Top 2007 Special Contractors

Contractors Fend off Blows,Fight On in Volatile Market

by Craig Barner

Contractors in the Midwest are trying to fend off the one-two punch of declining starts and rising costs but are fighting for success.

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"The first quarter of 2007 was slow, but it's picking up," says Kay Anagnos, president of Justice, Ill.-based Anagnos Door Co. Inc., a commercial and industrial door contractor.

Data from McGraw-Hill Construction, publisher of Midwest Construction, confirm a diminishing market in first-quarter 2007. Each major metropolitan area where the magazine circulates had a decline in construction starts.

Milwaukee had the biggest drop, 77%, to $309 million, but the decline's steepness is explained by the start in early 2006 of the $2 billion Oak Creek Generating Station expansion south of Milwaukee. It had inflated first-quarter 2006 data.

Trades workers are being hired throughout the Milwaukee because "that project is having an effect on the amount of workers available," adds Jeffrey Beiriger, executive director of the Milwaukee-based American Subcontractors Association of Wisconsin.
St. Louis dropped 23%, to $1.2 billion; Chicago 13%, to $4.2 billion; and Indianapolis 4%, to $939 million.

Contractors are also getting hit with cost increases for construction materials. Indeed, 13 of the 19 materials that the Bureau of Labor Statistics tracks were up in April, the latest data available, vs. the same period a year. Leading the way were asphalt, 30.4%, and copper, 73.2%.

Demand is high because "a lot of steel and copper are going to China," says Donald Morse, CEO of Freeport, Ill.-based Morse Electric Inc., an electrical contractor. The hunger for construction materials is strong in China because of the country's growing economy.

Only two materials were unchanged from a year ago (brick and PVC) and three commodities have dropped in price (gypsum, lumber and plywood), according to the bureau. No data was available for aluminum sheet.

Volatility is especially unwelcome during bidding.

"The big thing for contractors is some predictability on prices and the ability to create a bid that projects the cost of fuel, copper and steel," Beiriger says.

Fighting Back

Despite these blows, Midwest contracting executives are battling and confident overall in their outlook.

"I'm coming to the end of the second quarter, and it's picking up nicely," Anagnos says. She adds that her firm had about 400 jobs in 2006, and she expects to complete between 350 and 400 this year.

Other executives echoed her confidence. They cited the steady overall economy, backlog of work after years of roaring construction starts, and megaprojects and specialty niches in an ever-changing construction market.

"Backlog-wise, we're as strong as we've ever been," says Bob Krier, president of Franklin Park, Ill.-based Hill Mechanical Inc.

Co-location facilities-data centers with multiple users-are helping drive some activity. Packed with heat-generating equipment, some of these facilities require up to 16 chillers to keep the sensitive equipment cool.

In addition, a trend first detected about a year ago is continuing: Residential construction, which drove the construction for years, is falling, but commercial construction is picking up steam.

"It seems the commercial side is carrying the industry, while the residential side carried it for a bunch of years," the ASA's Beiriger says.

Indeed, employment in the three nonresidential categories-nonresidential building, specialty trades and heavy and civil engineering-climbed 2.4%, considerably faster than the 1.4% gain in overall nonfarm payroll employment, according to a report from the Bureau of Labor statistics.

That counters and partly offsets a 3.9% drop the bureau is reporting in residential building and specialty trades employment.

"We're hiring in both the office and for the field," Krier says. "We have 10% more over last year, and we're probably looking to hire 10% over the next year of two."

Indianapolis has a torrid commercial market, going up 173%, to $423 million, in part because contracts are being activated on Lucas Oil Stadium, the National Football League's Colts new home, and the Indiana Convention Center next door to it.
Chicago also had a strong commercial market, going up 23%, to $1.6 billion.

A particularly noteworthy market, office construction, which was weak during the 2003-2006 expansion because of moderate to high vacancies, is booming again.

The sector grew 148%, to $279 million, in the first quarter. Work included the $440 million 353 N. Clark St.; the $230 million 350 N. LaSalle St.; and the $115 million 111 W. Illinois St. projects.

There were also major gains in the Windy City in hotels, 497%, to $123 million, due in part to the hotel portions for the Trump and Waterview towers and the Mandarin Oriental Hotel; dormitories, 286%, to $106 million, partly because of a residence hall under way on the University of Chicago's medical campus; and colleges, 75%, to $268 million, because of numerous projects.

Steady As She Goes

Other data show that the Midwest market remains steady if not bullish.

For instance, the American Institute of Architects' Architecture Billings Index-a work-on-the-boards survey of design firms-in May for the Midwest was 51.8. Though a score above 50 indicates an increase, the Midwest's score was the lowest of the four regions tracked. The highest score was in the West, 58.0.

Downtown Chicago's condominium craze continues, though at not the same momentum. Gail Lissner, vice president of Chicago-based Appraisal Research Counselors Ltd., is projecting 3,723 new for-sale unit deliveries in the Loop, a 10% decline from 2006's 4,157 deliveries.

And, the University of Illinois Flash Index-a weighted average of Illinois growth rates in corporate earnings, consumer spending and personal income-was 106.6 in May, marking an end to three consecutive months of increase. Nevertheless, a score above 100 points to economic expansion.

"The current reading indicates that the Illinois economy is growing at a good but not spectacular pace," says J. Fred Giertz, the economist who released the data.
Specialty contractors are upbeat about prospects for the remainder of the year and into 2008.

"I think the second half and 2008 will be good," Morse says. "I've been in the business 40-plus years, and it's a gut feeling I have from what I'm seeing."


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SIDEBAR 1

Declines-some of them large-were reported across the board in first-quarter 2007
in major Midwest cities.

Weak First Quarter
(construction starts in millions)

SIDEBAR 2

Thirteen of 19 construction products saw increases in April vs. a year ago.