2005 Industry Outlook

Forecast Comments from Leading Contractors Around the Southeast

Rex Kirby, president and general manager, Suffolk Construction, Florida Division, West Palm Beach:

2005 is projected to be a very interesting year. I say "interesting," because I don't know how else to describe it. In my 24 years of working in construction, I have never seen a more challenging set of circumstances.

First, there is more work than we can handle. We are turning down opportunities every week, and trying to focus on jobs with repeat clients or financially strong clients that will offer repeat opportunities in the future. Coupled with this abundance of work, prices have escalated 15 to 20 percent on total cost of work, and this is causing problems with some projects, especially those that were pre-sold or marginal to begin with.

Next, there is the problem with available labor to perform the work. Subcontractors are equally stretched, and are picking the contractors they want to work with. Fortunately, we have good relationships with subcontractors throughout South Florida, but we are having to evaluate their workload, availability of the right team and bonding capacity in addition to their price to perform the work.

I think you will see more partnerships between contractors and subcontractors, where a team is being picked at the beginning of preconstruction, to work with the owner to set the job up and then deliver it successfully.

The high-rise residential market remains extremely strong, and has even picked up from last year. Schools, public facilities and healthcare are growing dramatically as well. We are starting to see more opportunities in office and retail than we've seen in the last several years.

Jessie Brewer, co-chief operating officer, Skanska USA Building, Charlotte, N.C.:

advertisement

Current sales and backlog, going into '05, is really off the charts. Both here, in the Carolinas, and Virginia and Florida - I don't know that I've seen it better. Healthcare is huge. Education, both higher-ed and K-12, is really looking good. And we've got a good market share of public sector-type work - convention centers, museums.

The one area where we're starting to see an increase is commercial and retail. We have some large retail-type projects, and very little commercial, yet there appears to be some good things on the boards relating to that.

Geographically, Florida has always been strong, and that market is not slowing down at all. As a matter of fact, we're seeing larger construction programs in what we used to consider some of the secondary markets, like in Volusia County and the Panhandle. That's really gaining momentum and causing us to take note.

Charlotte and Raleigh are really power sources. In the Research Triangle Park, we're seeing a lot of movement in the biotech and pharmaceutical markets. Again, healthcare is just off the charts and it's projected to be that way over the next three to four years throughout the Southeast.

Also, in Atlanta, a lot of that is driven by corporate/commercial. We're beginning to see some opportunities coming up there. The university system, as well as K-12, are still very strong. Atlanta's a very good hub. In the next few years, we're seeing a lot of good things that are going to continue to cause that market to be a great place to work in.

Overall in the Southeast, we're certainly seeing some vertical markets have more activity than others, but it looks like we're going to have a fantastic backlog in those vertical markets that I mentioned - healthcare, higher-ed, K-12 and public sector.

Regarding the increases in materials prices, Brewer said, "That happened rather quickly. The steel and cement issues were not a predicted crisis, and it caught some projects, contractors and owners in a tough situation for a period of time. We now know what's happening, and those costs will begin to settle. So I don't expect any materials-type escalation, other than what we're currently experiencing. But because the economy's picking up, and we're seeing more construction projects, we're probably going to see escalation in the cost of work. It's wages, it's materials costs, it's subcontractor costs on margins."

Rocky Springer, vice president, business development, Southern Industrial Constructors, Raleigh, N.C.:

We are seeing an increase in bidding opportunities in the industrial construction sector, both for mechanical and electrical construction, all over the Southeast.

We have also seen a decrease in plant relocation bidding opportunities from earlier in the recession when there seemed to be more plant closings and consolidations. We are still seeing plant relocation/plant consolidation opportunities, but just not at the higher rates of closures in 2002-2003.

From our position, it looks like many companies are moving forward on industrial projects regardless. We'll see.

William A. Pinto, president and COO, Hardin Construction Co., Atlanta:

The 2005 market is much more active than 2004 in most parts of the country, with more projects actually moving into construction. Office buildings continue to be slow to recover and, but for specific build-to-suits, will not show any improvement in 2005.

Hospitality in selected markets is trending positive. Resort hotels and all forms of resort unit ownership, with the long awaited post-9/11 resurgence coming into play, will start to pick back up in 2005. The mid- and high-rise residential market continues to be strong in urban markets, especially in Florida. Lifestyle retail centers and niche retail show continued strength through 2005. There is continuing pressure on K-12 and higher education building needs, but funding shortfalls will limit this market's growth in 2005, unless the economy shows continuing strength.

Materials pricing, especially in steel, concrete and aluminum continue to be at record highs. Other construction materials have also ridden that wave and escalated well beyond what might be considered normal inflation.

The current pricing will probably stay elevated through most of 2005, with only slight decreases in certain areas and products. This is having a negative impact on construction, as pro formas are being reworked while some projects are experiencing delays to try and deal with these cost impacts.

Not only is the cost of certain materials escalating, but the availability of some is getting tighter. Florida markets are on allocation for ready-mix concrete and certain concrete products. Other geographic areas are experiencing shortages and longer lead times for delivery, but not as severe as Florida. The rebuilding from the hurricanes in Florida will start to impact projects and availability of labor in 2005 and will be felt throughout the year. Subcontractor pricing is escalating and they are having difficulty committing to the many projects that they have to choose from.

The surety and insurance market continues to be tight as those institutions try to control their risk, while they continue their industry consolidation.

Overall, it's a mixed message. More work is available than the market can handle effectively, while the marketplace is being impacted by extraordinary cost escalations.

Pat Rodgers, president and CEO, Rodgers Builders, Charlotte:

Like most contractors, we are always optimistic, however we think we have good reason to be optimistic about what we are seeing in the year ahead. Healthcare has been, and continues to be our strongest market share. We continue to see a strong outlook for the 2005 year for those contractors who have a strong foundation in the healthcare market.

Higher education, while very competitive, continues to be a good market, as does the education market in general.

We are beginning to be contacted about pre-construction services for more commercial projects than we were in the last quarter of 2003, and we see that as a good sign for our commercial and mixed-use group.

Steve Touchton, president, R.J. Griffin & Co., Atlanta:

I would say there's going to be a pretty significant increase in construction activity in '05. We were already seeing it at the end of '04, and we expect it to continue. There's a good bit of pent-up demand from the years since 2001 and Sept. 11, and people are starting to build again in several areas. So I think we'll see it pick up pretty well.

Medical is one area that's pretty strong (already) and will continue to be strong. Technological advances in healthcare equipment requires upgrades and changes to the existing building. There's a lot of emphasis on improved care, and I think sometimes that requires new facilities.

One of the areas we see really picking up is condos, in both urban and resort areas. The demographics support both right now.

It seems strong all over the Southeast. Orlando seems to be coming back. I think the office market is starting to come back. It might be a little longer before you see a real bounce-back in the office market, but there are some build-to-suit situations where they've already got a tenant lined up for the building. We're starting to see some of those.

Because of all of the demand, we're going to continue to see price increases on the materials side - maybe not to the extent during 2004, but there's a lot of demand for these construction materials.

All in all, I'm pretty optimistic about '05. I think it'll be a good year.

Don Warren, president and CEO, Suitt Construction Co., Greenville, S.C.:

The construction market improved somewhat in 2004 - especially in the second half - and we anticipate continued gradual improvement in 2005. Activity in the food industry and distribution remains active and strong. Hospitality opportunities are improving, but financing continues to be a hurdle. The pharmaceutical/life sciences sector is improving, but is still soft.

Both public and private research and development remains strong, including higher-education projects. We are beginning to see increased activity in some manufacturing sectors, such as automotive and aircraft. The good news is that although the construction market has not yet returned to its pre-9/11 levels, it is now improving at a modest pace.

Ron Autrey, president, Miller Electric Co., Jacksonville:

Work in Northeast Florida has been exceptionally good, primarily due to the Better Jacksonville Plan. The half-cent sales tax generated over $2 billion that was spent on a new library, equestrian center, sports arena, major roadway improvements and NFL stadium upgrades. Hospital spending has peaked with several major projects including the new Baptist Hospital South campus.

2005 will probably mark a downturn in construction spending as the public money goes away. The November election ballot passed a repeal of the controversial high-speed rail system in Florida. That unfunded constitutional amendment would have been too expensive for Florida's budget.

Overall, Florida remains an attractive spot for relocating businesses and retirees. More than 800 people move to Florida each day. A total of 2.7 million people relocated to Florida during the 1990s. Long-term economic growth in Florida is very likely. The business-friendly atmosphere and the absence of a state income tax will continue to foster economic expansion.

Taras Diakiwski, business development manager, The Weitz Co., West Palm Beach:

Residential's the hottest market in the area, obviously. If you're doing that work, you're real busy. If you're not, it's difficult because there are a lot of competitors in this market, one of the hottest in the United States.

Statistics have shown Palm Beach County is the fastest-growing in the area, and it will continue to be that way because of the Scripps Reseach Institute development. As Scripps becomes developed, we'll see an influx of commercial and more residential projects. Downtown West Palm Beach has many projects planned, and that's a huge mecca of redevelopment.

The biotech and healthcare market is going to continue to grow because of Scripps. And a lot of the larger universities are following along to create support-type facilities for that. But make no mistake about it - 50 percent of the marketplace is residential and educational, with residential being the biggest component.

We've also seen a lot of urban-type projects - mixed-use, with some retail, but mostly residential. In Miami, the Brickell corridor, the downtown area and the Overtown areas are all hot for new development of multifamily projects. Everybody's trying to revitalize their downtown areas.

It's a pretty active market, as always, but we did see in 2004 projects that slipped because of the rising cost of construction. We'll see some of that work pushed into 2005.

Michael Dominici, vice president, The Circle Group, Atlanta:

While bidding activity has increased exponentially through the latter half of 2004, around the Southeast many large-scale projects, both public and private, continue to remain sidelined due to budget issues, financing and what appears to be owner apprehension.

The condo market, particularly along the coast from Myrtle Beach to South Florida and over to the Florida panhandle, has by far been the strongest market sector for us. Institutional work, particularly in higher education, has also remained steady.

However, margins still remain tight with plenty of competition for projects at all levels. Metal pricing, while still high, has stabilized substantially. Hopefully, this increased stability and greater availability of steel products will minimize market and pricing volatility and help provide greater confidence to the industry and owners as a whole. We are cautiously optimistic for steady growth in 2005 provided that many of these sidelined projects move forward.

Michael Cannon, president, KHS&S Contractors-East Coast:

Overall, we see the market opportunities for 2005 and 2006 being significantly better than what we saw in the past couple of years.

We believe the Southeast's commercial construction market is on the upswing, with the hot spots being in the hospital, assisted living, condominium and entertainment and hospitality venues. We expect the office building sector to have relatively little construction activity locally throughout 2005, while vacancies continue to adjust to earlier building.

Material prices are still a big concern, but by early 2005 we expect metal prices to stabilize, although remain at higher levels than they were. Prices for concrete and gypsum will continue to increase, but not enough to severely impact construction activity.

Doug Williams, vice president and general manager, C.P. Buckner Steel Erection Inc., Graham, N.C.:

I see the outlook for the next year as very positive. It appears that there is an abundance of work bidding across the board - commercial, industrial, institutional. We are especially pleased to see the power industry coming back strong (mostly due to emission control upgrades) as well as windmill contruction active again with a record-setting demand for 2005. I think the companies that were fortunate enough to come through the slow down strong and healthy are set to benefit from the numerous opportunities that are out there.