Top 2008 Contractors

Battle in Iffy Market Continues in Midwest

by Craig Barner

Like battle-tested soldiers, Midwest construction executives are showing dogged determination to fight for prosperity in the face of an adversarial economy.

“Our backlog is 20% higher than we’ve ever seen in our history,” says Corey Brumbaugh, vice president of business development of Neenah, Wis.-based contractor Miron Construction Co. “Our perspective for this year is positive.” He cited numerous casino projects in Wisconsin as contributing to the company’s good fortune.

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Upbeat assessment aside, there are reasons for contractors to hunker down, with the most significant being the effect of the subprime lending and foreclosure crisis on the overall economy and consumer confidence. Estimates indicate that there is $1 trillion in subprime debt nationwide, causing creditors to tighten lending requirements.

Even those contractors not involved in residential construction are confronting the issue.

“The portion of our business that is residential is in high-rise condominiums, and there is no doubt it (the subprime crisis) has affected that market,” says Rick Mattioda, president of Hoffman Estates-based contractor Leopardo Construction Co. “The lending requirements, [number of] presales and those things in the condo market have become more difficult to meet because of the credit crises.”

Mattioda says that, as a result, he carefully evaluates residential developments to ensure they have adequate equity and are in desirable locations when considering whether to bid on them.

Dwelling on Residential

Not surprisingly, residential starts have fallen precipitously in the four states where Midwest Construction circulates.

Since 2005, when the region likely peaked with $33.3 billion in starts, the segment has declined 31% to $22.9 billion in 2007, according to McGraw-Hill Construction, the magazine’s publisher. Moreover, the region is projected to fall another 8.7% in 2008 vs. 2007, to $20.9 billion.

Single-family housing has tanked in Chicago, the biggest market in the magazine’s region. Housing starts declined 25% during 2006 and by an estimated 35% in 2007, bringing starts down to 15,539 units about 51% below the 2005 peak, the data show.

The condo market has experience a mixed fate. Multifamily housing actually grew 27% in 2006 to 25,268 units but fell 22% in 2007.

Not surprisingly, four of the 10 biggest projects in Chicago have a multifamily residential component the $1.5 billion Chicago Spire Condominium Tower that is projected to be the nation’s tallest building; the $410 million Mandarin Oriental Hotel & Condo Tower; the $210 million Legacy at Millennium Park; and the $197 million Aqua Building.

“The residential markets in downtown Chicago have been important to us, as well as some projects we have on the horizon,” says Joe Skender, president of Palos Hills-based contractor Skender Construction Co.

Steady as She Goes

Aside from the residential market, the contracting market in the four-state Midwest is expected to hold steady with both declines and increases.

Projections indicate that the region overall will experience a 1% decline in starts, to $66.7 billion in 2008 from an expected $67.3 billion in 2007.

Many nonresidential markets will have slight increases or decreases, but one perennial strong point in the region, education building, is expected to jump 22%, to $5.1 billion as numerous suburban school districts and universities continue to build.

Other nonresidential markets expected to be strong include health care, corporate interiors, offices, casinos and industrial/energy, contractors say.

“The biggest dynamic going on are massive industrial projects in the region,” says Karl Kloster, president of St. Louis-based contractor McCarthy Building Co. “It’s unusual to have this much going on simultaneously.”

He cited the $900 million Holcim (US) Inc. cement plant south of St. Louis; the $2 billion Conoco Phillips refinery project in planning in Granite City, Ill.; the $1 billion Prairie State Energy Center in Lively Grove, Ill.; and numerous ethanol plants and clean-air-compliance projects. Farther north, BP is planning a $3 billion expansion of its refinery in Whiting, Ind.

The engineering/infrastructure market is also expected to be a good one in the Midwest and rightly so. The nation’s infrastructure is a concern in an era of busted levees, exploding steam pipes and falling bridges.

Infrastructure construction is projected to increase 16.8% in the four-state Midwest, to $12.9 billion. Highway and bridge building alone are expected to increase nearly 20%, to $6.5 billion.

“There is some significant infrastructure work going on,” Kloster adds.

Aside from numerous interstate rebuilding and similar projects, major programs that will be starting soon include the Indiana Department of Transportation’s $12 billion Major Moves highway-construction program and the Missouri Department of Transportation’s Safe & Sound plan to rebuild about 800 bridges statewide.

Ups and Downs

Several indicators show that there are plusses and minuses to the current market.

Nationwide, construction spending in 2007 totaled $1.16 trillion, down 2.6% from 2006, the Census Bureau reported.

Another negative is that construction has lost 284,000 jobs since a peak in September 2006, according to the Bureau of Labor Statistics. The largest losses are in residential construction.

But some regional contractors who focus on commercial construction say they will hire this year.

“We are definitely hiring in both the field and the office,” says Miron’s Brumbaugh.

Moreover, as noted in previous issues of Midwest Construction, certain regional geographic markets are experiencing a shortfall in labor, especially Indianapolis and St. Louis.

“I think you’ll see shortages in the trades that do industrial work,” says McCarthy’s Kloster. He cited iron workers, pipefitters and electricians.

Trying to grease the economy more, Congress passed and President Bush signed in February a fiscal “stimulus” bill of temporary tax cuts for business and individuals.

One key provision is that contractors that buy no more than $800,000 of equipment in 2008 (up from $510,000) are able to deduct immediately the first $250,000 (up from $128,000). Also, businesses of any size may expense half of equipment bought in 2008.

While the bill will help contractors that plan to buy equipment, it does not contain provisions that would increase demand for construction.

Funding for construction is key in part because the Office of Management and Budget and the Congressional Budget Office are projecting a shortfall in the Highway Account of the federal Highway Trust Fund in 2009 unless Congress adds money or waives the requirement that it be fully funded. Otherwise, current law could trigger a cut of $1 billion to $3 billion in federal aid to state highway programs and a reduction in new construction contracts.

Two other key indices show a middling market in the Midwest.

The American Institute of Architects’ Architecture Billings Index was 51.5 for the Midwest in December, with a score above 50 indicating an increase of billings. The indicator has a nine- to 12-month lag between architecture billings and construction spending.

And, the University of Illinois Flash Index, a barometer of the economy in the Land of Lincoln, broke a six-month slide with a slight increase in January. The index rose to 103.8 from the December reading of 103.6, the first time since June (106.8) that the Flash Index has risen over the previous month. A reading above 100 indicates an expanding economy.

“In most months this would be a relatively insignificant result,” says J. Fred Giertz, the Illinois economist who released the data. “However, with the threat of a looming recession, this is a case of ‘no news is good news.’ As of now, the Illinois economy does not appear to be in recession.”

SIDEBAR1

Midwest* Starts Projection (in billions of dollars)

The four-state Midwest is expected to see a slight decline in construction starts in 2008 over 2007.

SIDEBAR 2

Chicago Area Starts (in billions)

Chicago, the largest metropolis in the Midwest, is expected to see the second consecutive year of declining starts.

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