Chicago Outlook

Ups and Downs Mark Windy City Market

by Craig Barner

The construction market in the Chicago is on a seesaw ride.

Commercial construction is at the high end of start activity. Through the first half, the segment was up 10%, to $3.7 billion, compared with the same period a year ago, according to McGraw-Hill Construction, publisher of Midwest Construction.

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But on the down side, residential dropped 36%, to $4 billion; infrastructure declined 10%, to $1.8 billion. The weakness of those markets is leading contractors to focus on commercial market.

“Commercial is strong,” says Michael Bohn, senior vice president and regional manager of the Midwest for Providence, R.I.-based Gilbane Building Co., a general contractor. “We don’t see it tailing off any time soon.”

Given the solid commercial market, trades employment is steady, says Thomas Villanova, president of the Chicago & Cook County Building & Construction Trades Council, an umbrella organization of 24 union affiliates.

“Everybody is at or about full employment now and has been for awhile,” he adds.

The local market mirrors the national trend. In May, employment in three nonresidential categories—nonresidential building, specialty trades and heavy and civil engineering—climbed 2.4% over the previous 12 months or faster than the 1.4% gain in overall nonfarm employment, according to the Bureau of Labor Statistics.

In Chicago strong commercial segments include dormitories, up 271%, to $112 million, and hotels, up 186%, to $393 million.

The start of an 811-bed, 391,000-sq-ft undergraduate residence hall at the University of Chicago accounts for the strong showing in the dormitory market. Major, downtown hotel projects include the hotel portion of the 92-story Trump International Hotel & Tower and the 89-floor Waterview Tower, which will house the Shangri-La Hotel & Resorts.

The hospitality segment is robust for other reasons, says Paul Hellerman, president and chief operating officer of Chicago-based Bulley & Andrews LLC, a general contractor.

“A lot of hotels are upgrading their facilities,” he says. “There is a lot of competition, and they’re trying to get up to speed and make them more attractive for users.”

Other strong markets are amusement and recreational buildings, up 88%, to $191 million; schools and colleges, up 50%, to $920 million; and stores and restaurants, up 35%, to $609 million.

“We’re still seeing a lot of activity in higher education and health care,” adds Rick Blair, manager of business development in Chicago for New York-based Turner Construction Co., a contractor.

Office construction is not experiencing as strong an upturn as others—up 10%, to $395 million—but that the sector is on the rise is significant because office construction was down or flat during the overall surge in activity from 2003 to 2006. Projects driving the segment include the $440 million 353 N. Clark St.; the $230 million 350 N. LaSalle St.; and the $115 million 111 W. Illinois St.

Whatever the project type, owners are interested in sustainable construction and design, Blair says. The marketing benefits of LEED accreditation is an attractive business option.

Market Down Overall

Overall, construction starts in the Windy City through first-half 2007 were down 18%, to $9.5 billion, the data show.

The relatively steep drop is being heavily affected by the decline in single-family-home construction, a trend locally and nationwide.

“We’ve seen residential certainly come down,” Turner’s Blair adds.

Nationwide, residential building and specialty trades employment had dropped 3.9% through May, according to the Bureau of Labor Statistics.

In opposition, the downtown condominium market continues to be steady, though signs of softening are starting to appear.

Gail Lissner, vice president of Chicago-based Appraisal Research Counselors Ltd., says 3,700 for-sale condominium units are expected to be delivered this year in the Loop, down from the 4,150 units in 2006. Moreover, multi-unit housing starts in the metropolitan area overall declined in the first half, 35%, to $1.6 billion.

New downtown residential projects include the 150-story Chicago Spire—projected to be the world’s second-tallest building—the 86-story Aqua tower and the 47-story ParkView condominium.

Though infrastructure starts were down, many observers say this could change.

“I am sure a lot of bridge work is coming as a result of the [Interstate 35W] bridge collapse in Minneapolis,” says Gilbane’s Bohn.

Reverberations from the disaster are being felt Illinois where Gov. Rod Blagojevich directed the Illinois Department of Transportation and Illinois Tollway to conduct inspections of critical bridges. Inspectors will examine bridges that are similar in design to the Minnesota bridge, are under construction or carry high volumes over waterways.

Other indices paint a steady outlook for construction in Chicago and the local economy.

For instance, the American Institute of Architects’ Architecture Billings Index, a key indicator of future construction activity, was 53.6 in June in the Midwest, the latest score available. Though the score was below the national average of 59.3, it was still above 50, the line indicating an increase in billings.

“It seems the architects are busy, and that’s good for construction,” adds Bulley’s Hellerman. “If they’re drawing, we’re going to have something to do in six months.”

In addition, the University of Illinois Flash Index, a barometer of the economy in the Land of Lincoln, dipped to 106.7 in July from 106.8 in June, but remained above 100, the dividing line between contraction and expansion. Two components of the Flash Index—individual and sales tax receipts—were up, while corporate revenue was essentially unchanged.

Impact on Contractors

Years of market growth are being felt in the operations of individual contractors, including upward movement in fees, sources say. The change is significant because previously fees were stagnant due to intense competition to land jobs.

“There is pressure from the bonding companies for construction firms to be more profitable,” says Gilbane’s Bohn.

Contractors say they are hiring to meet the demand for work, especially in commercial building.

“There is a lot of competition among firms for the limited number of qualifying graduates,” Bohn says. “You’re seeing some firms offering signing bonuses and relocation bonuses for graduating seniors. In the past you didn’t see that.”

Backlogs are up, too. “Our backlog is about double [last year’s total],” says Bulley’s Hellerman. “It is way ahead of plan.”

SIDEBAR 1

Chicago Starts
(through second quarter; in billions)

Commercial starts are sustaining the construction industry in Chicago. Residential and infrastructure are down.

SIDEBAR 1

Midwest Design Index
(score above 50=increase in billings)

The Midwest has scored above 50 each month this year, pointing to an increase in work for contractors in the region.