2007 Top Contractors

Contractors Find Refuge
In Commercial, Infrastructure

by Craig Barner

The boom in residential construction has tanked, but the commercial and infrastructure segments are providing contractors with the shelter of strong growth.

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Since the early 2000s, the housing boom played an important role in sustaining the construction industry, with double-digit increases in starts nationwide. The expansion was seen in both multiunit dwellings and single-family homes.

But things changed. Housing starts virtually imploded in January, dropping 38% nationwide vs. the same month in 2006, according to the U.S. Census Bureau.

Some residential segments are still hot, especially the torrid market in
Chicago's Loop for condominiums and apartments, says Gail Lissner, vice president of Chicago-based Appraisal Research Counselors Ltd. The latest data shows 5,414 for-sale and rental units were delivered in 2006, up 38% from 2005's 3,919.

But commercial and infrastructure construction is where the strongest activity is.

"A lot of segments in commercial are playing catch-up," says Heather Jones, construction economist for Raleigh, N.C.-based FMI Corp., a consultancy.

Data for all but one of the major metropolitan areas where Midwest Construction circulates were up in commercial: Chicago up 19%, to $7 billion; Milwaukee up 41%, to $1.4 billion; and St. Louis up 1%, to $1.7 billion. Only

Indianapolis was down, 42%, to $1.4 billion, partly due to the start in 2005 of the $675 million Lucas Oil Field and the $1 billion Indianapolis International Airport expansion.

Infrastructure starts were up in each market: Chicago, 31%, to $3.6 billion; Indianapolis, 33%, to $963 million; Milwaukee, 182%, to $2.2 billion; and St. Louis, 29%, to $855 million.

The strong growth is impacting some contractors.

"I'm expecting 20% growth in our St. Louis office this year," says Dan Frisbee, senior vice president and owner in the St. Louis office of Kansas City, Mo.-based Walton Construction. Others echoed his assessment of the year.

Nationwide, construction spending totaled a record $1.198 trillion in 2006, up 4.8% from 2005, according to the Census Bureau. The biggest increases were seen in lodging (53%), retail (33%) and hospitals (25%).

Steady Starts

Overall, construction starts in the Midwest are holding steady.
Milwaukee was the big winner, with starts increasing 49%, to nearly $4.7 billion, in 2006 over 2005.

The eye-opening surge was attributable in part to contracts coming online for the $2.3 billion Oak Creek Generating Station south of the city. Other major projects are the ongoing $810 upgrade of the Marquette Interchange downtown and the $417 million Columbia St. Mary's Hospital, a facility on Lake Drive that will replace two aging hospitals.

"The Milwaukee market has gained strength," says John Rodell, vice president in the Milwaukee office of Madison-based J.H. Findorff & Sons Inc.

Like its neighbor to the north, Chicago also saw an increase, albeit a modest one, of 4%, to $21.5 million, in 2006.

The most significant increase was in a traditionally weak market, office and bank buildings, where there have been steady vacancy rates in the Loop and suburbs since the early 2000s. The Windy City saw doubling in starts, to $854 million.

The increase was attributable to office projects that include the estimated $400 million 353 N. Clark St., $200 million 300 N. LaSalle St. and the $154 million office for the mixed-use Block 37 project in the Central Loop. In January, the 10-story 111 W. Illinois St. project was also announced, though no cost was released.

Gains continue to be seen in traditionally healthy markets in Chicago, including streets and highways, up 36%, to $1.4 billion; hospitals, up 34% to $976 million; and schools and colleges, up 25% to $1.2 billion.

Meantime, the University of Illinois Flash Index-a weighted average of Illinois growth rates in corporate earnings, consumer spending and personal income, with 100 being the diving line between contraction and expansion-rebounded to 106.5 in January from 106.1 in December. All components were up in January.

"We are worried about how the escalation of prices in 2005 and 2006 may affect 2007 construction starts," says Rick Blair, manager of business development in Chicago of New York-based Turner Construction Co.

"Owners set their budgets a while back, and they were not adjusted for that escalation."

St. Louis and Indianapolis saw losses in starts-4%, to $5.3 billion, and 21%, to $4.8 billion, respectively-but one contractor is "not worried at all."

"Starts are down because of the large projects started in 2005," says Jeff Hagerman, president of Indianapolis-based Geupel DeMars Hagerman and executive vice president of sister Hagerman Construction Co. of Fort Wayne, citing the airport and Lucas Oil starts. Others echoed his comments.

Indeed, the numerous projects-and potential for others-have contractors in Central Indiana concerned about the possibility of a labor shortage. In late 2005 the Indianapolis-based Indiana Construction Roundtable issued a report, "The 2005 Craft Labor Study," that warned of a shortfall of 1,450 workers by 2008. An updated study is under way.

St. Louis contractors are also concerned about staffing for projects.

For example, Walton Construction owner Frisbee says his firm needs the workers because it had a 50% increase in backlogs in January over the comparable month in 2006.

Contractors say they are hiring people.

"We would definitely be looking to hire in both the field and office," says Turner's Blair. "The past couple years it truly has been a talent war out there for the best people."

Architecture Billings Up

Other indices point to a strong market.

For instance, the Washington, D.C.-based American Institute of Architects announced that its January Architecture Billings Index-a survey of work-on-the-boards billings at architecture firms-was 54.4 for the Midwest, with a score above 50 indicating an increase in billings. Nationwide, the index was 57.9.

"You have to go back 26 months for the last negative score for the index," says AIA chief economist Kermit Baker, who released the data. "So far, the last three months have seen much higher levels of demand for design services, and that's likely to translate into sustained levels of high activity in the construction industry."

Construction-material costs are still high, as they were during the 2004-2006 boom, but the rate of increase is flattening, according to the Bureau of Labor Statistics. The producer price index for construction materials and components climbed 3.3% in 2006 but was greater than 7% during some months of the boom in part because of the torrid housing market and oil prices. The overall PPI in 2006 was up just 0.2%.

"You're starting to see a leveling off in material prices," says Michael Meagher, senior vice president of Chicago-based James McHugh Construction Co.

Stability marks the national economy. The Council of Economic Advisers reported that the inflation-adjusted gross domestic product-the total value of all goods and services produced-was an above-average 3.4%. The average is 3%.

Nationwide, the unemployment rate went down to 4.6% in first-quarter 2007 from 5% in late 2005, according to the U.S. Department of Labor.

Top Contractors 2007>>


Sidebar 1

Midwest City Starts

Milwaukee and Chicago saw construction-start increases in 2006,
but Indianapolis and St. Louis had declines.

Ups and Downs

Commercial and infrastructure are strong in the Midwest,
while residential is declining.

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