Articles
9 February 2012

Industry Outlook

Construction

by Utah Business Staff

09 February 2012—

 Utah’s commercial building and construction industry faced a tough 2009, and industry leaders predict 2010 is going to be even tougher. Our experts discussed financing troubles, high vacancy rates and head-to-head competition. Though the industry is still in the midst of the economic storm, our leaders discussed bright spots including downtown Salt Lake development, the NSA project and highway construction. 

We’d like to give a special thank you to Rich Thorn, president of Associated General Contractors Utah, for moderating the discussion, and to Holland & Hart for hosting the event. 

Participants:

Back Row: Bob Tempest, Tempest Enterprises; Rich Thorn, AGC; Mark Bodell, Gramoll Construction; Gordon Staker, Staker Parson Companies; Ed Cooper, Ash Grove Cement; 

Bill Garff, Garff Construction; Lonnie M. Bullard, Jacobsen Construction; Jody Jenkins, Cache Valley Electric; Carl Tippets, Pentalon; Jason Kilgore, Kilgore Paving; DeAnn Geary, Geary Construction; David Zimmerman, Holland & Hart; Terry Buckner, The Buckner Company; Rick Higgins, Mountain States Fence; Chris Smith, Layton Construction; Dave Hogan, Wadman Corp; Matt Klein, Klein’s Custom Countertops; Tyler Dabo, Utah Business; 

Thom Morgan, Morgan Asphalt


What is the current state of Utah’s commercial construction industry? How did the industry fare in 2009 and what are your predictions for 2010?

 

SMITH: I think the commercial building sector is living off its backlog from 2007 and 2008. 2009 was a very tough year, and 2010 is also going to be a tough year. I think we’re just in a recovery mode. I think that commercial building has bottomed out and things are going to be looking up, but 2010 overall is going to be a tough year.

 

MOORE: Big-D Construction has had three pretty incredible years of great construction and a lot of success. Many of us here had a backlog of work two or three years ago, but now the valve of work has kind of shut off. From December of 2008, the major projects stopped. Many developers and others who tried to get a loan from a bank just did not get it. Overall, I think we’re all facing some pretty interesting times right now that we have never faced as long as I have been in this industry. And while that is doom and gloom, everyone is working hard. It’s a tough world out there. There are not many markets real active other than the federal government, which is our money out there being spent to try to stimulate the economy.

 

How did the state’s utility industry do in 2009 and how does 2010 look?  

 

TEMPEST: We felt the slowdown sooner than others because 2009 was a tough year for the utility industry. Last year at this time, I thought I would be a little more optimistic about 2010, but I agree that 2010 is probably going to be the toughest year we’ve seen. And we’ve talked to many people in our industry and around the state, and it seems to be the consensus that 2010 is going to be tough. If we can get through the next 12 months, we will be OK, but it’s going to be very difficult.  

 

Highway construction is every-where across the state. What do all of those projects mean for the highway construction industry in 2010?

 

KILGORE: The industry has benefited from stimulus money during 2009, but 2010 is not going to be as strong. The Mountain View Corridor is a huge project that’s going to take a big chunk of UDOT’s money, but the work is only going to go to a couple of contractors. So from the highway side, I think it’s going to be a lot more difficult in 2010 than in 2009.

 

STAKER: I have to echo that feeling. UDOT’s money is going to be spent, a large portion of it, on a couple of significant projects. So, we are going to see a challenging 2010. Backlog is virtually nonexistent, and that’s a big challenge.

 

TIPPETS: I’d also echo what’s already been said. It’s a reflection of the financing industry. There is a lot of demand from the developer side, but funding is all but impossible to achieve and, consequently, lots of people are running numbers and wanting to put together projects, but very few projects are ever going to go in the ground.

 

GARFF: For small contractors like us, our backlog dried up a year ago. The commercial side of our business vanished a year ago. If it was not for government work, we would have very little to do right now. There are some big mega projects that are keeping the construction statistics up, but if you didn’t have those big mega projects, it would be really sad. There is a national unemployment rate in construction of around 20 percent. Utah’s unemployment rate is similar, and it would be really bad if we didn’t have the mega projects. 

 

How is Southern Utah’s commercial construction industry handling the economic troubles? 

 

WATTS: St. George has been hurt probably worse than anywhere else in the state. We’ve got an overabundance of commercial office space, retail space, residential and building lots that will take five to six years to absorb, even in a really booming economy. So, I think we are done building for awhile. Commercial construction is done for the foreseeable future, except for Washington County School District’s projects and Dixie College—so, government projects. But all private work is gone. 

 

GARFF: An indication of the hard times is the abundance of bidders. I recently bid against 14 other companies and for another project I bid against 24. It’s extremely risky because you’re basically bidding against somebody else’s mistake. 

 

SMITH: I think there is ray of hope and that is that our state is going to be the home to one of the largest projects in all of America—the NSA Data Center.  Construction will happen this time next year, so we’re about 10 to 11 months away from having approximately 1,000 people employed on a single construction site. There will be a 70 percent small business requirement for construction of the center. So, the project is going to employ a lot of small businesses and it’s going to employ a lot of people. I think the project will also create a lot of spin-off activity. It will create a lot of excitement in our industry and kind of take the cloud off our state.

 

Utah’s unemployment rate is 6.3 percent, but the state’s construction industry is at about 20 percent. When do you think project hiring will pick up?

 

MOORE: If you look at 2006, 2007 and 2008, there were increases in our industry that were pretty amazing. We were all pretty darn busy. We were up 14,500 in 2007, about 13,600 in 2008 and then in 2009 we started dropping off a bit again where projects were not in the pipeline. Then all of a sudden we tapered off in 2009 to about a 20 percent drop in where we were. Utah’s construction employment has seen about a 20 percent drop. But, if you follow some of the stats in some of the larger states around us, their employment is seeing around 23 to 24 percent drop. 

I agree that the NSA Data Center project coming up is going to be great for the state. It’s going to take a lot of folks and will help them get back to work. But the interesting thing is that it’s really not going to change the big picture. All it does is change a big stat because you have a mega project here. But, what about the rest of Utah? That is what we have all got to be concerned about. We are going to get a few folks busy, but the fundamental thing is: How do we talk to our representatives and say, “Gosh, you know what, here are the stats. Here is what is going on. How can we get tax relief? How can we do the things that are going to create employment and stop the unemployment?” I think that those are the things we need to be pushing hard on.

 

What are the big challenges you are seeing in the private sector side? Do the problems stem from lack of financing?

 

BULLARD: I don’t think it’s a banking problem. It’s an underlying demand issue. At this point, the financers don’t understand how to value anything. No one really knows what projects are really worth. Where do they set the values? Demand aspects of a project need to be looked at. For example, they should go underneath the financing aspect and look at whether there are tenants to take the office space. Or, are people buying goods that would make those tenants successful? Or, are new family formations looking for places to live? But, again, it all relates back to employment. If people have jobs, they are going to be renting apartments and buying homes. The fact that they are not means that they are living with people because of employment factors. 

I don’t think it’s fair to blame the construction slowing on one sector, the banks, for not financing projects. I think it’s an underlying problem with whether those projects are viable based on demand issues. We’ve all been living on a bubble that existed in our economy that it takes time to squeeze out what happened and we’re suffering through that.  

 

CAMPBELL: Financing is a real problem. We put a lot of work in place in 2009 that has not started. If the market would loosen up and companies could get financing, we’d be in good shape. So I think that is our biggest problem—we simply cannot get financing. A lot of the retail mortgages were 5 year or 10 year calls, and that has not even taken place, yet. That is going to affect the market starting in 2010 and 2011, and so it’s really going to put a damper on any new loans. The Federal Reserve is requiring the banks to have a higher reserve. So, I believe the banks don’t have the money to lend because of the reserve requirements. At one time, a $10 or $15 million loan was taken on property that was worth $20 million. Now the property is worth $10 million and the developer is going to have to come up with another $5 million just to keep it. It’s a big problem and I think we are putting our heads in the sand about it. 

 

WATTS: What Lonnie [Bullard] said is absolutely on target for our market in St. George. There is nobody asking for any bank loans down there anyway because the vacancy rates are so high in office, retail and also industrial. I’d say we have probably a million square feet of industrial office for lease out at the Pierce Industrial Park, which was the star of the show as far as our private construction business was concerned. I’m not sure there is a lot of demand for loans right now because there is so much vacant space.

 

EVANS: I think one of the issues that the lenders and the banking industry is struggling with right now is that they have so much debt on their books that it’s hampering their vision and ability to look ahead. 

Another thing that we’re seeing is the underlying legislative issues. It’s important to help the cities and the municipalities understand the complexities of the market right now. There are a couple of projects out there that the municipalities have placed constraints on from the standpoint of certain markets. A project might be viable if they relook at it, be more flexible and take certain components out of it. But trying to build a whole bunch more condominiums in certain markets, for instance, is just not viable right now. So it’s also helping our cities and our municipalities and the folks in those positions also understand what actually is viable in today’s economy and not putting constraints on projects that you actually can achieve.

 

GEARY: I think that people have learned that we actually need to build projects that will be used, build houses we live in. I see this stimulus money going into good projects. For example, we just worked on Coalville’s Main Street, a project that hadn’t been done for 50 to 60 years and needed to be done. So, the stimulus money seems to be helping. The only reason I’m working probably is because of the government’s requirements to receive the stimulus, so the government is helping my company. I’d also like to point out that I’d like to see the stimulus money that is coming here stay with the Utah companies and benefit the Utah workers versus being exported to out of state companies.

 

JENKINS: We work with a lot of different sectors in different areas of the country. So it’s been very interesting to see how the different sectors in areas of the country have reacted to this economic slowdown. I think the first and hardest sector hit was the industrial sector. The sector has been hit very hard, but I think Utah has been behind the curve and now it’s catching us. We had a relatively good year in 2009. We’ve had as many people working here in Utah as we’ve ever had. That being said, our backlog is much like everybody else’s—it’s very slim. I think that everybody, even on a personal level, has taken a hard look at how they spend their money. Even companies that have the capital to spend have held up, waiting to make sure that the project is viable. 

I also think commercial is going to continue to soften a little bit. Residential will probably be the first to come back. As far as the industrial sector, I think it will continue to soften slightly, but it is my belief that we are nearing the bottom. I think it’s going to start coming back. It’s going to be a slow climb, but I’m very optimistic into the future and where we are going and that work is going to continue to improve and grow. I agree that the NSA project is a fantastic project coming down for Utah construction. But the next 10 months are going to be nothing but expenditures for Utah companies to try to secure that work. So 2010 won’t be a great year, but 2011 should be very good. 

 

What are some of the bright spots in Utah’s commercial construction industry? 

 

BULLARD: The projects downtown provide a good foundation for the market as a whole. It’s not just the few general contractors that are involved with it, but subcontractors and suppliers. There’s a lot of activity on that project that would make Salt Lake a very different marketplace if it was not going on and if the owner had not stood up to the economic conditions and decided to move ahead. And I think the NSA project will do the same thing. 

The City Creek project is scheduled to finish sometime in early 2012. So, you have a couple more years of a lot of activity downtown. But, one project is not going to make the market, and you are going to have essentially some rolling layoffs associated with that project. As the concrete portion is complete and there is nothing in the pipeline, then the fact that the project has two years to go doesn’t mean a lot to the concrete workers that have no place to go when it’s done, and it doesn’t mean a whole lot to the other trades as well.

 

MOORE: In regards to City Creek, we are finished with the Key Bank renovation piece and the excavation. So, we went through what Lonnie [Bullard] is talking about. The end result was we had 680 employees and we are now down to about 500. I think Lonnie [Bullard] is right: What is going to happen here as these projects close up and we start to get into finishes and some of our concrete partners who are working here are going to stop pouring concrete before long, and you are going to see a big impact on that project. 

The only large project coming up is NSA, and that is going to keep a few folks busy, but it is not the savior of our industry for the long term. There are some other projects and there will be some opportunities there for the large contractors and probably smaller contractors, but it’s not the answer. Overall, construction is on sale, too. 

 

EVANS: In regards to City Creek, if you look at different markets in other states, it’s pretty much an exception to the rule to see a project of that magnitude going forward in today’s economy. But like Lonnie [Bullard] said, it does finish in 2012. We’ve already turned over major portions, like the parking garages, and we’ll actually start turning buildings over in the spring of next year. So we’re at the peak coming down as far as the manpower standpoint, and we’ve already hit the point where craftsmen and labor are having to be dealt with. And then we’ll start hitting the management level as we turn the actual buildings over. It was a very good thing in 2009, but it’s now on the down curve. We’re going to be dealing with the repercussions, at least internally, from a management standpoint of what do you do with all these people now where obviously the work is not there to take care of all of them. 

 

How is the concrete industry faring?

 

COOPER: Nationally and locally, we think the industry is going to experience a U-shaped recovery—probably down at the bottom and then it will spike back up. There is still a lot of work that will not impact 2010 or 2011. I read that construction was off $600 million worth of wages during 2008. That was from October 2007 to October 2008, representing about 17,000 jobs lost. I compared October 2008 to October 2009 and we are down 29,900 jobs. It’s going to be a long time before we get back to that number of jobs.

 

Beyond lack of projects, financing and the unemployment rate, what other challenges is the industry experiencing?

 

ZIMMERMAN: The issue that I’ve seen a rise in is any claim that has insurance funding on it—companies with those issues should plan on a battle. I’m spending a lot more time making insurers pay very straight forward, straight up claims. We are seeing insurers taking unrealistic positions simply to manage cash flow. I see them looking at litigation as an opportunity to manage cash flow. 

 

BUCKNER: I’m seeing now where projects had problems in the past and when they were financially stable they would just solve the problems. They are now saying let’s go down to our subs and try to get recovery from all of our subs. So they’ve become the source of funding to recover from their projects that are in trouble. 

 

BODELL: What we’ve seen is that even some of the smaller owners are at least going to select bid lists, and I believe that is driven by the fact that they don’t want to go through the controversy with their general contractors. So what we are seeing on some of the smaller municipal markets or the municipal entities is they will go out and go through a variation of the value based selection process. The value based selection process that the state is using has worked, in our opinion, as far as the state being able to get the best value for their dollar. If I was an owner, I would not be putting anything out to just an open bid process because it probably wouldn’t be coming my way because the low bidders very possibly made a mistake to get the project.

 

HOGAN: In 2008, we bid four hard bid jobs that we just felt like we needed to be on because of an architect relationship or something like that. In 2009, we bid 51. That is not where you want to be, but you have to do what you have to do to get the work. From the owner’s standpoint, the smart owner right now would bid the job out as a hard bid and not take the low bidder, because the competition is insane. We are all going head-to-head on a daily basis. Though the competition is tough, the low bidder isn’t always the best bidder. When your hard costs don’t add up to the bid number, there is a problem. I think there are owners out there getting a tremendous value right now, however, it is risky for them. As far as turning a profit on a job, it’s difficult. There are profitable jobs, however. By and large, we’re looking to keep work and we’re down to our core people. What we have left are fantastic people. So we are looking to keep that unit together, that core of individuals together, so that when things do turn around, we are ready to go. 

 

KLEIN: We are, on our level from the supply side, as competitive as ever. We’ve actually turned down doing projects just because we don’t feel like we want to finance them in house. Our competition is absolutely insane—if we did it at their cost, we’d lose money just to keep our doors open. 

 

THORN: The AGC membership has actually held pretty solid. Our St. George office is maybe a little bit hit harder. We had 210 members in St. George at the close of 2008. We’ve dropped at least 100 and we have picked up another 50 or 60, so we have had a net loss of 25 percent, which is big. 

 

We are seeing a lot of traditional, residential contractors transition into commercial work. Is that causing challenges for you?  

 

CAMPBELL: It seems that some subcontractors were doing residential and now they are trying to get into  commercial, but they are not capitalized enough. One of our biggest problems is subcontractors going broke. We spend a lot of time and a lot of money interviewing our subcontractors and checking financials. We think we do a pretty good job, but it seems like at least one or two subs per job are getting into trouble. And, it doesn’t matter what size the job is—if it’s a $500,000 job or if it’s a $10 million job—our subs are getting in trouble. We either have to come in and bring another sub in to help them or remove them from the project, and then it ends up costing us more than the second bidder or the third bidder. We are spending a lot of time upfront trying to resolve that problem, but it still is happening. 

 

KLEIN: The smaller subcontractor does not have the same type of funding that a larger company does or a contractor does. So for us to do as much commercial or to take on more commercial work would impact our cash flow to a much greater extent than maybe the contractor or the developer. We’ve actually gone from more commercial work into residential remodel where we have a greater cash flow on a daily basis with 50 percent down or 100 percent down. With commercial work, we may not get paid for six months with 5 percent retention. It is happening quite a bit. So we’re actually seeing a lot of commercial contractors trying to get out of commercial work and getting into residential remodel. 

CAMPBELL: But it’s not necessarily just the small contractors. It started out there, but it’s some of the larger subcontractors also that, for example, the client didn’t pay a general and so he’s holding up money from that sub, so they are put in the position. And we’ve said several times that our backlogs have decreased 50 percent or more. This happens with the sub. And they are working on a shorter string than we are, so I think it’s affecting them faster and maybe they are not as capitalized as maybe some of us. 

 

HIGGINS: This is encouraging for me because we lose a lot of work to subcontractors or competitors who simply just don’t have the financial wherewithal to be in business. And this year in particular we managed to pre-qualify on a large number of projects and that is what has kept us in business. There are other projects that, because of our safety record, we are the only ones who qualify and that also helps us.  

The other thing that is happening with us is that we are running into general contractors who cannot pay. It’s not unusual to wait six months to get paid and that really stretches us out. We are not a very big company, so payment is becoming a real issue and we have to stay right on top of that all the time. 

 

KILGORE: The work is slim; we all know that. But, when you have to start worrying about getting paid for the work you’ve done, that’s a whole new problem. What I’m seeing is the owner pays and then whoever we’re working for, the sub, is paying somebody else their bills from two jobs ago. I’d like to see some type of legislation, something where there are some ramifications for the guy who spends my money. I’d like to see some type of justice.

 

GARFF: Well, commercial code requires a general to pay a sub within a certain amount of time. That is state law. If you are working for a scoundrel, you are working for a scoundrel. 

 

KILGORE: Something should happen there. In this environment, the people who can’t pay their bills, instead of choosing who they pay, I’d like to see them pay who was on that job where the money came from, not the job before. 

 

HOGAN: Everything goes back to the bubble we’ve been living on. There are people who have managed their money well during that bubble and some who have not managed it as well as others. They are now in a bad situation, so we become worried about getting paid. When we finally do get paid, which is a tough process, it is usually two or three months later and we’re happy that we got paid at all. When we talk about introducing legislation to make general contractors pay, you are going to punish the good guys on that almost across the board. If we lose our ability as general contractors to have a say in how the money goes out and the way it goes out, we are taking a huge risk. 

 

BUCKNER: One of the concerns we have is that we see guys who are so hungry for work that they are not doing real due diligence on the owners. They see a project and they are grabbing the work without protecting themselves well enough on the financial side, and then they are left hanging when stuff happens. This is a market where you have to do extra due diligence on making sure your owner has the money and a lot of people are not doing that. There needs to be tremendous due diligence on owner funding.

 

Do you agree that green or sustainable building is no longer a trend, but a social mainstay? How does green building influence your company? 

 

HOGAN: I think we will see more sustainable building plans being put out there in the design-build because of the federal money and the state money. When you have three contractors developing a proposal for an office building for a federal job, and they are looking at that value and you are going in there to sell it to them and you can sell the sustainable building aspect of it—then that’s what they’re going to want. I believe that the way that the money is going to be appropriated in the next few years is a great platform for LEED to move forward. Sustainable building concepts are going to come into our industry—it’s already happening and I see it continuing. Maybe in the private sector it will slow, but I think the federal and the state sectors are going to push it.

 

THORN: It’s my understanding that the lion’s share of what I would call stimulus money from the building side of the federal government is not being spent quite as fast as the highway side. Most of it will go toward retro fit, better windows or green-type building. 

 

MOORE: I think LEED projects are becoming the standard. Everything we see in local government, state government and federal government is about sustainability. The new FBI center, another big project coming into town here, will be a minimum LEED-Silver project, and the NSA project will also be LEED certified. Almost everything we are working on now, even if it’s private-type projects, is LEED. Years ago people though ADA was just a trend. That’s how LEED is now—LEED is what we think of every day when we’re looking at a new project. Most of the larger firms here have 30 plus professional LEED accredited individuals in their firms—it’s just the way we do business now. I don’t see it being an extra thing anymore; it’s part of reality. It’s what we do every day and we better be thinking of it every day. We are stewards of our environment and green building is here to stay. The fad is gone and the reality is here—it’s how we do business.

 

SMITH: I’m in alignment with what Rob [Moore] just said. I think green building is normalized. Where there was one or two of us kind of out there starting to do it, everybody is doing it now. Subcontractors are also doing it. Overall, it’s really not as big of a deal as it was once thought of and I think it’s here to stay. My concern is that the LEED requirements are going to get redone again. What was tough was to come up with a plan for a green building, and now that is so normal that it’s tough to get platinum. Now I think platinum building will become the norm. Next, we’ll a diamond or some other standard. Overall, though, I think there will be even higher standards.  

 

How far are you chasing work? Do you leave the state often to find the next job?

 

MOORE: Salt Lake is a very unusual place for large general contractors and we have a really good group of contractors. There are probably 20 of us in this marketplace that compete with each other every day. And when the market in Utah gets down, we have to go other places. The larger companies can’t sustain our business being just in Utah. So, when the market in Utah goes down, we have always been able to go out to other states and compete very aggressively and win a lot of projects. And I think it’s because we are so aggressive and so competitive here that competition makes us so much better when we compete in other states. Our firm is reaching out and we’re looking at projects in certain markets that fit our company and some of our niche markets, as I’m sure many others are, but we cannot sustain the businesses we have here in Utah with this small
of a demographic. 

 

CAMPBELL: We’ve been regional for about 25 years. For the most part, we’ve been in the Western United States, but now we’re as far east as North Carolina.

 

EVANS: In certain markets where you are proficient, the niche markets, we are getting more geographically expansive in our reach as far as looking at projects. But we are not going to go to certain parts of the country and chase anything. It just doesn’t fit our model or what we do as a company. But in certain areas where we are well qualified and we have the expertise, we are having to go outside of our area. Traditionally we’ve stayed in the Intermountain states, but we are now reaching out a bit farther than we have in the past, but it is in areas where we already have a very well developed expertise. We’re not just going to go build anything somewhere—that’s too risky. 

 

Many have said that construction is on sale. Is now the time for companies to build if they can afford to do so?

 

TIPPETS: I think there are almost unrealistic expectations from the private development side about where costs really are. Everybody has heard the term “construction is on sale,” and I think that is the view that the development community has—that construction is on sale. And if you negotiate, you can get that sale price down even lower. However, some of those expectations are definitely unrealistic at the moment. That is the constant struggle we are having now—everybody is looking for costs that are not what the market currently reflects. There is never going to be a cheaper time to build than there is right now today. 

 

SMITH: Our industry needs our state municipalities to not have a hunker down mentality. We need them to take advantage of the marketplace and to build. 

 

COOPER: The one message I’d like to get out is that growth and economic development is what we need. The state is doing a good job, but we need to continue urging the state to increase economic development. We’ve got to convince out-of-state companies to move here. And, we’re going to have to take it from other states. We need to push more so we can bring more business in because that is going to be probably the best quick fix.

 

BODELL: If we can just keep our wits about us and not brutalize each other, times will turn. And it’s not going to turn back to how it was during the bubble—those days are gone. The good news is that we are all coming out of this mess a lot more cautious and a lot smarter. But this is a wonderful community. Utah is a great place to be, compared to every place else that I have seen.   

 

 


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