Retail Contractors Expect Business to Remain Slow in 2010.
Jan 25, 2010 4:25 PM, By Elaine Misonzhnik
approximately 25 percent, though Rivers hopes there won’t be need for more cost-cutting in 2010 since the firm does a wide scope of work, not just retail. That might not be the case for contractors that specialize in commercial construction—in November, most of the job losses in the construction industry were among non-residential specialty trade contractors, according to the BLS.
“There will be some additional layoffs in non-residential building and specialty contractors—engineering, mechanics—will be let go,” says Haughey. “We’ll probably see some more job losses over the next couple of months, but it will be 20,000 a month, not 50,000.”
In fact, some firms that managed to slog through 2009 thanks to a backlog of previously secured projects, might not survive another slow year, notes Ken Simonson, chief economist with AGC. Contractors whose major clients are struggling or have gone bankrupt could be the first to go—last year, for instance, brought with it the bankruptcy of John Vratsinas Commercial Builders Inc., a West Des Moines, Iowa-based general contractor, which has done work for General Growth Properties and for Circuit City. (The company successfully emerged from Chapter 11 on June 4, 2009.) Bankruptcies and liquidations mean loss of potential revenue on new projects while, at the same time, it might take longer to receive payment for work that has already been completed on behalf of the bankrupt client.
“I think this will be the area where people will be challenged to get over the wall and sustain it if they can," says Matthew Schimenti, president of the Retail Contractors Association. "If they won’t sustain it this year, they won’t sustain it. I don’t think the industry has that much activity in the market that it will stabilize businesses that are not healthy. If they can’t make it through this year, it will be a challenge.”
Smaller contractors that have drastically cut their prices to remain competitive in today’s marketplace might also be at risk, adds Rivers. Last year, they might have taken some losses to keep working, planning to make up the gaps in their budgets once the economy improved in 2010. But in the absence of a strong turnaround, they may face bankruptcy instead. This year, there will be few, if any, new mall or shopping center developments started, according to Haughey. Any retail projects that do go ahead will likely be small, including freestanding stores for big-box retailers and restaurant franchise operations, in-line build-outs for some expanding international chains and inexpensive renovations at the larger properties. Considering current market conditions, the relatively low number of contractor bankruptcies in 2009 came as a surprise to industry insiders.
Given the limited amount of work, bidding wars have been getting increasingly fierce, says Rivers. Where in the past Hardin would go against three or four other contractors on retail projects, today the figure can often go up to a dozen. And some of those bidders might include very large, national corporations that in normal times would concentrate on mega-projects and stay away from smaller work like store build-outs. (When it comes to government projects, the pool of competitors can be 25 firms deep.)
At the same time, in a more competitive environment, contractors are lowering what they are asking for in the hope of winning new contracts. Haughey, for example, estimates that the cost of sub-contractor labor has gone down by as much as 15 percent. When lower materials costs are factored in, the cost of building a new project might be 20 percent lower compared to 2008. In the 12-months period leading up to December 2009, the producer price index for gypsum products declined 8.2 percent, according to AGC. For asphalt paving mixtures and blocks the decline was 15.8 percent, and for concrete, 1.2 percent. The producer price index for diesel fuel declined 3.7 percent.
Contractors face another danger this year as well—the possibility that the projects they are working on may be repossessed by banks, which can appoint different developers to finish the job. The most prominent example of this is the Block 37 development in Chicago, which was ordered into receivership by its primary lender the Bank of America at the end of December. Because of a loan default on the part of Block 37’s developer, Joseph Freed & Associates, plus disputes over leasing fees, Bank of America is withholding the $72 million it would take Joseph Freed to complete the work. In a situation like that, the project’s contractor might be caught in the crossfire. (The general contractor for Block 37, W. E. O’Neill Construction Co., did not return calls for comment).
Meanwhile, in Phoenix, Capmark Finance has just foreclosed on the first phase of CityNorth, a 144-acre mixed-use development being built by Klutznick Co. and the Related Cos. Because of the project’s timing—it opened in the fall of 2008—many of the retailers that committed to CityNorth had cancelled or delayed their plans. Now, Klutznick and Related are $290 million in debt and have been forced to stop construction on subsequent phases of the project until new financing becomes available. Hensel Phelps Construction, one of the general contractors behind CityNorth, declined to comment on the story. The other general contractor, Sundt Construction Inc., did not return calls.
Normally, if a developer fails to pay a contractor for the work completed, the latter can file a mechanical lien. If the claim is legitimate, the contractor can hope to get paid in full, says DiSanto. But in a situation involving foreclosure or bankruptcy, the chances of recouping 100 percent of the costs decline considerably. Meanwhile, as lending institutions try to work through the backlog of defaulting commercial loans on their books, development projects are likely to be the first to be foreclosed upon, according to industry sources.
All this may sound like a tough break for general contractors, but retail developers can actually benefit from the current environment. Building a new mall or shopping center has not been this cheap in a long time, says Haughey. He estimates that developers have an opportunity window of about five to six months to get their shovels in the ground before materials and labor prices start to climb back up.
“I would encourage property owners and developers who are thinking about doing construction at some point not to tarry,” says Simonson. “Materials prices have been showing signs of having bottomed out and this is an ideal time to do construction. You are getting the best prices on materials and the best choice of competent contractors who are ready to go to work. Both of those things could change without a warning.”
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