North Carolina Report: Tough Times for Tar Heel State

Pessimism is Pervasive for 2009, 2010 Industry Activity.

By Bea Quirk

Players in North Carolina’s construction industry expect to limp along in 2009, finishing up jobs that were awarded or begun last year. But their biggest worry is 2010.

”2009 will not be a growth year for us. We’ll do about the same as 2008,” says Eric Reichard, chief operating officer for Charlotte-based Rodgers Builders. “Our biggest concern is 2010. A lot of designers aren’t busy, and that will flow back down to us.”

 UNC-Charlotte finance professor Tony Plath agrees. “There’s some forward momentum with unfinished work, but when that’s done, we’re looking at a two-year nuclear winter,” he says. Plath compiles the quarterly Construction Barometer Report for the Carolinas Associated General Contractors, based in Charlotte.

The overall economic numbers for North Carolina explain the gloomy mood. According to UNC Charlotte economist John Connaughton, the state’s economy shrunk by about 7% last year, and he’s predicting flat growth this year. The state’s unemployment rate stood at 9.7% in January, up from 8.1% in December and nearly double from the 5% rate of January 2008.

Connaughton’s report estimates that the state’s construction employment fell by 7% last year.

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Compared to the same period a year ago, the value of new construction contracts signed in January for future construction fell by 48% in North Carolina, according to the latest information from McGraw-Hill Construction, publisher of Southeast Construction. The overall total for new project starts was roughly $818.5 million, down from the previous January total of nearly $1.6 billion.

 “Construction is one of the things you postpone when you’re just trying to meet payroll,” says Dave Simpson, CAGC’s building director for North Carolina. “It’s the worst time I’ve seen in decades. Banks are not lending, and construction companies are laying people off and taking down their shingles.”

Reichard says some of the projects his company had been awarded have been put on hold indefinitely, and he blames a drying up of funding.  He says Rodgers has already laid off employees.

Meanwhile, Reichard says Rodgers has begun bidding for subs on two major projects in center city Charlotte – a $50.4-million, 143,000-sq-ft classroom building for UNC Charlotte and the $31-million renovation of Discovery Place, a children’s science museum. The firm also has current projects for Presbyterian Hospital and Carolinas Medical Center in Charlotte, as well as for the new Hanover Regional Medical Center in Wilmington.

And it’s building the Bechtler Museum and Knight Theater, components of the Wachovia First Street Cultural campus in uptown Charlotte, in partnership with the Walter B. Davis Co. of Charlotte.

Even health care and institutional markets, which had proven recession-proof in the past, are slowing down.

“This is the first time we’ve seen all the markets affected,” Reichard says. “There’s no safe haven.”

Raleigh, the state capital and with strong health care, pharmaceutical and research industries, remains the state’s strongest area, Plath says. But the state is looking at a deficit of about $3 billion. “Raleigh has always held itself together with government spending,” he says. “But the government is broke.”

Yet projects continue. Parsons, the program/construction manager for Raleigh-Durham International Airport’s $570-million Terminal 2 capital improvement program, began work on phase two in November. This phase will increase the number of aircraft gates from 19 to 36. Completion is expected in early 2011.

There’s still a lot of construction progressing in Charlotte, particularly in its center city. There, in addition to the cultural campus, work continues on the NASCAR Hall of Fame, a Bank of America office tower and a Ritz Carlton Hotel, all set to open within the coming year. 

But layoffs at the Queen City’s two major banks, Wachovia and Bank of America, are just beginning.

“We’ll have to see what the bank job losses mean,” Plath says. “That could bring all building to a halt.”

Just outside of the center city, Hendrick Construction of Charlotte is building the Fillmore Music Hall at the North Carolina Music Factory, an entertainment complex in Fourth Ward. The 20,000-sq-ft facility is scheduled to open in June and will have a capacity of up to 2,000 patrons.

Fayetteville, the home of Fort Bragg, remains in fairly good shape because “military spending sustains commercial construction,” Plath says.

Other rural areas—especially those with strong tourism-based economies—are being particularly hard hit, but there still is some activity.  

Charlotte-based PCL Construction Services has begun construction on Antler Hill Village, a new project at the Biltmore Estate in Asheville that will feature exhibition space, a village green, dining, shopping and an outdoor adventure center. The Biltmore Winery will also be enhanced to include a newly designed tour and tasting areas. Completion is expected in early 2010.

The state’s budget woes have also dramatically impacted construction spending in the state university system, which has been a consistent source of work for contractors and subs. There is roughly $3.27 billion of projects in the design and construction pipeline, but only $502.2 million of that total is proceeding. Also, none of the $96 million approved by the General Assembly last year for new projects, renovations and repairs has been released.

Industry and state leaders are grateful for the funds North Carolina will receive through the federal stimulus package, but the funding is only addressing the tip of the iceberg, Plath says. “It’s not a stimulus so much as it is holding up the bottom,” he adds.

Plath is predicting a 5-6% decrease in the state’s construction industry this year. Connaughton is more specific, predicting a drop of 5.9%. Plath adds that about 20-30% of North Carolina’s contracting and subcontracting firms could close this year.

 “With no work to cover their fixed costs, they’re not going to make it limping along to 2010,” Plath says.  The recession is “going to wash out anyone who is undercapitalized.”

And there is intense competition for the jobs that are open for bidding. Reichard says Rodgers is watching its subcontractor bids carefully to make sure they are not bidding below cost just to be the low bid and get the job.

“We want to know they are financially stable and so are choosing firms we know will be around,” he says. “We need to do the best job we can for the clients we have.”