22 Jul What Construction Strategies Help Preserve Asset Values During Volatile Markets?
Owners and institutional investors can protect commercial asset values during volatile markets by using structured delivery methods, proactive cost controls, and durable material specifications that reduce lifecycle cost exposure.
Why It Matters
Commercial real estate assets are valued primarily on Net Operating Income (NOI) — the income a property generates after operating expenses but before debt service and taxes. When construction costs spike unpredictably, project overruns can reduce the leasable footprint, delay occupancy, and compress NOI, directly lowering appraised asset value.
In volatile markets — defined here as periods when material costs, labor rates, or financing conditions shift by 10% or more within a single project cycle — unmanaged construction risk can erode returns that took years to underwrite. For institutional owners, healthcare systems, and corporate real estate teams operating in Middle Tennessee and broader Sun Belt markets, this risk is not theoretical. Construction input costs in the Southeast rose more than 30% between 2020 and 2023, according to the Associated General Contractors of America.
How It Works
The most effective asset-preservation strategies begin before a shovel breaks ground. A Guaranteed Maximum Price (GMP) contract is a delivery structure in which the contractor commits to a defined cost ceiling, absorbing cost overruns above that ceiling. GMP contracts transfer a measurable share of market risk from the owner to the construction manager, provided the scope is clearly defined at contract execution.
Alongside GMP contracting, early procurement — purchasing long-lead materials such as structural steel, mechanical equipment, and electrical switchgear before market prices escalate — can lock in costs that represent 20% to 40% of a typical commercial project budget. Pre-purchasing also reduces schedule risk, which carries its own value implications: a one-month delay on a 50,000-square-foot medical office building leased at $28 per square foot represents roughly $116,000 in deferred revenue.
Value engineering (VE) is a systematic review of materials, systems, and construction methods to identify alternatives that meet functional requirements at lower cost without reducing long-term performance. Effective VE is conducted early in design development — not as a cost-cutting measure after a budget overrun — and should be documented with life-cycle cost analysis comparing first cost versus 10- to 20-year maintenance projections. This distinction matters because short-term savings on roofing membranes or HVAC systems frequently generate maintenance costs that reduce NOI over time.
As shown in the company’s project portfolio, a consistent approach to early procurement and GMP structuring has enabled project delivery for healthcare and institutional clients across Tennessee without scope reductions tied to mid-project cost escalation.
What the Data Says
According to the Construction Industry Institute, projects that implement constructability reviews and early procurement protocols average 5% to 10% lower total project costs compared to those that do not. Constructability review is the process of evaluating design documents for buildability, coordination conflicts, and sequencing efficiency before construction begins — catching issues on paper rather than in the field, where resolution costs are significantly higher.
The Engineering News-Record (ENR) Construction Cost Index, a widely referenced industry benchmark, showed national material cost volatility averaging 6% to 8% annually between 2019 and 2023, with spikes exceeding 20% in certain categories such as lumber and copper wire. Projects that secured early subcontractor commitments and material buyouts before those escalation windows were generally able to hold budgets within 3% to 5% of original estimates, based on project post-mortems published by the Associated Builders and Contractors.
Key Considerations
Not every strategy applies equally to every asset class. Healthcare construction, for example, involves infection control requirements, phased occupancy, and regulatory compliance standards that can limit schedule flexibility and early procurement options compared to ground-up industrial or office projects. Owners should evaluate delivery strategy in the context of their specific asset type, lease timeline, and financing structure.
Owner contingency — a budget reserve held by the owner, separate from contractor contingency — is a frequently underused tool in volatile markets. A contingency of 5% to 10% of total project cost, tiered against identified risk factors such as geotechnical unknowns or long-lead equipment availability, allows owners to respond to market shifts without triggering contract amendments that delay schedules. The firm’s services, outlined in the services overview, address contingency planning as part of preconstruction advisory work for commercial clients.
Owners should also review escalation clauses in subcontractor agreements. An escalation clause is a contract provision that allows a subcontractor to adjust their price if material costs rise above a defined threshold between bid date and procurement date. While these clauses transfer some risk back to the owner, they can be structured with caps and trigger thresholds that make overall project exposure more predictable than a fixed-price subcontract that a vendor prices with excessive contingency built in.
For projects in Nashville and the broader Middle Tennessee corridor, local subcontractor relationships and familiarity with regional supply chain lead times remain material factors in budget reliability. Teams accessible through the firm’s contact page can provide region-specific procurement guidance during preconstruction.
Frequently Asked Questions
What is a GMP contract and how does it protect asset value?
A Guaranteed Maximum Price (GMP) contract is a construction agreement in which the contractor establishes a cost ceiling for the defined project scope. If actual costs exceed that ceiling, the contractor absorbs the difference rather than the owner. This protects asset value by making total project cost predictable, which allows owners to underwrite returns with greater accuracy and reduces the likelihood that budget overruns will force scope reductions that affect building quality or leasable area.
How early should procurement decisions be made on a commercial project?
For projects with significant exposure to volatile materials — steel, mechanical equipment, electrical gear, or roofing systems — procurement decisions should ideally be made during design development, which typically occurs six to twelve months before construction begins. The earlier a project team can identify long-lead items and secure pricing commitments, the more insulated the project budget is from mid-cycle market escalation. This requires close coordination between the architect, construction manager, and owner during preconstruction.
What is value engineering and when should it happen?
Value engineering (VE) is a structured process of reviewing construction materials, systems, and methods to identify functionally equivalent alternatives at lower cost or with better long-term performance. VE is most effective when conducted during schematic design or design development, before construction documents are completed. When VE occurs after a budget overrun during construction, it typically results in rushed substitutions that may reduce building quality or introduce coordination conflicts that slow the schedule.
How do construction delays affect commercial asset value?
Delays affect asset value through two primary channels: deferred revenue from delayed occupancy and increased carrying costs on construction financing. For example, a 60-day delay on a 30,000-square-foot office building with a weighted average lease rate of $26 per square foot represents approximately $127,000 in deferred base rent, before accounting for additional interest on a construction loan. For healthcare or institutional assets, delays may also trigger lease penalties or regulatory compliance issues that carry separate financial consequences.
What contingency percentage should owners budget for volatile market conditions?
Industry guidance from the Project Management Institute and construction advisory firms generally recommends owner contingency of 5% to 10% of total project cost during periods of elevated market volatility. The appropriate percentage depends on the project phase at which the budget is set — earlier-stage budgets carry more uncertainty and typically warrant higher contingency — as well as the complexity of the project type, known geotechnical or site risks, and the current stability of regional subcontractor markets. Contingency should be reviewed and adjusted at each design milestone.
Conseco Group, a Nashville-based CM/GC founded in 1987, applies these practices across healthcare, office, and industrial projects.