer, so great to see you again. Looking forward to our conversation.

Spencer Levy
Great to have you. So, Ken, can you just walk us through where we are today and how it's changed since the beginning of the pandemic?

Ken Colao
It was a challenge. And from the days of 100% mask wearing and safe distancing and temperature taking, which formed large lines around some of the sites, all of that has diminished today to just mostly being prepared to act, but has impacted a state of mind, clearly. Some workers continue to wear masks voluntarily. Some of the safe distancing is practiced on sites, although it's not mandated. Just providing an overall, an environment where people just generally feel safer.

Spencer Levy
So let me just sum it up. Would you say that we're pretty much back to where we were pre-pandemic, in terms of the procedures on the site at most construction sites today?

Ken Colao
Yes, that is true. The thing that continues, and I think will always, is that we still have our task team that meets once every couple of weeks instead of daily, just to keep their pulse on what's happening. There has been a new variant coming through. People have kind of stepped up and dealt with it. But overall, protection on job sites is pretty much back to where it was.

Spencer Levy
Rebecca, you help CEOs with strategies, helping executives grow through uncertainty. Just give the general advice you're talking to construction executives about, given the uncertainty today.

Rebecca Homkes
You know, I think it's a great question, Spencer. And the one argument that I often make back is – to CEOs – tell me a time when you grew your company through certain times, right. Like please tell me a time in the time of your company where things were very certain. And I will say, and I think it's probably a good segue into a lot of our conversation. Something different has happened when I've asked that question over the past couple of months. And here's what it is. CEOs tell me. Yes, Rebecca, but I've always been able to take global macro political conditions as a given, right, and now I have to factor those in. So even though I never like to say it's a new normal or this time is different, that is the one big piece of feedback I've been getting, is that it's different because they can no longer take on global political stability as a certainty. The second thing is, I always want to reframe the question – and you even did it yourself there, Spencer, without realizing it. When we ask people how to think about change or uncertainty, we always frame this thing as bad, right? We talk about how are we going to manage uncertainty, overcome uncertainty, get through uncertainty, right? We are always setting it up as a bad thing – we just got to get through it. So we need to define uncertainty. Uncertainty means a series of future events which may or may not occur. Whether or not those events are good or bad depends on what we're trying to do and how we're set up. So that's the conversation I have with Ken and other CEOs. Figure out what we're trying to do, and then let's get set up.

Spencer Levy
Ken, let's get a little bit now into the nitty gritty of what some of this uncertainty is causing today. Tell us a little bit about what's going on with respect to your construction management in the face of inflation we haven't seen in 40 years.

Ken Colao
You know, I'd just like to first comment on the overall uncertainty and change. You know, change is a part of life. And I think one thing that is different that continues to be different is the rate of change is continuously increasing for construction, for real estate. That's just, throws up a lot of questions, and where do we go from here? What do we do? I think, never before have we taken so much time working with clients and analyzing different scenarios, whether it's a new build or a reconstruction, renovation, so forth. There are just so many more variables to consider. It's not just inflation escalation. There's a lot happening in the world making it uncertain.

Spencer Levy
I agree with you. There is a lot more than just inflation going on out there, but inflation is going on out there. And according to CBRE’s recently published construction cost report, we pegged construction costs going up at 14.1% year over year. But I've been hearing from some of our developers, particularly those in the hotel space, their costs have gone up by almost 40%. What are you seeing, Ken?

Ken Colao
You raise a good point. It definitely depends on the sector and the market and the geography. It's different in different places. It also ranges on the size of projects. In the last two years, we've seen some materials go up well over 100%, 130, 140%.

Spencer Levy
And what might those be, Ken? Just give us some more specifics on that.

Ken Colao
Sure. So some materials, you know, such as miscellaneous Iron, stairs, stair staircases, you know, all of the, as we say, the tchotchkes in the building that end up being lots of pieces in lots of different areas to hold up things. The ladders and railings and so forth. Another area is in metal moldings and trims and storefronts. It's gone up incredibly. Softwoods, plywood, structural steel went up over 60% in the 18 month period. And this is a huge impact, and it also changes by market. We found that working with larger suppliers, larger contractors are able to buy bulk. And when you're able to buy bulk purchasing, you are able to defray some of those costs. When you're working with smaller contractors buying things off the shelf. Well, that's going to be a substantial increase in cost.

Spencer Levy
Now, one area where we're seeing cost differentiation is shipping goods from overseas versus buying the same goods manufactured here in the States. As a matter of fact, I had dinner on Saturday night with a gentleman in the concrete business, and he said that it may be more expensive to get some of the raw materials for his concrete here in the States. But getting them from where he gets a lot of his materials happened to be South Korea. It's cheaper, but boy, he's having trouble with logistics. What are you hearing about that, Ken?

Ken Colao
Absolutely. Absolutely. If, in fact, you're buying from overseas and you are getting held up at the ports, or are you just adding in more transportation time? That's going to change the equation. We just recently changed the facade of a building. It was originally programmed as a least-cost method. We were going with the precast, but because of the delivery times on the precast – and this is a domestic product – we changed it and went back to something we probably haven't done in 15 years, and that is handset masonry and terracotta facade. So it's absolutely impacting if you have to go overseas and the thing I could say for that is know your supply chain. Today we literally have to map out the entire supply chain. We want to know from raw goods, where is it going, where is it being manufactured, where's it being fabricated, how many touch points are there, contacts being able to touch each of those points, communicate with those locations, understand what those factories are doing, and in fact, even looking to visit more so than we ever had before.

Rebecca Homkes
I’ll just echo Ken's point, that working with a lot of people in the concrete industry, steel fiber is a massive issue right now, not just for the incredible price increase, but for the shipping delays. So I think we are going to see a lot more trying to get set up in the U.S.. Does it cost more, yes, but certainty has a cost, right? And putting that amount of unpredictability into time adds a substantial cost to what contractors can do. And then to the other notion, what we're seeing a shift of for companies who do want to grow through uncertainty is really working what we call supply chain robustness. Now, going into 2020, there was so much push for efficiency and just in time and get as lean as possible throughout the entire supply chain. And we saw in 2020, when that manifests itself again, you don't get to take opportunities, right, that the market gives. So we're seeing a lot more push for robustness, which might mean having two or three suppliers in some aspects, which as Ken said, it's mapping out the entire supply chain. You know, one manufacturer being shut down for a couple of weeks because of a Covid case could take away your entire autumn pipeline. And so it's important to really go a lot farther on and get a little bit more into the details. And maybe we kind of lured ourselves into thinking we had to anymore.

Spencer Levy
One of the key areas is not just materials, it's labor in the logistics chain to get the materials here, but also once you are here, you need the labor to help build the building or to manage the building. And CBRE recently came out with a Facilities Management Cost Trends report, and I found a very interesting conclusion there, that a lot of the higher skilled trades, the plumbers, electricians, actually there wasn't that much of a shortage. But once you got into people that were in janitorial services, people that were in security, that's where the problem lies. How do you address that, Rebecca, in terms of the labor question and sometimes the different types of labor it takes to either bring the goods to your job site or to operate and build on your job site.

Rebecca Homkes
Well, Spencer, again, we've got macro issues and we have micro issues, right. One of the big macro issues is, you know, we had the stimulus from 2020. We had a lot of things shut down. But there's all these second and tertiary effects we don't think about, you know. Commercial driving schools were shut down so people couldn't get licenses, right. We had different vaccine requirements across different states. So who could come to ports? Who could leave ports? Who could drive things? So there was all this mismatch policy that we've seen over the past two years, which led to a lot of this as well, besides there’s a lot of people deciding that this isn't the workforce they wanted to be in, that this steady, show up 8 to 5 every day, was not for them, and they were able to find work in the gig economy or elsewhere. So we're seeing a pretty fundamental macro shift. Now on the micro level, right, that means for people running companies like Ken, they really need to reevaluate where the labor pipeline is coming in from, what their employee value proposition is across the entire company, which again might not have been something we spent enough time thinking about across all companies going into this year.

Ken Colao
Labor breaks down into two areas. There's union labor and there's nonunion labor. And union labor is pretty much set to a fixed wage plus fixed escalations in accordance with the collective bargaining agreement for that particular union and local. So in these kinds of times, it's more of a stabilized expense. Nonunion labor on the construction side has been struck with more volatility, and we're seeing rises in nonunion labor. So in that sense, in some ways, it's closing a gap in certain areas like New York City and Chicago and other areas that have a union base, and it's an interesting dynamic. I also want to say you mentioned something I also think is often not spoken about enough, and I know your report addresses it well, and that is the operating cost. You know, too often we find that developers focus on what that capital cost is upfront and lose sight, not intentionally, I think it's more inadvertent, of what the long term operating costs and impact to their building is going to be. Very often it makes sense to actually spend more money upfront on a capital cost or a particular item in order to alleviate and get the better payback over a longer time.

Rebecca Homkes
Yeah, I agree with that. So many times, we've seen this across industries, we're trying to solve a problem at the very end of the decision tree, right. Like, how do I get more labor in? But I think Ken is alluding to the bigger question, which is how do we fundamentally relook at our cost structure? How do we fundamentally relook at how we approach these problems? And it's something I would argue Ken, and please feel free to disagree, the construction industry hasn't been forced to do it the same way other industries has, which is fundamentally relook at how it actually approaches problems from a cost structure standpoint. And I think I'm starting to see companies do that more over the past year than I've seen over the past five. I think that's a good thing for the industry to fundamentally relook at how we cost, the allocation between capital and operating, and how we can get dramatically – like order of magnitude change – different in how we approach things from an operations. Now in uptime, it's very easy to throw bodies at the problem, right. And we're being forced now to say, well, actually, how can I resolve these problems in a different way?

Spencer Levy
Now, on the operations side, there are things such as window washing, janitorial services, things like security, that if you were to spend more money upfront on construction, you may reduce your operational costs moving forward. Are you seeing any of that, Ken?

Ken Colao
Yes. We're finding more sophisticated developers who have a longer term horizon are spending more money upfront and upgrading, particularly in the MEP area – mechanical, electrical, plumbing – and upgrading the level of pumps, and even things down to better hangers for pipes, better isolation for vibration and so forth. All the things that over time will lead up to a deterioration or a higher degree of maintenance. And that's what you want to do. You want to reduce that maintenance over the long term. And then you also have the energy side. I mean, I think in certain cities, I believe New York and California are leading the efforts with some of the environmental laws that are coming into effect. But by pushing legislation through and forcing upgrades, forcing more money to be spent on facades, on the buildings itself to reduce the carbon emissions and so forth, all will lead to, in the long term, a lower operating cost. And when you take a building for over 30 years, 40 years, and you look at what your operating costs are and where you can be slightly above market or below market compared to your capital cost, I think it's a no brainer, and I think that developers have and are beginning to move in that direction, certainly the larger, more sophisticated ones.

Spencer Levy
Well, another thing that comes up with the anticipation of maintenance costs, and maintenance comes in a variety of categories, certainly might change the highest and best use of a redevelopment or a new development. And the examples I would use there are labor heavy real estate uses such as senior housing, such as hotels. So Rebecca, what's your response to a developer that's trying to make this decision? Do I build an apartment building for market, senior housing, hotels, taking the entire picture into consideration.

Rebecca Homkes
Yes, it comes down to two things. First of all, you've really got to articulate your beliefs. You know, one thing about going through uncertainty is that we can't predict the future. I know that sounds just silly me saying that out loud, but sometimes we almost kid ourselves into thinking we can predict, right? Because we've got lots of data. We put lots of models out there. Except for the fact we can't predict the future. But then as a leadership team, as a developer, you've got to sit down and say, well, what are our beliefs? You know, where do we really see our industry going over the next one or two strategy cycles or 3 to 6 years? We had strong beliefs when we spoke to Spencer in 2020 that, you know, senior retirement homes would be going down, right? Because normal people won't want to move their parents into that. We haven't really seen that macro trend. You know, people in the elevator industry were thinking about, do we need to make lifts with more social distancing? We haven't really seen that trend, right? So really pushing, where do we actually see our beliefs going forward on these things? And the second, where are your clients? Where are your customers? You know, are our clients and customers ready to accept that yes, I'm going to have a higher upfront cost, but my maintenance is going to be lower. If I go one more macro trend that the cycle of executive teams keeps flipping so, so quickly, it gets harder and harder for me to think that all markets are ready to accept that fact, right? Most people want the cost to come down later, not in their tenure. So I think we've got a lot of macro factors coming in. But I'll go back to two things. It's what are your beliefs? Force yourself as a team to say, What do we really believe to be true about our market? Know you’re going to get most of them wrong, but that's okay, because you're going to test them and make adjustments. And second, where are you going to play? You know, where are your right clients and markets? Find your sweet spot in the markets. Are your clients going to go with you on this journey?

Ken Colao
It really has to start with the big picture. I mean, buildings today, the built environment is far more complex than it ever has been throughout history. And it takes a very strong, deliberate, and collaborative effort, day one, to understand what's the objective, what's the vision, and look at multiple uses. One thing is for sure, there is no one answer that will address all different buildings. Like here, well, maybe let's take the hotels and convert it to senior housing. Okay, and I'm sure there are buildings that would be suitable, but not all. Certainly not all. And even the ones that initially made or appear that they could have that adaptive reuse, it depends on the extent of the renovation that needs to be made, because now you're dealing with people that are going to be living there all the time versus just frequented during the day to work. And there's a difference in codes and so forth that have to be respected, difference in elevating. So when you start to study it and peel the onion, that's when you really understand what it is. And that effort takes a tremendous amount of time and needs to be done more and more upfront.

Rebecca Homkes
Ken, are you seeing that? Are you seeing more and more developers go in looking for adaptive reuse from the onset, or is that something we're thinking about in the actual design phase? I'm going to build this building to potentially be repurposed another 5 to 10 years? Or are codes and regulations so far behind that cost wise, we're not even thinking about it at that point?

Ken Colao
It's more the former, there’s initial intention, but often that intention is bolted to the opportunity and you have to factor in all the things that we're talking about, like with inflation.

Spencer Levy
One of the things that people have talked about is, for some older office buildings, conversion into affordable housing. And we clearly have an affordable housing shortage in America, just about everywhere. But the challenge there is that the cost to build affordable is not that different than the cost to build market-rate. How do you deal with that issue, Rebecca?

Rebecca Homkes
I just see a very varying approach by city. London and the United Kingdom is taking a very specific approach to this and there is a fixed amount that every developer has to build of affordable housing for allocation of regular housing, right. I know the Miami-Dade mayor has come out with some similar statements in the last couple of weeks. We're not seeing those echoed across the entire country. But, Ken, I’d also be interested to see what you're seeing in those New York markets, very different from the Miami, San Francisco, London market I'm a lot more familiar with.

Ken Colao
It certainly depends on the markets.

Rebecca Homkes
It depends on the answer to every single question related to these topics, by the way. So “it depends” will probably get you with everything.

Ken Colao
It depends slightly on the geography. In cities such as New York, it's really high rise versus mid rise. And you're not going to be doing three story units in New York City. However, in the states, Florida, as an example, you're going to have a difference in the cost structures, more so, because your cost of superstructure, it's wood frame. And if it's going to be upscale or not, you could incorporate modular building or prefabricated building more easily in a low rise workforce housing or affordable housing. The real difference is when you can go to a less expensive superstructure, let's say, like a wood frame or a modular or so forth.

Spencer Levy
And are we seeing an increase in that? Now I know in the major markets we're probably not seeing a whole lot of modular, but outside of the major markets, it is a growing trend. Would you agree?

Ken Colao
Yes, and in particular, prefabrication. I'm long on prefabrication as opposed to modular, to be honest with you, because modular when you think about it, if you think about stacking a series of shoeboxes that you are doubling the walls, doubling the floors, doubling the ceilings, everything has double material and the material cost does catch up. We find in our experience, we've done a couple thousand modular units, that it's not the least expensive, but it is the least time. You save on time, but you don't save on the expense. However, I think the real long term play is on prefabrication. Europe, where we have built a number of projects, is ahead of the United States in this particular area and coupling that with some of the environmental changes that are being imposed and through construction means and methods and materials and so forth. There is things that we can learn from them and we are.

Spencer Levy
Let's go now to electrical. I think that the energy question is one of the areas where our European friends have led the charge and are leading it when they come here to invest. They're certainly leading in what they're building, buying here and over in Europe. And I am even hearing that there are new buildings being built in Manhattan that are going to go all electric. So let's start with you, Rebecca. How much does your vision for things like energy play into your construction decisions?

Rebecca Homkes
Well, it comes down to the purpose of your organization, right, and where you're going to factor in these ESG choices into your strategy. Now, a lot of companies for many years saw it as a trade off. And frankly, it was, right? Is that we could create value or we could do things to contribute to the ESG landscape. And we were making explicit tradeoffs with our shareholders and stakeholders because we were spending more, we might not be able to capture that in increased willingness to pay. We are seeing that tension be broken across many industries and I think that's, you know, one of the other bigger shifts that we're seeing right now. I think if we watch that over the next couple strategy cycles in this industry, this will get more and more interesting. And we can watch Europe a bit, which was forced to move there, given legislation and regulation. But we're seeing a catch up there. So I think that your purpose or, you know, vision, mission, purpose, call it whatever you want. The overall guiding principle of your company, will come into play. But I think more and more I'm pushing executives to think about it explicitly within your strategy, because there is value creation gains of looking both on the willingness to pay and the cost side and explicitly building some of this in. And if you just look at the energy crisis, which is what I'm calling it, because that is what Europe is facing right now, we are going to be forced to make more and more trade offs, understand what that means coming into building costs.

Ken Colao
Yes, it's absolutely happening, not only in New York City, but in other parts of the country. We're moving to all electric. We have a number of large scale developments that are in planning right now, and they are 100% electric, and more locally in New York City, where you have the pending Local Law 97 codes that are coming down, which in fact will apply to any buildings that are greater than 25,000 square feet. They go into effect in 2024 to reduce overall CO2 emissions. And it's a good thing, it's going to force change. Today, a lot of the Class A and Class B buildings are in much better shape, but the C, D and less buildings, they're going to have a rough, rough go at it. They really have to look at either major investments in their building or perhaps a tear down or a reconstruction. But the real change needs to happen at the top. And I say that because if I look at the built environment, not only the construction industry, but it's the real estate and design industry, all working together, as well as government, because right now, the built environment, when you really look at it, it uses 40% of the world's energy. We emit 38% of the CO2 emissions. We use over 30% of raw materials globally. We generate 35% of the waste, and we consume 12% of potable water, and we generate 20% of effluent discharge. That is simply not sustainable, and that's what's going on today. We have to change that. It starts at the top. It starts when a project is being planned and financed. It starts with what the vision for the project is going to be. We need to all work together. Real estate's not going to do it alone. Construction’s not going to do it alone. The government’s not going to do it alone. We all need to come together.

Rebecca Homkes
And get more explicit, Ken, because you and I have been speaking about this for a while. Give Spencer a tangible example, like what does, kind of, this coordinated effort actually look like? Paint us something that would actually, you think, make a tangible difference.

Ken Colao
Let's take safety. 15 years ago in the industry, maybe 20 years ago, when very stringent safety regulations came down from OSHA and other localities, every contractor is saying, “Oh my God, I run a safe company. I don't need to do all these things for protection. Elaborate systems. Oh my God, I'm adding 15% to my numbers.” If you were to ask any contractor today, how much do you put in for safety and can you isolate that and move that out, challenged to say probably not one. Say, no, it doesn't cost anything. I need to do it. If I don't do it, if I'm unsafe, it's going to cost me money. So it's that education process. Eventually it'll all evolve into where we want to be.

Rebecca Homkes
But we're asking the industry to make a lot of changes, right Spencer? To your early questions. We're asking you to make fundamental changes at a time of low labor, high input costs, fundamental uncertainty, not knowing if public spending, which we haven't spoken about yet, is going to come back. If we do have this recession we're all talking about, it's usually followed subsequently by big public spending. We might not see it this time, given that the coffers were kind of drained. So how are we going to expect action on something new that requires a lot of fundamental executive mindshare and costs with all of these other variables in play?

Ken Colao
It takes a collaborative effort. I think that construction coming together with real estate and, property by property, looking at things to be more sustainable, and even, I would suggest, regenerative, you know, which is another whole area beyond sustainable. But it has to change, and I don't think that it solely rests with government to force it. Because it’s like anything else. Once it's doing it, it picks up speed, it becomes more of a mass acceptance. Then the costs will drop dramatically.

Spencer Levy
Back to this safety point. Couple of just statistics while we're in statistics land here. I looked up some fairly terrible things that happened over time, but things that got better because we got better with safety. So one of them was the Triangle Shirtwaist Factory Fire. 146 people perished in that fire because the landlords locked the doors. They didn't want their materials going out the door. So we changed the safety rules that you can't lock the doors. 96 people were killed building the Hoover Dam. Five people were killed building the Empire State Building. And all of these things got less and less and less and less over time, and we got better and better for it. And the other example I would give you is the costs that came along with the ADA. When that came into the form about 30 years ago, a lot of people were like, oh, this is going to change everything. Well, it just made things better over time and the costs came down. Is that how you see it going down with energy, Ken?

Ken Colao
Yes. Absolutely. Local Law 97, while I think it could be somewhat painful initially, over time those costs will be minimal. As new buildings are being built – today, Class A buildings that are being built are being already built to those standards. As more buildings are built to those standards, it'll become less and less of a cost.

Spencer Levy
And just to clarify, folks, Local Law 97 has to do with carbon reduction. And there are versions of Local Law 97 all over the country. And I understand, for some of the work I do on the real estate roundtable, that it encompasses about 77% of all commercial buildings in the country once you aggregate all of these things. So this is not just a New York issue. This is happening everywhere.

Rebecca Homkes
I think, Spencer, that's a good point, though, is that developers who aren't in one of the big three major metro areas think all these things are fine, but like it's years before it's going to come to my city, right? I've got plenty of time before I have to do those things. And that's just really not the case. And we can't emphasize that enough.

Spencer Levy
Well, that's right. And it used to be, if we did this show five years ago, I would have said the only sector within commercial real estate where green is a huge factor is office. Now it's in every asset class. And why? What was the fundamental change? Because the office change was led by the tenants. The tenants demanded it. Now, the capital is demanding it across the board. And to your point, Rebecca, even if you don't have a Local Law 97 type of regulation, you may be in your best interest to do it anyways, because the capital is going to require it down the road.

Ken Colao
And whose driving that change is the occupants. The employees of the tenants are saying this is what we looking for, which is forcing the tenants to address it with landlords. But the occupants are in other types of buildings and it's permeating through all industry types, all building types.

Spencer Levy
I would be remiss, Rebecca, first of all, to tell our listeners how many times you and I have debated on air before, and I'm disappointed that we didn't go head to head as much this time. But I do want to plug your upcoming book, Survive, Reset, Thrive. What a cool title. Tell our listeners a little about the book that you're just about to complete.

Rebecca Homkes
Oh, thanks, Spencer. Don't worry. I'm sure there'll be many, many debates in the future. But the title came from, actually people in Ken’s industry, that I work with a lot of people in construction and concrete as well as technology, software, fashion. And when 2020 hit, I was just having conversation after conversation with CEOs, just why me? Why now? I was doing so well, you know, not one more crisis. And I found myself repeating the same playbook over and over. And so that's when I started to codify it. So growing through any sort of market shock has a three phase approach of survive. Handle the shock proactively; reset, relook at everything you're doing and reset, and then appear to be a thrive organization. And we talk a lot, almost flippantly and latently, about survive and thrive. But the power move is the reset, and it's the challenging yourself and your leadership team to, the situation has changed, we might need to change what we're doing now. And executives are pretty bad at the reset. They want to survive and think they can go right back and build the business they had before the market shock. And I just want people to realize when they're shocked, you need to reset and reset can be a good thing. So we need to be a more sustainable thrive company on the other end.

Spencer Levy
Ken, I would like any final thoughts you have on where we are and how the industry is going to evolve over the next five years.

Ken Colao
Sure. But I would like to say that I would love to debate with Rebecca, but on her last point, I cannot, being old enough to go through four crises and surviving, I am a huge fan of her approach. Certainly have practiced it. In fact, one of the things that we've identified in our company as the single most important trait to learn is to be more adaptable, to be more agile. We've actually put all of our employees through adaptability courses because we think it's that important. I think for our industry I am bullish on cities and metropolitan areas. I feel that the investment in infrastructure that's been here and the cities operating as a cultural center and the opportunities for cities to be reconstructed so they can garner more of the efficiencies that are in place. So when you think about a building that is a million square foot building that goes straight up versus having a million square foot footprint. If it was just one story high, and the energy use and impact to environment, it's a no brainer. I mean, cities need to be continued to be invested in. And so I'm very bullish on the development in the cities, including New York City and also other metropolitan areas.

Rebecca Homkes
Same. I remain incredibly bullish as well. Are there several variables that I'm looking at that I'm testing my beliefs on? Absolutely. But periods of uncertainty are a great time to grow if you're smart about it. Remember, all of these things, these input cost, labor, policies, they're what I call a fair disadvantage. Everyone in the market is facing them at the same time. Your job as a leader is to turn these into an unfair advantage. Is to take all of these inputs that everyone else is saying and say, what's my different stance? What's my differentiation here? So again, I'll repeat, you just take these fair disadvantages and turn them into an unfair advantage, and you can grow through any market environment.

Spencer Levy
Well, that was a great discussion about construction bigger issues with two great experts on the space. First, thank you very much. Ken Calao, President and CEO of the CNY Group, for joining us today. Thanks, Ken.

Ken Colao
Thank you, Spencer. Enjoyed it.

Spencer Levy
And then my old friend and debate partner, Rebecca Homkes, from Duke and the London Business School, among other things. So, Rebecca, thanks for joining the show.

Rebecca Homkes
Spencer, always a pleasure. Look forward to our next chat.

Spencer Levy
For more on the state of the construction industry, you can dig into our website to find the CBRE research we mentioned in the discussion, including CBRE’s Facilities Management Cost Trends Index and the 2022 U.S. Construction Cost Trends Report, which is hot off the presses this month. They're filled with deeper information and analysis on labor, materials, supply and more. We'll post links on our Website, CBRE.com/TheWeeklyTake. You'll find more information on this show, plus others you may have missed. So check those out too. Our own construction project is continuing to build the best audience around, and by sharing an episode you can be part of that effort. You can do that on our site and also remember to subscribe, rate and review us wherever you listen. Thank you very much for joining us. We'll be back next week. For now, I'm Spencer Levy. Be smart. Be safe. Be well.