Firms Hold Tight, Awaiting Better Days
Revenues of top contractors in the tristate region held steady in 2010, even as the third year of the weak economy continued to force many to trim budgets and staff. There were few major new projects, and some that had been ready to go were put on hold amid problems with financing, due diligence or higher-than-anticipated costs, executives say. Many of the firms that did well redirected business to active markets, including the education, government and health-care sectors.
Intense competition, rising costs and no prospect of an immediate economic turnaround have forced contractors and construction managers to keep their belts tightened.
“Companies have focused on cost efficiencies and, even more important, technical and knowledge competencies to do work better, faster, less expensively,” says Bill Gilbane Jr., president and COO of Gilbane Building Co., New York. The firm is providing management services for a 46-school construction and renovation program in New Haven, Conn. The $1.5-billion project began in 1998 with completion slated for fall 2012.
“For us, last year was about being as disciplined as possible about expenses and administrative costs,” says John T. Livingston, president of Tishman Construction Corp., New York, which serves as construction manager for 1 World Trade Center.
Firms have been trying to build backlog, but there is still only a small number of new projects. “This is a trend we saw in 2010 and 2011, and I think we're going to see it in 2012,” says Mike Kalakowski, president and CEO of KBE Building Corp., Farmington, Conn. KBE started design-build work last year on an Army Reserve center in Middletown, Conn.
Data from the New York Building Congress shows that New York City has gone two full decades without a significant expansion of office stock. However, Richard Anderson, NYBC president, says he expects the market to pick up. “We're poised for a strong decade, but we're not seeing it yet,” he says. New York City's annual volume of total construction work remains fairly strong at more than $20 billion and will likely climb to $24 billion by year's end, he says. In 2008, construction activity volume was about $32 billion.
A stronger job market along with increased owner demand for more sophisticated communication systems and environmentally friendly office space will spur development, Anderson says.
“You're going to start seeing good developers with residential and commercial tower work, because we're pricing these now,” says James McKenna, president and CEO of Hunter Roberts Construction, New York. He says the economy will likely continue to struggle, but he sees bright spots in the education, health and hospitality sectors. “There's tremendous opportunity in interiors because leases expire and, in spite of what the economy is doing, people either move or stay, and that usually stirs some kind of renovation work,” he says.
But ongoing challenges, including the high unemployment rate, have tempered enthusiasm. “The city is facing a growing nonunion challenge, and there are many more bidders and competitors for every job,” Anderson says. “Costs are unpredictable but usually rising, and government work, which has sustained the market for the last several years, is beginning to slip.”
Louis Coletti, president and CEO of the Building Trades Employers' Association, says there is good reason for caution. Projects continue to face financing and cost issues, and the gap between union and nonunion wages remains, he says.
Several NYC unions and contractors signed a tentative agreement on June 30, averting a strike. At issue were demands for lower labor wages and work-rule changes. Terms of the deal have not been made public.
The prolonged downturn and increased cost of materials made this round of negotiations particularly intense, says one NYC contractor. “There definitely were more demands put on labor unions from management to bring us to be more competitive with the open shop and nonunion markets,” he says. “If the economy were better, this would not have been so intense.”
Many firms are working at or below profit margins in hope of staying afloat, executives say. Concerns include underestimating both the cost and time to complete a job, as well as outright business failures for those that are consistently failing to do both.
“In 2010 it wouldn't have been unusual to see a project come in at 10 percent to 15 percent under budget, [because] everyone's discounting and being optimistic about how they can run the job,” Gilbane says. “I think it's going to moderate itself in 2011 because the pricing experiences of 2010 are going to be reflected in the budgets of 2011 and 2012.”
That might not happen in time to stop some firms from folding, however. Concerned about defaults, owners are asking for more due diligence for the prequalification and selection of contractors and subcontractors, Kalakowski says.
There have been some mostly small- and midsize firms forced to file for bankruptcy, Coletti says. “I've talked with several contractors who, just to keep their doors open, had to pledge their personal assets,” he says.
Many large contractors are diversifying their offerings to stay on top of market fluctuations. A.P. Construction is currently eyeing more work in the private sector than the public market because of the sheer number of bidders who show up for the latter, says Nick Everett, a senior vice president of the Stamford, Conn.-based firm. “Public bidding has gone from levels of six to seven firms to 27,” a situation that is likely to continue until the economy turns around, he says. A.P. expects to complete work soon on a $29-million renovation of a town hall and adjacent police station and garage in Hamden, Conn.
Meanwhile, some have begun to rehire, although they say they are not up to their prerecession levels.
There have also been a few restarts, including the $2.4-billion Atlantic City, N.J., Revel Hotel and Casino, which was delayed until Revel secured all of the $1.15 billion in financing. Tishman is serving as construction manager for the project, which is set for completion next summer.
Even so, many projects remain on hold. That has spurred the American Institute of Architecture to plan the creation of a database of stalled projects that “make economic sense” but lack financing. The database, which will be launched in coming months, will be available to potential investors.
Despite the challenges, some firms believe the market is emerging from an economic trough. “There is a different sense of optimism” as many believe the industry hit bottom in 2010 and that several factors are emerging that bode well for contractors, McKenna says. These include a decrease in office and commercial vacancy rates from last year; an increase in commercial office rents; and an increase in hotel average daily room and occupancy rates. These may not signal that industry's difficulties are over, he says, but they are likely to place it in a more favorable position than last year.
