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Local Outlook - 2007
Midwest Activity
May Ease from Rapid Climb
by Paula Widholm
Despite soaring material prices and a shrinking labor force,
commercial construction activity in the Midwest has risen
every year since 2000.
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In 2007, however, Midwest contractors may have to take a
breather, according to McGraw-Hill Construction Research &
Analytics.
The provider of construction market analysis, forecasts and
trends reported $43.7 billion of total construction for Illinois,
Indiana, Wisconsin and Missouri in 2000.
Each year thereafter, the number climbed. In 2001, it jumped
by $4.7 billion.
In 2002 and 2003, the pace slowed yet it rose each of those
years by about $1.4 billion. The years of 2004 and 2005 saw
large bumps - $6 billion and $4.39 billion, respectively.
In November, this group of leading industry economists released
its forecast that the 2006 figure for the four Midwestern
states will come in at $61.9 billion, which is up from 2005
but only by $173 million.
Even more unsettling, however, is the forecast for 2007. For
the first time this decade, McGraw-Hill Construction Research
& Analytics forecasts the total construction for the four
states will go down by $1.92 billion to $60 billion.
Keeping Up Spirits
Still, optimism for '07 remains high.
"We have been bracing for a slowdown, which has not come,"
said Jeffrey Riemer, executive vice president and principal
in charge of Bovis Lend Lease Inc.'s Chicago office.
Riemer added that many trends would continue to support construction,
such as suburban Baby Boomers buying residences in downtown
Chicago and shoppers demanding more retail options.
"These factors are still sound even though the economy
has slowed up a little," he said. "We're not seeing
much of a slowdown, maybe somewhat, but not anything drastic."
Only one-third of Midwest contractors in a recent survey anticipate
a better year in 2007, according to Jeffrey Raday, president
of Rosemont-based general contractor McShane Construction
Corp. He said uncertainty in the market has prompted inflationary
clauses in subcontracts and owner contracts, slowing down
the rate of new construction starts.
"In general, 2007 construction activity should perform
similar to that of 2006," Raday added.
One way Bovis buffers itself from slowdowns is by spreading
its work around.
"We're making sure we're in a lot of the market sectors,"
Riemer said.
This move has paid off. As of early November, Bovis' backlog
of projects in construction or preconstruction topped $3 billion
just for the Chicago office, which is 50 percent higher than
two years ago.
"We've been fortunate," Riemer said. "It's
a combination of doing things right and good fortune."
In Indianapolis, "commercial construction is going to
continue to be extremely hot in all the vertical markets,"
said Jeff Hagerman, president of locally based Geupel DeMars
Hagerman and executive vice president of Fort Wayne-based
Hagerman Construction Co., which partly owns GDH.
Lucas Oil Stadium, a retractable roof sports and entertainment
facility under construction in downtown Indianapolis and the
new home of the NFL's Colts, is scheduled to open in 2008.
Hagerman said the $500 million project is sparking more hotel,
restaurant and retail projects downtown.
Next to that venue, a $275 million expansion of the Indiana
Convention Center is slated to begin in spring 2008. And,
a new terminal building at the Indianapolis Airport is slated
to open in 2008.
In addition to these large undertakings, Hagerman said there
would be many health care and higher education projects in
Indiana, including Clarian Health System's Indiana University
Cancer Center and Riley Hospital of Children Bed Tower expansion.
"Opportunities will certainly be there next year,"
he said. "We don't see any slowing down."
GDH's current backlog is more than $300 million.
In St. Louis, the area's leading 15 contractors predicted
a 6.5 percent increase in local construction activity for
2007 at an annual forecast meeting organized by the Associated
General Contractors of St. Louis.
"For the last five to six years, they've been pretty
accurate, if not conservative," said Leonard Toenjes,
president of AGC of St. Louis.
For 2006, the contractors predicted a 5 percent increase,
and the figure is expected to come in at 6.5 percent. AGC
compares the number of work hours from year to year of five
trades - carpenters, ironworkers, laborers, cement masons
and operating engineers.
There are many huge projects in the pipeline, including the
biggest highway project that MoDot has ever let in its history
- the rebuilding of Interstate 64/U.S. Highway 40. The five-year,
$535 million project in St. Louis will start in the spring.
Other projects nearby include the retooling of a Chrysler
plant in Fenton, Mo., several projects in electrical power
and the building of Pinnacle Casino in downtown St. Louis.
Plans are also under way for the new Ballpark Village next
to the St. Louis Cardinals' Busch Stadium.
"Folks are very positive for the next two to three years,"
Toenjes said.
Finding a Few Good Workers
"The No. 1, biggest issue for '07 is going to be the
availability of skilled crafts," Hagerman said. "In
this region it's difficult to find highly qualified and motivated
craftspeople to do all the work."
This dilemma has been going on for many years. "We have
a declining number of craftspeople at the same time we've
been having an economic boom," Hagerman said. "A
lot of organizations and industry associations have spent
a lot of time and money trying to encourage the next generation
to get into the industry to fill those declining numbers.
It doesn't happen overnight. It's over five, 10, 15 or 20
years that you see the fruits of those efforts."
Toenjes said the labor challenge "is going to put more
pressure on every level, from workers to supervisors to project
managers."
To respond, Toenjes said AGC is providing more supervisory
and project manager training.
At Bovis, "we're actively recruiting new graduates from
schools around the Midwest," Riemer said.
Hagerman added that his firm is "constantly looking to
hire and obtain top-level individuals in the administrative
world as well as our field operations."
The Material Cost Wildcard
Glass, steel, gypsum, copper, petroleum - you name it and
it has gone through double-digit percent increases in the
past few years.
To combat the unpredictability, Bovis' Riemer said, "Wherever
we can we're trying to buy our products as fast as possible
to prevent any further increases.
We're tracking commodities more than we ever have."
The extreme cost spikes are subsiding, as a slowdown in residential
building eases demand for materials, particularly lumber and
plastic products.
"Copper, a significantly volatile commodity this year,
has already begun a price decrease in world markets,"
McShane's Raday said.
Nonresidential Construction Strong
Nationwide, nonresidential construction spending climbed to
its 13th consecutive record in September, according to the
Nov. 1 construction spending report from the U.S. Census Bureau.
In the first nine months of 2006 combined, overall construction
spending nationwide was up 6.6 percent from the same period
of 2005, according to Ken Simonson, chief economist for the
Associated General Contractors of America in Alexandria, Va.
The report also stated that private nonresidential construction
spurted ahead 17 percent and public construction rose 10 percent.
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Midwest Construction Starts
(in billions)
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YTD 2005
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YTD 2006*
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YTD 2007*
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% Ch. 07/06
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Illinois
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$24.6
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$26.0
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$25.4
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-2%
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Indiana
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$14.2
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$13.4
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$13.2
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-1.3%
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Missouri
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$12.0
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$11.2
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$11.2
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-0-
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Wisconsin
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$11.0
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$11.4
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$10.1
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-11.3%
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Four-State Total
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$61.8
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$61.9
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$60.0
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-3.1%
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Source: McGraw-Hill Construction
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*projected; source: McGraw-Hill Construction
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