Local 2009 Outlook

Hope, Heartache for Nation, Economy and Construction

by Sarah Klose

President-elect Barack Obama is ushering in hope in the United States at a time when economic problems continue nationwide and commercial construction forecasts darken in the Midwest.

“We won’t be anywhere near the huge volume we’ve seen in the last four to five years,” says Karl Kloster, president of St. Louis-based contractor McCarthy Building Cos.

Mostly Gloomy

Projections and indices indicate that the industry is heading into a down period and possibly a long-term recession.

For instance, the American Institute of Architects’ semiannual Consensus Construction Forecast projects a 6.7% drop for 2009 nationwide.

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In addition, the AIA’s Architecture Billings Index, a nine- to 12-month glimpse into expected construction spending, fell from 49.5 in September 2007 to 45.2 in September 2008 for the Midwest region. A level below 50 indicates a decrease in billings.

“Many architects are reporting that clients are delaying or canceling projects as a result of problems with project financing,” says AIA chief economist Kermit Baker.

The University of Illinois Flash Index, a monthly barometer of the state’s economy, spiraled down to 100.6 in October to the lowest level in four years and barely above the 100 level indicating economic growth. Three components of the index—sales tax receipts, individual tax receipts and corporate tax receipts—were down compared to 2007.

“The firewall between the financial sector and the real economy that many had hoped would keep the damage from spreading is now fully breached,” says economist J. Fred Giertz, who releases the Flash Index.

Meanwhile, the triple whammy of shrinking economic growth, failing housing and tightening credit markets is slamming the door on construction starts.

“Banks are in a position where they don’t know how to package loans because they are so tied up with other (troubled) financial institutions,” says Kirk Warden, senior vice president and partner of St. Louis-based contractor Clayco.

Bonds, loans and capital are needed for contractors to continue breaking ground and providing jobs.

Economist Ken Simonson of the Associated General Contractors of America says job losses will accelerate unless credit markets open up. In fact, the Bureau of Labor Statistics reported that construction lost 35,000 jobs nationwide in September. Employment levels in architecture and engineering services fell as well.

Construction Starts Down 11%

Data from McGraw Hill Construction show that construction starts dropped 11%, to $22.2 billion through third-quarter 2008 vs. the comparable period in 2007, in the top four cities where Midwest Construction circulates. Chicago was down 12%, to $13.6 billion, and St. Louis fell 32%, to $2.7 billion.

But there were some bright spots in part because of megaprojects. Indianapolis was up 7%, to $4.6 billion, partly because of work on a $250-million convention center. Milwaukee grew 1% to $1.4 billion because contracts continue to be activated on the $2.3-billion Oak Creek Generating Station power plant.

Residential construction was down drastically. It dropped 64% in Chicago to $2.6 billion. St. Louis fell 45% to $1.1 billion, Indianapolis fell 33% to $1.0 billion and Milwaukee dropped 15% to $459 million.

However, nonresidential construction remained strong in Chicago, up 48% to $8.8 billion, partly because of strong hospital construction. In Indianapolis, it grew by 25% to $2.6 billion due to hospitals, hotels and recreational facilities. Milwaukee’s 29% increase, to $665 million, was driven by growth in warehouses, manufacturing plants and hospitals. (Only in St. Louis did nonresidential construction fall, 19% to $1.2 billion.)

“Retail and speculative commercial is down, so builders are migrating to K-12 and other public sector projects” within the nonresidential arena, says Michael Bohn, senior vice president in the Chicago office of Providence, R.I.-based Gilbane Building Co.

But nonresidential construction could follow residential into the sinkhole in part because the commercial market generally lags behind the residential market one to 1.5 years.

Data released by the Census Bureau shows that power plants, hospitals and higher education are growing at a much slower rate. Local construction spending could fall as states announce budget shortfalls due to decreased tax revenues. Highways and schools are in jeopardy because the fuel and property taxes they rely on have dipped substantially.

Lighten Up

Individual megaprojects are continuing and providing contractors with work.

“We are working on a coal-fired power plant in Springfield, Mo,” says Thomas Boldt, CEO of Appleton, Wis.-based The Boldt Co. “And, we are trying to meet the demands of our green owners. The technology of choice is wind turbines, and we have been installing 300-ft, 1- to 1.5-MW turbines in Indiana and Wisconsin.”

Gilbane is working on projects that were given the green light on Election Day: an $89-million project to update Joliet Junior College in Illinois and a $153-million project to expand Harper Community College in Palatine.

Moreover, suburban Chicago voters approved referenda for street and sewer improvements, high school renovations and community college additions, but rejected referenda for library renovations, community center additions and aquatic center installations.

The market has some strength because some companies built a backlog of work during the economic expansion earlier in the decade and are hiring selectively to seek and complete projects.

Rick Blair, manager of business development in Chicago for New York-based contractor Turner Construction Co., is pointing to preconstruction work.

“There’s a lag time that is substantial before we put a shovel in the ground,” he says. “We’ve worked hard to distinguish ourselves in health care, higher education and K-12 construction, so we are well-situated for 2009.”

Turner plans double-digit increases for college graduate hires in engineering and construction management, Blair says.

Clayco’s Warden says his firm is hiring business development people and procurement staff to be smarter about materials and contractors.

Meanwhile, material prices have ceased their rapid increases. Petroleum prices have dropped. The prices of steel, lumber, copper and metals have stabilized or fallen as worldwide demand has fallen off.

“There will be a lot of people hungry and wanting to build jobs, and they may become more aggressive by lowering prices and margins,” Warden adds.

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