Crystal Ball Design Build Architects, contractors cool on 2011 prospects
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By Nathan Peck | MiBiz
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While the cranes dotting the skyline of Grand Rapids have started to come down, the construction industry in West Michigan remains in uncertain time as a number of government and educational projects buoy their project portfolios in 2011. What remains unclear is the degree to which private investors are going to reenter the game. We invited a number of leaders in the design-build community to participate in this year’s roundtable discussion. Included are:
 Rex Bell |
Craig Datema |
Mike Houseman |
Tom McGovern |
Arnie Mikon |
Mike Novakoski |
Casey Schellenboom |
Bill Schoonveld |
Tim Schowalter |
Bradley H. Thomas, P.E. |
Chris Veneklasen |
Dan Vos |
Mitchell Watt |
Bell: Overall and in general, the non-residential construction business in Southwest Michigan is slowly improving and beginning to regain some of the workload that was lost over the past two to three years. However, the capacity to provide construction services still exceeds the demand for those services. We expect the positive trend to continue in 2011 as the volume of work slowly increases. Meaningful growth, however, may not come until 2012 or later.
Datema: We carried a tremendous backlog in 2008, (but) we’ve burned it off. We are very blessed, very fortunate for the sectors we invested in — government and education. We are strong in these areas and that has helped us. We are all feeling the pain of this recession.
Houseman: I see more work for 2011, but the projects will remain smaller and the increased competition for the work will keep prices and margins low. You will continue to see much of the work in the education and government projects with an increase in commercial real estate remodeling. Not many new developed projects to speak of.
McGovern: We talked in 2009 about how the upswing for construction lags behind the overall economy; but fortunately, we are starting to see the improvements in the construction industry as projects are receiving financing again. Ownership groups recognize the bottom has occurred and are trying to find opportunities to move forward and capitalize on the current pricing structure. As we approach 2011, there are more opportunities in the market as more capital is available. As you would anticipate, it is very competitive.
Mikon: Currently, the A/E/C industry seems to be at a low point. However, using employment as a strong indicator across all industries, the prospects are looking better for 2011 — especially in the second half of the year. When people are unemployed, there are fewer occupied spaces. Michigan’s current unemployment rate of 12.6 percent is the lowest it’s been since March of 2009, and if this percentage continues to drop, our industry will certainly follow the trend.
Novakoski: I don’t believe we’ll see prices any lower on projects than we did this past year. We are climbing out of what has been the largest economic challenge many businesses have ever faced. There will be more contractors, subs and suppliers who will not make it through this coming year. Successful companies will apply a laser focus on the growth markets they have the distinct competency and experience in. Since Michigan’s lag behind most other states will continue, I see a focus in geographical diversification as well.
Schellenboom: In 2010, construction in general remained flat. The bid and spec world was difficult, both in terms of opportunity and tight margins. The design-build market was somewhat better in 2010 than 2009, but the overall economy has limited the number of project starts. In 2011, we feel that energy conservation opportunities will continue to grow. New construction will remain fairly quiet. Design-build will continue to pick up, as companies see some positive growth in the economy.
Schoonveld: The industry, as is the greater economy, is going through a storm right now. At this time it appears that it has stabilized with some opportunities for growth. The main opportunities are in the government, education and healthcare industries. However, we’re also seeing more activity in the private sector.
Schowalter: As expected, 2010 was yet another challenging year in the West Michigan construction market. Average contractor backlogs are near a very low 6 to 8 months and the unemployment rate in the construction sector is still well over 15 percent in Michigan. 2011 will be the year of the survivors. There was a slow trickle of contractors shutting their doors in 2010, and this trend will likely continue, if not accelerate, in 2011. Contractor pre-qualification based on financial strength and bonding capability will be more important to clients in 2011.
Thomas: (There is) much more optimism than at the end of 2009. Yesterday I actually heard a client say, “The bank has approved our financing, and we are ready to get going.” We have not seen the banks engaged in construction lending for quite a while, so this could be a positive sign. (The) scale of projects has been smaller with a much larger percentage of renovation, remodel and repurposing of existing buildings. This is true of most, if not all markets. Healthcare reform has created some uncertainty with healthcare clients, perhaps causing a deferral of capital spending and changing the nature of spending from large acute care facilities to more urgent care, medical office and ambulatory facilities.
Veneklasen: There are probably a lot of ways to describe the current state of the industry, but I think the most appropriate is “lean.” Overall, the industry right-sized to survive in this new economy, but there is not much room to handle any additional capacity. Material lead times are long and subcontractors are reluctant to make any new hires to meet short-term demand, which puts a lot of strain on aggressively scheduled projects. 2011 should be a year of improvement from 2010. The opportunities will depend somewhat on a contractor’s core competency. For AJV, we see good opportunities utilizing our labor forces to handle smaller projects quickly and cost effectively. Ultimately, we need to provide more services to our clients than just constructing a building.
Vos: As far as activity goes, there seems to be quite a bit going on. A year ago at this time, we weren’t hearing about anything. Projects that were slated to go were cancelled or delayed. It seemed we were working twice as hard for nothing. Fast-forward to where we are today, the revenue would be similar to last year, but the margins are thinner. We don’t have the luxury of higher margins yet.
Watt: We’ve had to lay off superintendents and we are looking for short-term opportunities to bring them back. We are seeing a very small downturn this year — 1 or 2 percent of revenues. We didn’t see the 10 or 15 percent increase we have historically targeted, but we haven’t seen the 30- to 50-percent revenue drops either. We are seeing a few opportunities — projects that were put on hold that are resurfacing.
Watt: Margins continue to shrink. We are spending much more on the due diligence determining the financial status of contractors, looking at the financial ability of subs to minimize risk to clients and us.
Vos: Our plan of attack is to stay consistent with how we operate currently: Our existing clients are our number one focus. We are like any industry, we’re service. It is simple, it is about our core values. Those can’t change. We have to remain committed to the things we’re good at — the things clients know us for.
Veneklasen: Versatility and out-of-the-box thinking has been our main strategy. By leveraging the talents of our workforce as well as our financial connections we’ve made through development projects, we were able to help some clients get their projects going when other, more traditional avenues would not have allowed them to proceed.
Thomas: Understanding where and why you are successful and being very targeted and intentional with both existing and prospective clients. Non-traditional collaborations and teaming arrangements are occurring more often, resulting in more integrated services and solutions. (We are) continuing to expand work outside the region, now operating with architects and engineers licensed/registered in all continental 48 states, and completing some international sustainability consulting with work in Singapore and Zurich.
Schowalter: Initial cost has taken a backseat to overall value, which ultimately drives a lower total life cycle cost. This trend will continue in 2011 and beyond. Our clients want solutions that help them to be more competitive.
Schoonveld: The strategies we have employed to weather the storm are rather basic: control overhead cost and continue to provide excellent service to our clients. We also have been taking the opportunity of the slowdown to significantly increase our training and the use of technology in our processes. Resources … are in short supply. If we can collaborate as an industry and share best practices, the better off we are as a community.
Schellenboom: We have continued to provide the high quality, added-value services we are known for while diversifying the products and services we offer. We’ve also pursued mechanical contracting, fabrication, controls and service work in a larger geographic area.
Novakoski: We have ultra-conservatively managed our overhead. In spite of strong sales and backlog, we are asking more of all employees before considering adding headcount. We have found a productive rhythm with our core group that is exciting to participate in. Our morale is higher than ever, which is vitally important to sustaining the drive we need to stay ahead of the curve.
McGovern: Rockford Construction anticipated the economic downturn several years ago and was strategic in positioning our staffing levels appropriately. While it has been challenging, we were prepared and are in a very good position as the economy takes its turn for the better. Traditionally, our supply and demand principles would dictate that our pricing would stay very competitive as we approach the winter months. Yet, as the first 2011 projects are awarded, the model will result in a slight creep in pricing as the spring months are reached.
Datema: Training is huge for us. We have had to build it into our structure. Clients are expecting better and more extensive services as lower costs. We’ve cross-trained our employees. We continue to invest in our people here — it improves our service and our ability to provide value to clients.
Bell: The sound business practices that have served our firm well for generations are great strategies for today: avoid debt, protect cash reserves, maximize efficiency, practice careful risk management and pursue new business relentlessly. Applied technology and talented young people offer enormous opportunities for operational improvement and for the future of our organizations.
Schellenboom: Michigan’s infrastructure continues to be in dire straits, and until our state and national governments can “right the ships” and focus on some of the basic needs, it doesn’t appear that our area will see much in terms of government dollars in 2011. We expect 2011 to have some modest growth in terms of overall construction dollars in West Michigan. Utility companies will begin some upgrade work in 2011, and we’ll also see some education construction opportunities over the next several months. Our industry has yet to turn the corner though.
Veneklasen: In 2011, the mix of private sector to government sector projects should start to slant more toward the private sector. It’s never easy to forecast in November and December, but it does appear that the industry has “bounced off the bottom.”
Thomas: We are expecting these markets to cool as stimulus spending winds down. From a design perspective, much of the work has already passed and the projects are now in construction. Further, all levels of government are wrestling with budget deficits and will have no choice but to limit capital spending.
Mikon: While the educational sectors are showing some strength, government projects will continue to be constrained by national and state budgets. Private developments are not a large niche of our company, but will also largely depend on employment growth in Southwest Michigan. Offices, manufacturing facilities, housing and retail have already started to show some advancement.
Bell: Publicly funded projects will continue to develop in 2011, but privately funded projects will slowly become more evident. The corner may not have been turned yet, but hopefully we can at least see it coming.
Schoonveld: I don’t foresee much change in 2011. Housing prices are expected to continue to decline next year, which will have a negative impact on residential construction. Historically, the economy doesn’t improve much until residential construction improves. I don’t think the corner has turned yet, even though there appears to be more activity. Thankfully, many of our clients are in the government and education sectors.
McGovern: As capital funds become available, there are many projects that have been on the shelf waiting for the market to change. Once they are viable, I do see owner groups cautiously moving forward. There is also a significant surplus of unoccupied real estate in the industry. Owner groups recognize the low rent structures and the low construction pricing and will eventually take the steps to capitalize on the opportunity once the risk is acceptable.
Schowalter: We believe that educational projects that are driven by philanthropy will continue to perform well. These are the public-private partnership projects that have been such a successful model in West Michigan. However, the government projects backed by taxpayer dollars will dry up out of necessity, but they will continue to be a source of work in 2011.
Schellenboom: It seems that if tax incentives or credits are offered to private businesses to expand, upgrade or install energy cost saving items, construction and renovation dollars will flow more freely in 2011. A lot of work has been delayed due to our tight economy.
Thomas: National retail is picking up. Our national big-box retailers never slowed down once they got past Christmas 2008, taking advantage of low real estate and construction costs. We are now seeing several national clothing retailers and restaurant chains planning renovation, remodel and expansion programs, although most is outside of the state of Michigan.
Schowalter: We expect to see continued activity in projects involving public-private partnerships. We do see financing available for qualified borrowers for owner-occupied and institutional facilities. Underwriting criteria (are) more stringent than ever. Financing for development projects remains difficult due to decreased loan to value. We believe that well-capitalized developers and landlords will be in a unique position to respond to tenant demand over the coming years.
Novakoski: We are generally seeing much of our backlog coming from all industries. Many of these projects have been delayed a year or better. Access to capital is still difficult, however, we are encouraged by the increased activity we are seeing.
Bell: Slow, but steady improvement in industrial and commercial construction is expected for 2011 as corporations move beyond minimal maintenance work to growth and expansion projects. Both K-12 and higher education projects will continue to develop and healthcare work may increase, also. Significant improvement in the development of private projects through more abundant financing is not expected.
Veneklasen: The private sector as a whole should show improvement. Financing for an end user with stellar finances can most certainly get bank funding. The process is significantly longer than it was three years ago, but the opportunities are there. The even greater challenge is obtaining an appraisal that can support the financing. There are still too many distressed properties utilized as comps, which drag down the appraised value.