The commercial construction market dropped 8.5 percent in Texas between 2009 and 2010, according to Engineering News Record. Permits for single-family homes are down 14 percent in 2011 compared to last year. The construction industry is facing challenges not seen since the Depression – the backlog of jobs has vanished, competition makes landing the winning bid very difficult, and many companies have had to make dramatic cutbacks to survive.
Construction industry executives met for a roundtable in Dallas to discuss these factors. The roundtable was moderated by David Downey, COO, Corporate Rain, and included:
Stephen Brooks, CEO, Grand Homes. His company builds 400 homes per year, and did a corporate transformation two years ago that helped Grand Homes survive the downturn. Profit margins have improved significantly.
Mark Nyquist, CEO, DynaTen. DynaTen is a mechanical contracting firm based in Dallas/Ft. Worth. It does heating, plumbing, air conditioning and sheet metal work. It has maintained level revenues over the past several years. Current projects include the George Bush Library on the SMU Campus, a Baylor facility in McKinney and the new First Baptist Church in downtown Dallas.
Charlie DeVoe, President, North Texas Division, Balfour Beatty Construction. The Balfour Beatty group in North Texas is newly formed with additional Texas offices in Houston and Austin. Projects are in hospitality, airports, federal work, and higher education.
Art Daniel, President & CEO of AR Daniel Construction Services. This family-owned business builds tunnels for water lines, sewer lines and storm water. It has projects in public/private partnerships in Tarrant County and on the LBJ Freeway, and is also working for DART (Dallas Area Rapid Transit) to relocate utility lines that are under the tracks. Their contract volume this year has exceeded all of 2010.
Kerry Burden, Senior Vice President of Development & Construction Services, PM Realty Group. PM is among the top five real estate companies in the country. Its core business is property management with between 160 million to 200 million square feet at any given time, in every major market in the country. PM formed a development group a few years ago whose core business is health care.
Judy Pesek, Principal/Managing Director, Gensler, Dallas. Gensler is a global architecture, design, planning and consulting firm, and will soon have more international offices than U.S. offices. The company has offices in Houston and Austin as well.
Steven Hanks, Risk Manager, Texas Mutual Insurance. The company’s focus is on working with commercial clients on safety and loss prevention.
Neal Harper, President, Cadence McShane Construction. Cadence McShane is a mid-sized company based in Texas with offices in Austin and Houston. Education is a main specialty. It tries for a balance of private and public work, but in the past few years, public work has been its main focus as the private sector has pulled back.
One way to consider the challenges faced by the construction industry is to look at three drivers, as summed up by Judy Pesek of Gensler. She told the group it’s all coming down to “growth, speed and talent.”
Growth has been hard to come by in the last two years. 2010 was tough for the industry, and it’s still not clear whether that was the year things bottomed out. However, some projections indicate that after a modest rebound next year, things will pick up nicely in 2013. Some observers say this is the “new normal.” But Stephen Brooks of Grand Homes said what people are calling the “new normal” is really the old normal – a cyclical pattern of ups and downs.
“The cycles used to be three years up and one year down,” he said. “What I see on the horizon is up and down and up and down. We have to be a lot more nimble in our planning and execution.”
Brooks noted that the residential construction industry is driven by job growth. Burden of PM Realty said the uncertainty about jobs is causing a change in the behavior of traditional homebuyers. “The housing market now is married people who are successful, over 30 and having children,” he said. “With the cost of energy right now, if it goes back up again, it’s driving the decision to move closer to town. It’s driven the ‘for rent’ product.”
Burden said younger families are looking at job losses in the economy, and are reluctant to make a commitment to buy a home. Instead, they’re looking at rental properties closer to the city center – even if it means paying $3,000 – $4,000 a month for an apartment in a high-rise building.
“People are willing to pay that because they are not willing to sink their money into a long term investment,” he said. “They are willing to sign a lease for a year, and we see that as a market that’s growing.”
As has been widely reported, Texas is not faring as badly as other states in this economy. Judy Pesek said Dallas hasn’t seen a slowdown in the last two years, because of the energy industry. “We’re seeing the energy industry driving a huge portion of growth and sustaining business in Texas,” she said.
Pesek likened the impact of energy to a domino effect. “It affects the service industry companies as well,” she pointed out. “They will relocate to be close to their clients, and they are responding to the clients they serve.”
But non-residential building construction took a big hit over the last 12 months, according to the State Comptroller’s office. The value of contracts dropped 71 percent. That’s reflected in the unemployment rate, which is 20 percent in the construction industry compared to nine percent nationally. “I don’t think it’s going to come back,” said Neal Harper of Cadence McShane.
Companies that used to concentrate on private sector work are now exploring opportunities in the public sector. But that offers its own challenges, because concerns about government indebtedness at all levels are causing legislators to cut back on spending. “That’s our lifeblood,” said Art Daniel of AR Daniel. He said infrastructure spending is now a political tool.
“If you don’t have that, you can’t have anything else,” he said. “You still have to transport goods and ultimately it’s going to be on a roadway.” He said Republicans in Congress favor a six-year highway authorization bill, but one of the main components of highway funding – the gas tax – came close to going away in Congress last month. Daniel said it was renewed a week before it would have expired.
“Gas tax revenue is dropping,” he said. “If you look further down the road on both the federal and state level, how are we going to replace the gas tax revenue because you have more vehicles like the Prius and Volt and other hybrid cars that use less fuel?”
Technology – A Game Changer
At the state level, highway funds are caught up in politics, too. According to the San Antonio Express-News, Texas is spending only half of what it needs to meet the state’s transportation needs. “We don’t have enough funds to build highways,” Daniel said, “and when you’re sitting in traffic on I-635 you think about how badly we need more concrete.”
Uncertainty over jobs, whether in the private or public sectors, makes planning in the construction industry an iffy proposition. Preliminary figures from the U.S. Bureau of Labor Statistics show construction employment up 6.3 percent over a year ago. New technology is having an effect on job creation. DynaTen’s Nyquist says some of those lost jobs aren’t coming back.
“We constantly have technology coming into our industry – there are always new ways to join pipe together that’s less labor intensive,” he said. “Through technology and materials integration, labor demands per square foot of building won’t be what it once was because we’re getting better at what we do – and that means the whole industry.”
Harper echoed that view. “All of our superintendents have iPads now,” he said. “It’s quicker communication, it’s getting schedules done quicker, if you have a problem you can photograph it and email it from there to get an answer in hours instead of days.”
“There’s a lot of opportunity in the marketplace, and that’s encouraging,” said Balfour Beatty’s Charlie DeVoe. But for contractors, “It’s like being an employee going to work one day and having your employer tell you, ‘Oh by the way, you’re going to work longer hours and I’m going to pay you less.’”
DeVoe noted the pressure on margins in the construction business, and the continued challenge to deliver an increasing level of service. He said it’s the biggest challenge the industry faces.
“As much as we’re talking about how good things are,” said Harper, “quite frankly, our margins are the lowest I’ve ever seen. The competitiveness is higher than ever because there is less work going on. The construction industry says, ‘I’ve got to get a little cheaper to get the next job and the next job.’”
Moderator Downey wondered what the emphasis on speed, a reduced workforce, and pinched margins meant for safety on the job. Most contracts aren’t awarded solely on the basis of price, said Nyquist. Safety is an important component. “I don’t see any weakening because I think our culture has advanced it,” he maintained.
Brooks, Harper and Daniel all said that was their experience, as well. “When you have a downturn, the riffraff is gone,” said Brooks. “You run quality contractors who run quality safety programs. It’s just that simple.”
Although the regulatory load might be increasing somewhat, for example on stimulus projects, PM Realty’s Kerry Burden said public-private partnerships could be a “growth area.” He cited several health care-related projects in the Dallas area that are moving ahead because of increased medical costs and reduced reimbursements to doctors.
“We have three projects we’ll probably break ground on next year where I’ve been able to successfully negotiate abatements and private partnerships with the city where I’m getting several hundred thousand dollars worth of money, because of the need,” he said. “The City of Dallas has a program where they will provide funding to you to have outside investors to fund your project if you create so many new jobs and get people legalized, they will give you money to fund your project.” He noted, though, that this is an example of a public-private partnership at the city, rather than the state or federal, level.
“That’s the kind of thinking we need,” said DeVoe.
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