September 1, 2011

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Rough Road Ahead

Utah’s Commercial Construction Industry Still Searching for Recovery Signs

Gaylen Webb

September 1, 2011

“We have to figure out how to get leaner,” says Wadsworth. His company, which also does heavy highway construction, has had a significant role in the I-15 Core project in Utah County; however, that project is now more than 50 percent complete, and the Utah Department of Transportation (UDOT) is dropping its highway construction budget from $1 billion to $250 million—a massive 75 percent drop. Hence, Wadsworth is bidding on $50 to $350 million projects in Arizona. The bigger projects weed out a lot of the smaller players and help his company remain competitive, he says.

As the commercial construction industry bumps along the bottom, Layton says some general contractors and subcontractors in the state are taking on historically unacceptable levels of risk in order to get work. “That will have repercussions down the road because there are no margins in the work and the contractors will be unable to perform at acceptable levels,” he explains. “There are huge amounts of risk with all of the low bids and the tough times will continue until that is sorted out.”

The tough times will also continue until the residential construction sector improves. Thorn notes that the commercial and residential construction sectors are interrelated. Consequently, commercial construction was hammered even further when residential construction cratered.

“When families aren’t buying homes, schools aren’t being built, construction of retail centers stops, and all of the peripheral work that comes from residential construction disappears,” he explains.

Thorn believes the massive amounts of excess residential inventory, combined with banks that have been hesitant to lend to residential buyers, is slowing the recovery of both residential and commercial construction. “We have really had a tough go of it, but we are battling our way out,” he adds. Nonetheless, he doesn’t see residential construction coming back in a big way any time soon. In fact, the state could see another surge of excess inventory from foreclosed homes, which would further exacerbate the recession for both residential and commercial construction.

The future doesn’t look completely dark. Layton says credit is becoming more readily available and lenders are once again lending to good borrowers for good deals. “Two years ago, lenders were not lending for any deals. It was out of control,” he says. “But now some projects are moving forward and we are seeing some moderation in the credit market. In fact, there are local banks that have lent sizeable money on some commercial projects.”

Construction in industrial space—especially the bigger box projects—seems to be the healthiest sector in terms of activity, he adds. And while there is little, if not zero, new spec office and retail going up, Layton expects those sectors will improve as the credit market opens up.

Wadsworth adds that a few out-of-state office clients and retail tenants are poking around, looking at Utah. “So we are seeing some possible growth down the road,” he says. “There has also been a slight increase in bidding, but the industry is extremely competitive right now.”

Thorn says the NSA Data Center project is a huge shot in the arm for AGC members. “A small city of construction trailers are onsite now and literally thousands of construction workers will be involved,” he continues. “This is one of the biggest construction projects taking place in the Western U.S.”

Thorn also points to a few other significant construction projects as good news for the struggling industry. They include the construction of new Granger and Olympus High Schools and other school projects; Adobe’s new building in Lehi; two projects on the University of Utah Campus—the new Utah Science Technology and Research (USTAR) Sorenson Molecular Biotechnology Building, being constructed by Layton, and the Huntsman Cancer Hospital expansion, an Okland Construction project; the federal building/courthouse in downtown Salt Lake City (also an Okland Construction project); a new water treatment plant being built in Riverton area by Alder Construction and PCL; and major construction work scheduled for Kennecott Copper.

“From the AGC’s standpoint, I think we are survivors and we have endured what we believe to be the worst of the recession,” Thorn says. “We have seen the bottom and are waiting to see if a recovery can be sustained. I guess we are cautiously optimistic about the future and hope to see some improvement over the next months and quarters.”

Ever an optimist, Thorn believes the depressed market conditions have actually created an excellent time for new commercial construction. “The time to build is right now. It truly is. The capacity is there, the equipment and manpower are just waiting to go to work, and pricing is very competitive. Plus, commodity prices are going up, so if companies want good value they should start building right away. It’s time to pull the trigger.”

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