Release Date: September 1, 2009

Wisconsin's Construction Industry may be idled currently by the recession, but it's prepared to build on the eventual economic turnaround

Corporate Report

CONSTRUCTION ACTIVITY NATIONWIDE IS IN A SLUMP. The industry has suffered steady declines over the past three plus years brought on by the recession, tough credit markets, overbuilding and other factors. Though the Department of Commerce reports that construction spending rose above expected estimates in June, the outlook for nonresidential, particularly commercial construction, remains grim. A recently released American Institute of Architect's Consensus Construction Forecast report predicts nonresidential construction spending overall will decrease 16 percent in 2009 with another 12 percent reduction m 2010. Commercial construction will be hardest hit with a 25 percent spending reduction this year and another 15 percent decrease in 2010. Employment in rhe construction industry follows suit with a 13.6 percent decrease nationally and a 13 percent decrease in Wisconsin from May 2008 to May 2009. In April, 102,400 Wisconsinkes went to work for the construction industry. That's a 21 percent decrease from peak industry employment in February 2006. The Associated General Contractors (AGC) of America states that for every $1 billion spent on nonresidential construction, 28,500 direct and indirect jobs are created. Unfortunately significant job creation in chis industry will most likely not occur until late 2010 or into 2011. There are a number of economic influences on the construction industry today. In a Construction and Materials Outlook, Ken Simonson, Chief Economist for AGC of America, suggests stimutus spending will have a positive impact on the industty, while negative impacts come from rising vacancies of office, retail and hotel facilities; falling state and local spending; rising unemployment; and strict lending policies. The American Recovery and Reinvestment Act allocates about $140 billion to construction. Much of those stimulus dollars will fund transportation and infrastructure improvements. Stimulus spending may lead to some activity in the institutional sector, but it will have minimal impact on commercial and industrial construction, notes the AIA Consensus Forecast. AGC's Barker agrees, and adds, "To a certain extent stimulus has pushed back some projects. Munis that were planning to build a water treatment plant, for example, held off on the project to see if they would receive stimulus money, which is awarded on a competitive grant basis." One industry leader, Madison-based J. H. Findorff Si Son Inc., one of the largest construction companies in the Midwest, is using the down time to evaluate different services and opportunities it may not have looked into during busier times, including the potential opportunities presented by stimulus dollars. "Which possibly could turn into new sustained work efforts as the economy comes around," says Findorff & Son President Rich Lynch. Economists agree that the upturn will happen sometime in late 2010. Until then Wisconsin firms are finding ways to survive. Some are doing better than others. Appleton-based Boldt Co. has been in operation since 1889 and today employs nearly 2,000 people. Senior Executive Vice President Jim Rossmeissl notes that though commercial construction is an important part of Boldt's market basker mix, the company has kept busy in healthcare and institutional construction. "The Boldt organization has always placed emphasis on diversification, and because of this, despite the fact that the commercial construction market is substantially down, we remain healthy," says Rossmeissl. "It seems that manufacturing, along with commercial, are rwo of the hardest-hit markers, yet at times they have been good markets for us, and we are confident that at some point there will be resurgence." Meanwhile contractors arc reducing staff, cutting overhead and getting leaner, improving processes while minimizing costs. Findorff has made efforts to reduce costs and control irs variable overhead items, notes Lynch. "Our focus has been to maintain as lean an operation as we possibly can while still maintaining our current employee base ... yet everyone has to make sacrifices," he says. "We have made it a priority to stress open communication with our team as we face these economic challenges and have received very positive feedback about our cost containment approach." Projects need financing to get off the ground. The current strict lending practices stifle this industry, creating perhaps its biggest challenge. "Our members rely on the private sector for the majority of their work and the access to credit for private projects is really hurting," notes Barker. Lynch feels that too many great ideas and projects are stalled as a result. "Equity requirements, added collateral and renanr commitment requirements are smothering what appear to be pretty good interest rates at the moment," he says. "On top ofthat, business owners are getting very conservative in their thinking, and as a result, capital expenditures/investments are on hold until business backlog picks up." With fewer projects on the horizon, competition is fierce for the projects that emerge. That competition can lead to increased risk for all involved. "Contractors are taking projects at little or no profit," says AGC's Barker. "It only takes one or two bad things to happen on the project for the contractor to lose money on the project. You can only lose money on so many projects and still maintain a healthy company. How that relates to the subcontractor and supplier industry is another big challenge." As projects become riskier, suppliers become more conservarle in their credit practices, which puts additional pressure on the contractor's bottom line. Barker warns private owners looking to build projects need to beware of the unknowns and risks associated with getting caught up in the low-bid market. "They should be careful that the contractors bidding on their projects are financially stable, have good track records and strong subcontractors," he says. "That helps to mitigate the risks in the market for everyone." TRENDS AND OPPORTUNITIES "These extremely challenging times also create opportunities," says Lynch. "We're taking advantage of certain individuals' free time to re-test and fine-tune many of our management processes and productivity systems. This assures that we stay on top during the highly competitive atmosphere - and hopefully puts us in the lead, when the recovery actually makes its way into the construction market." Construction industry trends like Lean Construction, Building Informational Modeling (BIM) and "green" construction practices keep firms in this industry focused on improvement and increased safety while utilizing the latest technologies. BIM, a 3D design practice that encompasses spatial and geographic information, leads to more accuracy and efficiency in design, construction and data management. Wisconsin was the first in the U.S. to require BIM on all state building projects. Industry experts predict that BIM may eventually become a standard in private projects as well. "BIM will undoubtedly revolutionize not only the planning and construction process, but also will provide tremendous advantage to the owner for the life of the building," explains Boldt's Rossmeissl. "The challenge is to use the technology to its fullest. There remain many obstacles, and we must work on this. BIM is much, much more than 3D and clash detection." Green construction, once considered a trend, is also becoming an industry standard. Though as a new standard, some lessons learned regarding cost, material selection and liability may arise. BUILDING TOMORROW'S CONSTRUCTION WORKFORCE Though the construction industry in Wisconsin currently has an ample pool of workers, it, like almost every other industry, expects to experience a shortage of qualified workers as the population ages and leaves the workforce. Some in the industry do question whether laid off workers will leave the industry during the long recession. A Special Committee on Building Wisconsin's Workforce, which studied the skilled worker shortage, heard testimony from Mark Reihl, executive director of the Wisconsin State Council of Carpenters. "We understand that if our contractors are going to compete successfully and have the ability to pay good wages and benefits, they need our members to be the most productive in che industry," noted Reihl in the testimony. He added that in Wisconsin, the Carpenters Union invests more than $4 million annually to train workers at no cost to taxpayers through a collective bargaining agreement. The industry's average annual pay of $47,600 keeps future workers interested in going to work in the construction industry. "We are seeking the same high-quality motivated students and individuals with good math and reading skills that are being told the key to their future is a college degree," Reihl noted." Our members are professionals who work on multi-million dollar projects and make decisions every day that have an impact on the quality of construction, the completion timeline and the safety of other workers as well as the public that will occupy or use the structure." Findorff's Lynch calls a career in this industry a great opportunity, whether one chooses a trade, like carpentry, or a construction-related career in project management, estimating, technology or design. "It is truly one of the most rewarding experience one could have ... to actually be a part of creating something you can see, touch and walk through with your family, " says Lynch. And according to Jim Villa, president and executive director of the Commercial Association of REALTORS Wi, as the state and the nation come out of the recession, those in the construction industry will be busy. "There are a lot of positive things on the horizon for Wisconsin," says Villa. "Projects that are in the books but haven't moved forward have great potential. 1 think we are poised very well to take advantage of the recovery as it comes along in the next 12 to 18 months. " SIDEBAR In the October 1985 edition of Corporate Report Wisconsin, writer Pat Tearny looked at location as an element of commercial development and construction, asking state developers where they thought the top spots for new construction would be. Larry Boe, president of Spring & Boe Investment Corp., offered a short list of hot areas: Brookfield's Bluemound Road area, the Third Ward in Milwaukee and areas in the northern suburbs of Milwaukee. "The Brookfield Square area is the most exciting thing to happen in the Milwaukee market since the development of Mayfair Road," he said at the time. Larry Krause of Opus Corp. saw potential west of Milwaukee in the Highway 164 and Interstate 94 area, a place the then-new Roundy's corporate headquarters had just been built. The headquarters has since moved from the area, and relocated its corporate offices to downtown Milwaukee in October 2003. Odier top spots around die state to make the top development list in 1985: Madison's west side, die Fox River Valley, La Crosse and Green Bay.