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VOL. 126 | NO. 131 | Thursday, July 7, 2011

Fewer Opportunities

Commercial construction continues to struggle

By Sarah Baker

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During a national online news conference last month, Associated Builders & Contractors chief economist Anirban Basu said although employment in the construction industry has expanded over the past four months, the nation’s construction industry recovery may be two years away.

Despite the success of recent projects like Ridgeway Trace Shopping Center at Poplar Avenue and Interstate 240 in East Memphis, commercial construction is likely two years away from recovery.
(Photo: Lance Murphey)

That’s understandably disappointing for executives like Kevin Moyes, president of The Flintco Cos. Inc.’s Memphis division.

“It’s a difficult time and we actually really thought that this year things would be getting better, and that was two years ago,” he said. “The construction industry touches a lot of other businesses, so it’s a ripple effect that hits a lot of people.”

While the number of projects the Tulsa, Okla.-based firm is working on are probably have about the same, the average dollar size for a project is drastically reduced. The smaller, $3 million and $4 million projects Flintco would have overlooked at in 2007 are now being heavily pursued.

With fewer opportunities for the mid- to large-scale projects, competition has skyrocketed, said Rusty Linkous, director of business development for Linkous Construction LLC.

“Now you have much more competition in a lot of these small- to mid-commercial projects because you have the general contractors who were always doing the small projects, plus the contractors that specialize in the mid-size projects and the contractors who specialize in the large projects all competing for the same ones,” Linkous said.

And while project bids are getting lower, construction material prices are continuing to rise. Construction materials prices rose another 0.9 percent in May after rising 1.4 percent in April, according to the latest producer price index report released by the U.S. Labor Department. Prices are 7.5 percent higher than a year ago. And there’s a fine line between bidding on projects against multiple general contractors at extremely competitive rates, Linkous said.

“When you look at the fact that every quarter, construction material prices are rising, but we’re quoting prices that we quoted seven or eight years ago, you can imagine your profit margin on those jobs are decreasing significantly,” he said. “In a normal market, logically, if you’re building an office building, you pay more this year as compared to last year and we’re not seeing that necessarily.”

One way to stand out from peer firms is through innovative technology and delivery methods such as Building Information Modeling, or BIM. The program allows firms to virtually put together a building on a computer before ever setting foot on the site.

Then there’s integrated project delivery, where an entire team is brought together – owner, designers, contractors, subcontractors and vendors – before a project starts. This allows all parties to share in the risk and the reward, Linkous said.

But not all sectors of the construction industry are in holding patterns. In the coming 10 to 12 months, Basu predicted growth in health care – with the construction of hospitals, health centers and clinics – and the natural resources sector, which is in reaction to the growing cost of energy.

Chris Woods, president of Chris Woods Construction LLC, agrees with that forecast, noting that his firm has seen an uptick in inquires for just about every area but retail centers, which are closely tied to the homebuilding industry.

As a general rule, commercial and industrial construction lags homebuilding by about two years, Woods said, and the market is still waiting for the residential sector to bottom out.

“Every year that we’ve had a good year in the commercial and industrial industry, housing has been a benchmark for our good year,” Woods said. “We don’t know if our recovery in the commercial and industrial will continue with the homebuilding so flat.”

PROPERTY SALES 61 61 6,453
MORTGAGES 46 46 4,081
BUILDING PERMITS 113 113 15,474
BANKRUPTCIES 19 19 3,289