Forecast 2003

Regional Outlook: What contractors say

It's belt-tightening time for contractors in many parts of the country. During the high-rolling late 1990s, business boomed almost everywhere. With the exception of the residential market and a few other niches such as health care, business has fallen significantly just about everywhere since early 2001. Many contractors are facing the deepest retrenchment since the early 1990s, and it's maddeningly unclear when the market will start moving forward again. Economists say the coming new year offers unusually high uncertainty for the economy.

Here's a look at how several contractors in different regions assess the contracting business climate:

Boston: The construction industry slowdown that began in 2001 in the Boston area worsened in 2002, with the fourth quarter shaping up to be the worst of the year, says Ken Wexler, president of $40 million Elaine Construction Co. (Newton, MA). Overall, he says his 56-year-old company had "a pretty good year," but business has fallen off noticeably late in the year. The office market is slack, but Elaine continues to win some jobs in that market segment. There are still some tenant fit-out jobs, Wexler says, "but clients are doing much smaller jobs [than a couple of years ago] and spending a lot less."

Many of the office projects are retrofits for tenants who sublease space that the region's financial services and high-tech companies shed recently. These companies had leased space at a premium during the boom times in anticipation of continuing growth. But Boston stalwarts such as Fidelity Investments and Polaroid, and younger heavy hitters such as EMC Corp. and Lucent Technologies, have had major layoffs over the past couple of years. These companies won't be renting or building more space for quite a while.

The institutional market remains fairly steady, however, and Elaine has a significant presence in that space. Biotechnology research labs and university projects of many types are the bright spots, Wexler says. Those markets should hold up well in 2003 and the multi-family residential market could also be fairly strong, but the latter isn't a major part of Elaine's business. The recession of the early '90s, an abysmal period for Boston contractors, is still fresh in Wexler's memory, but thankfully, he says, the current slowdown isn't shaping up to be nearly that severe.

"In 1991, the word was just try to survive until 1995," he says. Now, nobody seems to know what to expect over the next year or two. "What is affecting us the most is the uncertainty in the economy," Wexler says. Clients haven't decided how much they will spend next year, so it's very hard for contractors to plan. "What do we do with our staff? Do we staff up or down?" Wexler remains fairly optimistic about the local economy and construction market, despite the uncertainty. Still, there's an underlying sense of concern for the future that hasn't been present for many years.

It would be a major omission not to mention the $14 billion Big Dig when looking at the Boston market. Elaine isn't involved in that massive highway project, but every Bostonian has been affected by it. With two major phases expected to open by early 2003, much of the construction work is finished or close to it. By late 2004, the project should be completed. For three years (1999-2002) during the height of construction, the project generated about $3 million a day in construction work, according to Big Dig officials. When the project winds down, the loss of work is bound to impact the local construction industry.

Chicago: Graycor Inc. (Chicago, IL) ended its fiscal year on September 30th, and it was one of the top three the $400 million general contractor has ever had, says President Ken Isaacs. With most of last year's jobs planned years in advance, though, 2002's results may be a reflection of the previous few years' prosperity. Still, Isaacs is upbeat about next year even though business is slowing noticeably. Graycor concentrates on commercial, industrial, and institutional projects in the Chicago area and other parts of the Midwest. The company has also undertaken work in Mexico in recent years, for U.S.-based companies adding manufacturing plants south of the border.

Graycor's mix of clients in many industries should help the company ride out another recession if that's what 2003 has in store. In the Chicago area, Isaacs notes that health care was unusually active in 2002 and remains a hot market today. The projects vary from small renovations to multi-million dollar hospital expansions. The retail sector had been hot in recent years, Isaac says, but merchants are now holding off on construction until they see how the holiday shopping season goes. Graycor is still doing "a reasonable amount of retail refurbishments. The industrial sector is fairly weak right now," Isaacs says. The steel industry is "somewhere between slow and comatose." The power market, historically a major component of Graycor's business, has slowed with the economic slump and the fallout from the Enron debacle. After a couple of years of frenzied activity, power plant work has tapered off, though new, tougher air emissions standards will drive power companies to upgrade plants next year. That will mean more lucrative contracts for Graycor and others.

Graycor's work in Mexico is a promising growth area. The company has worked on plants south of the Rio Grande for Kraft Foods, International Truck, Toyota, and others recently. These projects are "somewhat tied to the U.S. economy," Isaacs says, though the Mexican market seems stronger than the U.S. market right now. Isaacs is a member of the Construction Industry Roundtable, a group of 100 executives from large construction, architecture, and engineering companies nationwide. At its last meeting this spring, group members were uncertain about 2003's prospects, and Isaacs expects more of the same at the next meeting.

There doesn't seem to be as much variation in the business climate from region to region as in past slowdowns, he says. For Graycor, Isaacs expects 2003 to be fairly comparable to 2002. The industry may retrench early, but based on what other roundtable members are saying, most contractors are hoping for increased activity in the second half of the year.

Las Vegas: One of the fastest-growing areas of the country, Las Vegas is a good place to be a contractor. Yet, even in the booming oasis of southern Nevada, the economic slowdown is apparent. Frank Martin, president of $165 million general contractor Martin-Harris Construction Co. (Las Vegas, NV) counts his blessings as his company is racking up its highest profits in at least seven years, but the market got much more competitive in 2002. Martin-Harris splits its work about 50/50 between private and public projects, and Martin noticed a lot more bidders for public-sector projects this year.

"We're seeing bidders that never touched the public sector before," Martin says. Until this year, Martin-Harris typically competed with two or three other companies on public-project bids. This year, it's competing with eight or nine. Public works projects in Las Vegas should continue to be a strong part of the company's business even with the added competition, Martin says. Clark County, which encompasses Las Vegas, is in the midst of a major construction program with funds set aside for another six years. The area continues to build schools and bolster the transportation infrastructure. Residential home building is booming in the area, though Martin-Harris is not involved in that sector. New homes spawn retail developments, however, and the company is benefiting from that activity.

The company's private sector business slumped in the late spring and early summer, but picked up this fall. Still, Martin is concerned about the national economy's impact on the travel and hospitality industries that drive Las Vegas's economy. After last September 11th, Las Vegas's travel industry suffered as hotel occupancy rates plunged from the norm of about 90% to about 25%. Over a year later, there's been a strong resurgence in travel, but developers are still skittish as they look warily upon the national economy. Although private developers postpone or pull the plug on commercial development even in the best of times, Martin says that phenomenon is more common this year than in the past few years.

His company's private sector business is holding up, though, due to some longstanding business relationships with desirable clients. Martin says it's too early to tell what 2003 will bring for the local construction industry, but with the revival in tourism, he is optimistic. With no income tax, Nevada is dependent on hotel, sales, and gaming taxes, so both public and private sectors are wishing for the rebound to continue.

Memphis: The late 1990s construction boom didn't impact the Memphis area as much as it did other regions, and the business climate worsened in 2002. "It's been a very tough year," says Henry Haizlip, co-owner of $30-35 million Grinder Haizlip Construction Co. Inc. (Memphis, TN). Ironically, while business was slowing over the past few years, a new generation of contractors launched many new companies. As a result, Haizlip says, there's been a recent shakeout as demand for construction services dropped. Survivors like Grinder Haizlip have tended to be older, well-established companies with longstanding client relationships.

"Thankfully, we have some of those longstanding customers that don't look elsewhere," he says. But even with those loyal clients, his company has had to adjust to the tough business conditions to hold on to them. "It's incumbent upon us to lower our rates," he says. "When times are good, we share in the prosperity, but when times are tough we expect to take a hit." The number of bidders in many jobs has gone way up over the past couple of years, Haizlip says, with 15 companies typically bidding on "just about any job of any size." Naturally, profit margins have shrunk as the competition has intensified.

Looking at the various segments of the Memphis construction market, Haizlip sees few bright spots. Car dealerships and some retailers are the most active niches at the moment. Health care and laboratory facilities are also fairly active segments, but most others are slow. Federal Express, the area's largest employer, is still healthy, and Haizlip expects it to continue to put some projects out to bid next year, but FedEx alone can't carry the whole market. Grinder Haizlip doesn't do much work in the residential market, but Haizlip expects local housing contractors to hold their own in 2003 as low mortgage rates hold.

With Tennessee's state government facing a major budget crisis, many public projects are likely to be canceled or postponed in 2003. The state's fiscal woes will impact cities and towns, so Haizlip doesn't expect a lot of new business from municipalities. What might prompt a rebound in the local construction industry? "I think it's going to take a change in the whole national economic climate," Haizlip says. "Confidence needs to be rebuilt and not just in the stock market." Meanwhile, Grinder Haizlip will ride out the storm by concentrating on the basics. That means keeping a close eye on expenses and cash flow. "We're going to concentrate on the ABCs of contracting and be prepared for the next up cycle."— PETER FABRIS (pfabris@zweigwhite.com)