Atlanta Report: Hotlanta Cools Down

As in other major metros around the Southeast, new project starts in Atlanta are few and far between.

By Debra Wood

After years of sizzling construction activity, Atlanta’s new starts have fallen off as developers struggle to secure financing during the national economic meltdown.

“We’ve been a strong market, but the last nine months have put a strain on some market sectors,” says Phil Roy, vice president of the Southeast region for Barton Malow in Atlanta.

Barton Malow is building the $58 million Gwinnett Braves Stadium in Lawrenceville, two high schools and a $4.8 million softball complex at the Georgia Institute of Technology.

Mike Dunham, executive vice president of the Georgia Branch of Associated General Contractors in Atlanta, says that “across the board everyone is seeing a slowdown.”

(Photo courtesy R.J. Griffin & Co.)

John A. Reyhan, Skanska area general manager for Georgia in Atlanta, says via e-mail that it’s not 2009 that he is most worried. With most projects having a 12- to 18-month lead-time, he says, “Our greatest concern is in 2010 and 2011. That’s when we will see the full impact of this market.”

New starts for office, retail and mixed-use developments have come to an abrupt halt, reports Roddy McCrory, regional vice president of Brasfield & Gorrie in Atlanta.

“The health care, education and hospitality sectors don’t seem to be hit as hard, but they are down from where they were a year ago,” McCrory says.

Brasfield & Gorrie is working on the $600 million, mixed-use development 12th & Midtown and the $175 million Phipps Tower in Buckhead.

Paul Wallace, senior vice president of business development for Bovis Lend Lease in Atlanta, says he is hopeful that developers will have less trouble obtaining financing by the latter part of this year.

Bovis is wrapping up construction on the $160 million, 636,000-sq-ft St. Regis Hotel & Residences and the second phase of the $130 million Lenbrook retirement community.

“The commercial market is slow,” adds Tom Raney, senior vice president of marketing for contractor R. J. Griffin & Co. of Atlanta. “And residential development has totally stopped.”

Raney anticipates there will be no new high-rise residential starts for at least two years. R.J. Griffin is finishing the $136.6 million, 50-story, 401-unit Atlantic condominium tower at Atlantic Station and the $100 million, 467,319-sq-ft, 219-unit Brookwood condominium.

“All projects have slowed down, but there are still several sectors that are positive,” says Kevin Kuntz of the Southeast Division of McCarthy Building Co. in Atlanta, pointing out a continuing demand for health care and education. “When there is money available and bonds can be sold again, those markets will take off.”

McCarthy continues work on the $115 million Parker H. Petit Science Teaching Laboratory at Georgia State University’s new downtown science park. Atlanta-based tvsdesign designed the 347,000-sq-ft center in association with CUH2A, also of Atlanta.

tvsdesign is also working on a project for the Centers for Disease Control and Prevention, and it designed 271 17th Street, the largest office building at Atlantic Station.

What’s still moving

Health care and higher education remain steady.

Skanska was selected to build projects for St. Francis Hospital, the Georgia Military College and Columbus Technical College.

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R.J. Griffin is working on a $61 million, six-story, 180,000-sq-ft, five-story bed tower for Gwinnett Medical Center in Lawrenceville and has several medical office buildings and ambulatory surgery centers in the works.

Raney says that although health care is a strong market, it’s hard for companies without experience in this sector to succeed. “The margins are low, and the owners are sophisticated and know how to manage the work,” he adds.

Roy says both the K-12 and higher education market are still moving. Barton Malow is building the $50 million, 320,000-sq-ft John’s Creek High School in John’s Creek and the $55 million, 319,000-sq-ft Arnold Mill High School in Woodstock.

“You will see that trend [for school construction] develop and strengthen in the Southeast,” Roy says. “The K-12 market has been neglected for awhile.”

McCarthy’s Kuntz, on the other had, says many higher-education owners are taking a wait-and-see approach as money has tightened and endowments have dropped off.

“But there is a good opportunity for our customers to buy construction services over the next 12 to 18 months,” he adds. “You have contractors and subcontractors who have good people available and good pricing.”

Increased Competition

More firms are chasing the work that is moving forward.

“Contractors who depended on the residential and retail markets are branching out into other sectors, and it is making for a more competitive market than we’ve seen in a long time,” Skanska’s Reyhan says. “We are seeing on average more than 12 competitors submit in response to a request for proposals.”

Roy says as many at 35 bidders are now vying for jobs that in the past would have attracted six or seven bidders. He adds that owners are selecting the most-responsible bidder, even if not the lowest, to avoid learning curves.

Reyhan also sees strong competition at the subcontractor level.

“Many subs are hungry for work,” he says. “Owners building new projects are benefiting by a substantially lower cost than recent years.”

Kuntz finds more owners seeking hard bids, thinking they will get the work cheaper due to the competition.

“Once we get out of the downturn in the economy, the customers that can will go back to the negotiated process because they can get a better-quality project with better value,” he says.

Transportation

The Georgia Department of Transportation has multiple projects under way in the Atlanta area, including improvements to the 14th Street Bridge over the Downtown Connector. GaDOT expects C.W. Matthews Contracting Co. of Marietta, Ga., to complete the $88.5 million project in October.

Three Interstate 285 interchange reconstructions are in process. C.W. Mathews is working on the $54.8 million Memorial Drive project, widening ramps and constructing two bridges and approaches.

C.W. Matthews began improvements to the State Route 54 interchange in the fall. That $47 million project is expected to wrap up in fall 2011.

Atlanta Hartsfield-Jackson International Airport expects to open its $635.9 million Consolidated Rental Agency Complex in November. Austin-Prad, a joint venture between Austin Commercial and PRAD Group, both of Atlanta, are constructing the $266.5 million complex. Archer Western Contractors of Atlanta is building the people mover system.

Stimulus opportunities

McCarthy’s Kuntz says the federal stimulus should give health care and education a shot in the arm “because it will make people feel good about spending. It’s not speculative. It’s what people need.”

R. J. Griffin & Co.’s Raney sees opportunities in the public market, especially with the federal government’s plans to shore up infrastructure, including funding for retrofits to make buildings more energy efficient.

“It will be good for our industry,” Raney says. “This government spending package will force us to get out of our box and get off into these areas. We have great people who can do that sort of work.”

Reyhan says that if the stimulus spurs renovation and other projects, some of the credit markets will follow, but lenders will be more demanding on equity contributions and leasing commitments.

Dunham says Georgia Gov. Sony Perdue has proposed a $1.2 billion stimulus.

“All of that will be encouraging and a shot in the arm to lead this economy out of the doldrums,” Dunham says.

Managing through rough times

Contractors are already looking at new markets that will keep employees working.

“Everybody in the company needs to be opportunistic and look for ways to grow the business and help our customers,” Raney says. “That may be smaller projects that aren’t as sexy as a 50-story building.”

R.J. Griffin also views the slowdown as an opportunity to reflect, streamline and invest in its people. Within the next year, Raney expects the majority of employees will become LEED certified. The company also is training staff in the use of building information modeling.

Layoffs remain a concern.

“Of great concern are the high levels of layoffs in the architect/engineering sectors,” Reyhan says. “Since last fall, a number of large-scale layoffs have taken place in the Atlanta area. This spells bad news for contractors, signaling new projects will be far and few between.”

Wallace says some of the layoffs are affecting 20-year design veterans.

“Our concern is when developers are able to get the money and say go, how long will it be before architects can produce the documents we need to price and get going,” he adds. “I think the owners who are bravest and first to strike will be in the best position.”

What’s ahead

Just where the market is heading, no one can say for sure.

“There is no quick fix,” Roy says. “The banking industry has to get money back into the marketplace, and until that happens, no one will understand the term of this crisis. A dozen-plus-year trend led us up to this, so we’re not going to get out of this in six, eight, nine months.”

Roy adds that the market might turn in the next 14 to 18 months.

Kuntz says the Atlanta area will continue to need more infrastructure and health facilities to accommodate its population.

“People want to live in the Southeast,” he says. “And that’s the best thing we have going for us.”