Construction spending in the U.S. unexpectedly increased in June, boosted by gain in government programs that made up fordeclines in private residential and commercial projects.

The 0.1 percent increase in outlays followed a revised 1 percent drop in May that was larger than previously estimated, figures from the Commerce Department showed today in Washington. Spending by federal agencies rose to a record.

Homebuilding and sales are falling after the expiration of a government tax credit that boosted builder sentiment and brought starts to the highest level in more than a year in April. Demand will now depend on the state of the labor market and foreclosures.

“Support to construction spending via new homes should continue to remain dampened in the coming months,” Maxwell Clarke, chief U.S. economist at IDEAglobal Inc. in New York, said in a note to clients before the report. “Ongoing difficulty of accessing capital for speculative commercial real estate ventures will continue to act as a deadweight in the overall construction measure.”

Economists forecast construction spending would decline 0.5 percent, according to the medianof 52 projections in a Bloomberg News survey. Estimates ranged from a drop of 2.1 percent to a 0.5 percent gain.

Construction spending decreased 7.9 percent in the 12 months ended in June.

Private Construction

Private construction spending dropped 0.6 percent following a 1.4 percent decrease in May. Homebuilding outlays fell 0.8 percent. Private non-residential projects decreased 0.5 percent, reflecting declines in construction of factories, commercial dwellings and communications stations.

Spending on public construction increased 1.5 percent from the prior month, led by power, sewage and waste disposal and conservation plants. Federal building climbed 4.6 percent to $31.7 billion, the most on record.

New home sales reached a record low in May and were the second-lowest last month, according to Commerce Department data, reflecting diminishing demand after the government tax credit expired. June housing starts, reported July 20, fell 5 percent, after a 15 percent decline the prior month.

To qualify for the government tax credit of up to $8,000, purchasers had to sign a contract by April 30. While the government in July extended the deadline for closing on the contract to Sept. 30, from the original June 30, declines in housing starts and building permits suggest residential construction will continue to fall in coming months.

Single-Family Homes

Spending on single-family residential structures dropped 0.7 percent in June, the fist decline in a year, today’s report showed.

Employment gains are needed to boost demand and forestall foreclosures. Home seizuresjumped 38 percent in the second quarter from a year earlier, RealtyTrac Inc. said last month, putting lenders on pace to claim more than 1 million properties this year.

NVR Inc., based in Reston, Virginia, said last month the original June 30 closing deadline to qualify for the tax incentive resulted in a “surge in settlement activity” in the second quarter, with closings jumping 63 percent from the same time a year earlier. New orders fell six percent in the period.

The outlook for commercial projects is less dire should credit begin to flow as office vacancy rates ease. Office vacancies in U.S. central business areas fell in the second quarter from the prior three months, the first drop since 2007, commercial property broker Cushman & Wakefield Inc. said July 8.

In another signal that commercial construction may improve later this year, billings at U.S. architecture firms rose in June, the American Institute of Architects said July 21. Commercial building typically follows the building index by about six months.

Source

At a seasonally adjusted annual rate of $406.3 billion, new construction starts in May climbed 3% from the previous month, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies.  Nonresidential building showed improvement after weak activity in April, and residential building edged upward.  However, nonbuilding construction retreated in May, following April’s elevated amount of new public works and electric utility projects.  For the first five months of 2010, total construction starts on an unadjusted basis came in at $162.0 billion, down 2% from the same period a year ago.

The May statistics lifted the Dodge Index to 86 (2000=100), up from a revised 83 for April.  The Dodge Index reached its most recent low at 82 back in February 2009, and since then it has hovered in the range of 83 to 94.  “The recent pattern of construction starts indicates that activity has stabilized at a low level, with ups-and-downs on a monthly basis, but the transition to sustained expansion has yet to occur,” stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction.  “The good news with the May statistics is that nonresidential building rebounded after a very depressed April.  However, the volume of nonresidential building remains quite low, and is likely to stay that way through 2010.  Much of this year’s upward movement is expected to come from public works construction, which lost momentum in May after earlier gains.”

Nonresidential building in May jumped 19% to $145.6 billion (annual rate), following a 21% decline in April.  The May pace for nonresidential building can still be characterized as weak by recent standards – 12% below the monthly average for 2009 and a full 39% below the monthly average for the peak year of 2007.  On the institutional side of the nonresidential market, educational facilities advanced 31% in May.  Large education-related buildings that reached groundbreaking in May included a $229 million medical research building for the U.S. Army in Maryland, a $122 million university laboratory and science building in Massachusetts, and a $100 million university performing arts center in Chicago IL.  Healthcare facilities continued to strengthen, advancing 2% in May with the boost coming from a $159 million medical center expansion in California.  Amusement-related work soared 62% in May, aided by the $80 million renovation and expansion of the Pauley Pavilion in Los Angeles CA and $75 million for the Fantasyland expansion at Disney World in Orlando FL.  As for the other institutional categories in May, church construction increased 11%, but reduced contracting was reported for public buildings (courthouses and detention facilities), down 3%; and transportation terminals, down 30%.

Several commercial categories in May registered large percentage gains, relative to very low levels in April.  Office construction in May surged 44%, helped by the start of a $200 million renovation project at the United Nations Conference Building in New York NY.  Stores and warehouses in May posted gains of 26% and 28%, respectively.  However, hotels showed further weakness in May, dropping 11%.  The manufacturing plant category in May advanced 33%, reflecting the lift coming from $96 million for a semiconductor solar technology plant in Tennessee and $95 million for a lithium battery manufacturing plant in Florida.

Residential building, at $133.0 billion (annual rate), increased 1% in May.  The multifamily side of the housing market grew 9%, as this structure type has now shown improved contracting for four straight months.  The largest multifamily projects reported as May starts were the apartment portions of two mixed-use projects in St. Louis MO, with the apartment portions valued at $90 million and $81 million, respectively.  Other large multifamily projects that reached groundbreaking in May included a $70 million apartment building in the Bronx NY, the $64 million apartment portion of a mixed-use building in Honolulu HI, and a $58 million senior living facility in Elmhurst IL.  Single family housing in May slipped 1%, losing momentum for the second straight month after trending upward from early 2009 through March of this year.  By geography, single family housing in May showed declines in the Midwest (down 13%) and the Northeast (down 3%), while the West was steady and modest gains were reported in the South Atlantic and South Central regions (each up 3%).  Murray noted, “The upward trend for single family housing at the national level seems to have paused for now, but it’s likely to resume later in 2010, helped by what’s expected to be the continuation of very low mortgage rates into the second half of this year.”

Nonbuilding construction in May dropped 8% to $127.7 billion (annual rate).  Highway and bridge construction retreated from strength earlier in the year, sliding 22% in May, but on a year-to-date basis it was still able to maintain a 15% gain for the first five months of 2010 relative to last year.  After very strong activity in April, two of the environmental public works categories fell back in May, with sewers sliding 13% while water supply systems plunged 51%.  River/harbor development was the one environmental public works category able to register growth in May, rising 29% with the support of several hurricane-reconstruction projects in the New Orleans LA area, including $238 million for the Chalmette Loop Levee.  The “other” public works category (including such diverse project types as site work, pipelines, and mass transit) also showed growth in May, jumping 64% with the lift coming from $1.1 billion related to work on the Kansas and Oklahoma portions of the Keystone oil pipeline project.  Electric utility construction in May retreated 14% from its heightened April volume, although the pace in May was still high by recent standards – up 22% compared to the monthly average for this category in 2009.  Large electric utility projects that reached the construction start stage in May included the following – an $820 million gas-fired power plant in Tennessee, a $360 million wind farm in Illinois, and a $195 million wind farm in Oklahoma.

The 2% decline for total construction starts on an unadjusted basis during the first five months of 2010 was the result of varied behavior by sector.  Residential building climbed 30%, with the comparison to the early months of 2009 when the improvement for single family housing was just beginning to take hold.  Nonbuilding construction year-to-date decreased 8%, with public works down 4% while electric utilities fell 28%.  Nonresidential building year-to-date dropped 16%, due to this performance by major segment – commercial building, down 32%; manufacturing building, down 63%; and institutional building, down 4%.  By geography, total construction in the first five months of 2010 showed this pattern relative to last year – the Northeast, up 8%; the South Central, no change; the West, down 1%; the South Atlantic, down 2%; and the Midwest, down 12%.

Source

ABUJA — Nigeria and a Chinese state firm have signed a 23 billion dollar deal to build three refineries and a petrochemical complex in one of Africa’s biggest tie ups with China, officials said Friday.

Nigerian National Petroleum Corporation (NNPC) and China State Construction Engineering Corporation Limited (CSCEC) sealed the deal in Abuja on Thursday, an official statement said.

China is already the number one investor in Africa — ranging from oil in Algeria to mines in Zambia — and a senior NNPC official told AFP the new deal might be the biggest that China has made in the continent.

Nigeria is in turn Africa’s leading oil producer, but it has for more than a decade been importing refined petroleum products to meet local demand.

The two corporations will jointly seek financing and credits from the China Export & Credit Insurance Corporation and a consortium of Chinese banks for the projects in Nigeria, the NNPC statement said.

“NNPC aims to accelerate the construction of new refineries in Nigeria to stem the flood of imported refined products into the country, currently estimated at 10 billion dollars,” the statement said.

CSCEC wants to “expand its presence on the African continent and establish its footprint firmly in the Nigerian oil and gas landscape,” it added.

The new refineries are expected to add some 750,000 barrels per day capacity in Nigeria and position NNPC in the international trading of refined petroleum products, it said.

Nigeria’s four refineries — with total capacity of 445,000 barrels per day — are using less than 30 percent of their installed capacity, according to official figures. Corruption and poor maintenance have undermined their performance.

“We are very excited about the deal. We thought it is the biggest ever in Africa, although I do not have the details yet,” said the NNPC official who demanded anonymity.

President Goodluck Jonathan arrived Friday in Nigeria’s oil capital of Port Harcourt for an official visit to inaugurate gas and oil projects.

The construction of the new refineries “will reinforce the ongoing oil and gas reforms in Nigeria”, as envisaged in legislation which has been before the Nigerian parliament for almost a year and imminent deregulation of the downstream sector the country’s oil industry, the NNPC statement said.

Anglo-Dutch oil group Shell in February criticised the bill, saying mistakes in it, if passed into law, will take years to correct.

Shell’s vice president for Africa Ann Pickard has warned that the country could lose 50 billion dollars in investment in the next decade if the bill was passed in its current form.

Jonathan has promised to pursue government reforms of the oil sector to make it profitable and end corruption.

His nascent administration recently sacked some key oil industry officials and redeployed others as part of the promised reform.

He has promised to give new impetus to an unconditional amnesty granted last year to thousands of ex-militants in oil-rich Niger Delta in order to bring peace to the region.

The training of more than 20,000 militants who surrendered their arms under the amnest deal begins next month, officials said.

The president of the Lagos Chamber of Commerce and Industry, Olufemi Deru, told AFP the establishment of the new refineries in Nigeria “will provide jobs for thousands of Nigerians and give them technical knowledge.”

“It will save the country millions of dollars spent on importation of refined petroleum products as well as give the country a sense of national pride that Nigeria produces and refines its oil locally,” he stated.

Source

South Korean builders may exceed a $40 billion overseas order target for roads and refineries this year as oil prices recover and governments increase spending from stimulus packages to revive their economies.

Orders for industrial and infrastructure projects abroad in the second half may exceed $30 billion, compared with $13.1 billion in the January to June period, the Ministry of Land, Transport and Maritime Affairs said today. Contracts may exceed the full-year target as oil-producing nations resume bids for refineries, the ministry said.

Higher oil prices are encouraging companies globally to resume construction projects that were put on hold because of the credit crisis last year. Overseas orders may total more than $16 billion in July and August, the ministry said.

“Companies, especially in the Middle East, have restarted bids for construction projects because it may cost them more if they wait too long as raw material prices are recovering,” said Kim Suk Joon, an analyst at SK Securities Co. in Seoul. “We are definitely going to see more orders in the second half.”

Construction contracts from the Middle East may more than double to $17 billion in the second half from the first, while those Asia will probably more than triple to $13 billion, the ministry said.

“Orders are expected to increase in Asia in the second half as governments are expected to spend money to stimulate the economy,” the ministry said in a statement, without giving year-earlier numbers.

South Korean builders have announced orders won in Saudi Arabia, the United Arab Emirates and Algeria worth about $9.34 billion so far this month.

Source: Bloomberg

Construction spending rose 0.3% in March, boosted by spending on nonresidential buildings and on public works, the Commerce Department reported Monday. Economists were expecting a 1.5% decline. Spending in January and February was revised higher, which, all things equal, should lead to an upward revision to gross domestic product. Earlier reports had investments in non-residential structures falling at a record 44% annual pace in the first quarter. In March, spending on residential projects fell 4.2%. Spending on nonresidential construction projects rose 2.7% in March, while spending on public projects rose 1.1%.

Source: MarketWatch

Latin America’s oil and gas market has remained relatively strong over the past year, despite the impact of ongoing financial problems worldwide. Demand for drillships and semisubmersibles has led to fleet utilization rates of around 100 percent, and Petrobras has busied itself with a number of offshore field development projects.

However, while the discovery of vast reserves in the pre-salt area of Brazil has helped drive activity for state company Petrobras, the company has had its share of problems, as has Venezuelan state oil company PDVSA.

Troubled Waters

Petrobras recently had to contend with a five-day strike by oil workers union Federação Única dos Petroleiros (FUP). FUP began the strike, which affected refineries and exploration and production units, after becoming unhappy with a profit-sharing scheme proposed by Petrobras, along with grievances that the company had not guaranteed protection against layoffs or adequately addressed concerns over safety issues. The workers previously went on strike in June 2008, demanding payment for time spent commuting to oil platforms.

The latest strike ended March 27 after Petrobras agreed to a substantial increase in the base level for its profit sharing, overtime payment for May Day, new meetings on employee safety and an assertion that job and benefit cuts were not planned. Petrobras also agreed not to harshly penalize workers who participated in the strike.

During the strike, Petrobras’ contingency teams took over operation of its platforms, and the company asserted that there was no interruption in oil and gas production.

Due to low oil prices, Venezuelan state oil company PDVSA has had trouble making payments to drilling contractors and oilfield services companies since pushing out foreign operators and nationalizing its oil and gas industry. PDVSA has ordered gradual payment of all outstanding debts dating back to 2008, and started to renegotiate terms and conditions with rig owners and companies providing well services.

In one of the more dramatic moments related to payment problems, PDVSA subsidiary Petrosucre took over operations of Ensco International jackup ENSCO 69 in January. Ensco had suspended drilling operations due to a lack of payment in the region of US$35 million. Petrosucre employees resumed drilling operations under observation by Ensco supervisory rig personnel, claiming that Ensco had violated contract provisions giving it 30 days to resolve such issues. PDVSA and Ensco are now working on resolving payment issues while drilling continues.

PDVSA President Rafael Ramirez said that the company would be “breaking away from structures that provide goods and services through monopolies, in many sectors of the oil industry” and create new companies, organizations and production units that “contribute effectively to the construction of socialism is the beginning of a new stage in the revolutionary process.”

Discoveries
In September 2008, Anadarko Petroleum made a pre-salt discovery at the Wahoo prospect offshore Brazil in the Campos Basin. The 1-APL-1-ESS well is on Block BM-C-30 in around 4,650 feet (1,417.3 m) of water, southeast from Petrobras’ pre-salt discoveries at the Jubarte field. Results at Wahoo indicate 195 feet (59.3 m) of net pay with similar characteristics to the Jubarte 1-ESS-103A well, Brazil’s first producing pre-salt field, which achieved rates of 18,000 b/d of light oil. Anadarko plans to run a multi-zone drill stem test toward the middle of 2009 at Wahoo and anticipates drilling more wells on the block later in 2009.

In late January of this year, Petrobras found  traces of natural gas in Blocks BM-ES-5 and BCAM-40. BM-ES-5 is in the Espirito Santo Basin in around 196.8 feet (60 m) of water. Scorpion Offshore jackup Offshore Defender is drilling on the block. BCAM-40 is in the Camamu-Almada Basin in around 967.8 feet (295 m) of water.

ExxonMobil has notified Brazilian regulatory agency Agencia Nacional de Petroleo, Gas Natural e Biocombustiveis (ANP) of two hydrocarbon discoveries in block BM-S-22, a pre-salt block known as Azulao. The discoveries were made in 7,293 feet (2,223 m) of water using Seadrill drillship West Polaris.

Rig Demand
South America continues to dominate Latin American drilling activity, with the majority of the rigs in the region working offshore Brazil or Venezuela. There are currently 128 rigs of various types in South America, and at least four rigs that are planned or on order will be headed to the region as well.

Of the existing rigs, 91 are under contract. The majority of the rigs with no contract are cold stacked or out of service drill barges and tender barges in Venezuela.

Other rigs are en route to South America. Noble semisubmersible Noble Dave Beard, Transocean semisubmersible Sedco 706 and Seadrill semisubmersible West Eminence will all begin contracts with Petrobras before the end of the year. Ensco International jackup ENSCO 68 is heading to Venezuelan waters to begin a three-well contract with Chevron.

Demand in both regions is expected to grow, with the majority of the growth coming from the semisubmersible market, according to ODS-Petrodata’s World Rig Forecast Short Term Trends report. In South America, an increase in demand to 52 semisubmersibles is predicted, but some requirements are likely to remain unfilled. At present, 40 semisubmersibles are in South America, all in Brazil, and all mainly operated by Brazilian state energy company Petrobras. Aside from Aban Offshore semisubmersible Aban Pearl, which will begin a contract with Venezuela’s PDVSA towards the end of the month, the rest of the arriving semisubmersibles will be working offshore Brazil for Petrobras or OGX Petroleo.

Of the seven rigs in Central America and the Caribbean Sea, all are in Trinidad and Tobago, with three jackups, one semisubmersible and one platform rig working, one platform rig warm stacked and one jackup cold stacked. One of the working rigs, Maersk-managed semisubmersible Kan Tan IV, has been drilling for Canadian Superior, Challenger Energy and BG Group on the Intrepid block, but will soon be leaving the region for Australia.

Field Development
Petrobras has been busy installing new FPSOs and production platforms offshore Brazil, and on Feb. 25 managed to set a new daily oil production record of 2,012,654 barrels with the help of the new facilities.

In the last quarter of 2008, floating platform P-53 became the first production unit installed in the Marlim Leste field in the Campos Basin. The P-53 is capable of producing up to 180,000 barrels of heavy oil, 20 degrees API, and of compressing up to 211.88 MMcf/d. The platform’s oil production is offloaded by shuttle tankers with the assistance of autonomous repumping platform PRA-1 and floating storage and offloading vessel Cidade de Macaé. The P-53 is in waters of 3,543 feet (1,080 m).

In January 2009, semisubmersible platform P-51 began producing from Well MLS-99 in the Marlim Sul field in the Campos Basin. Installed 93 miles (150 km) offshore in 4,117 feet (1,255 m) of water, the platform is capable of producing up to 180,000 b/d of oil. P-51 is capable of compressing 211.8 MMcf of gas and has a water injection capacity of 282,000 b/d. P-51 is 410 feet (125 m) in length, 360.8 feet (110 m) wide, and weighs 48,000 tons.

Petrobras brought FPSO Cidade de Niterói online in February, also in the Marlim Leste field. Chartered to Modec, the FPSO is 75 miles (120 km) off the coast in 4,495 feet (1,370 m) of water. The FPSO is capable of producing 100,000 b/d of light, 28-degree API oil and 123.6 MMcf/d of gas.

Following these projects, Petrobras expects to bring FPSO Cidade de São Mateus and FPSO BW Peace online within the next six months. Chevron’s Frade FPSO should also begin producing from the Campos Basin by mid-2009.

A number of field development projects have been taking place offshore Trinidad & Tobago. A consortium between Fluor Corp. and J. Ray McDermott recently installed the Poinsettia production platform for BG Trinidad and Tobago. Gas is now flowing from the platform.

The platform, located in 530 feet (161 m) of water off the northwest shore of Trinidad, can produce as much as 350 MMcf/d of gas, which is transported via a 20-inch diameter pipeline to the existing BG Trinidad and Tobago Hibiscus platform before final pipeline transmission to shore.

In March, Trinidad Offshore Fabricators Unlimited (TOFCO) delivered the EOG Toucan Deck to EOG Resources. The deck, a conventional deck module with a structure designed to support a drill rig, gas processing system and manned operations, will be part of the EOG Toucan platform in 433 feet (132 m) of water, 43 miles (69 km) east of Trinidad.

Source: Energy Current

Donald Trump and Deutsche Bank Trust Cos. Americas shelve suits to try to settle differences.

Donald Trump and Deutsche Bank Trust Cos. Americas announced Tuesday that they have temporarily suspended lawsuits filed against each other four months ago over Trump International Hotel and Tower’s finances and will try to settle their differences out of court, a move designed to allay concerns of potential buyers who are jittery about the Tower’s future in a morose real estate market.

“It certainly didn’t help,” Trump said of the lawsuits. “Now this totally resolves questions in anybody’s mind.”

While the project has seen a recent uptick in sales, both sides agreed that sidelining the lawsuits that generated headlines nationally would assist in marketing the 92-story tower at 401 N. Wabash Ave. The skyscraper is likely to be the last new high-rise in Chicago for some time, and Trump has lamented for months that restrictions put on him by a consortium of lenders led by Deutsche have thwarted his efforts to sell units in the trophy building.

Trump and Deutsche filed suits against each other in November. Trump first sued Deutsche and other lenders in New York State Supreme Court in Queens, seeking to excuse a repayment of more than $330 million due Nov. 7 and extend the $640 million construction loan for an unspecified amount of time. In that suit, Trump claimed that the global economic crisis was a “once-in-a-lifetime credit tsunami” affecting his ability to sell units at the Tower and repay the loan. He also sought $3 billion in damages. >more

Construction Claims Assistance

 Boston Properties Inc., the biggest U.S. office landlord, plans to suspend construction on a $980 million midtown Manhattan skyscraper after a law firm abandoned plans to lease space there.

“Recently the law firm informed the company that it could not proceed on those terms, thereby rendering the project economically infeasible in today’s environment,” the Boston- based company said today in a statement. The 1 million square- foot tower at 250 West 55th St. and Eighth Avenue was scheduled for completion in 2011.

Office building owners are being battered by the U.S. recession, with the 14-member Bloomberg Office REIT Index losing 51 percent in the past year. Manhattan office vacancies rose to 7.6 percent in the fourth quarter, the highest since 2004, broker CB Richard Ellis Group Inc. said last month. Lending has also dried up as financial companies have taken more than $1 trillion of writedowns and credit-market losses.

“It has more to do with the state of financial markets than the merits of individual projects,” said Dan Fasulo, market analysis director at Real Capital Analytics Inc. in New York. “Lenders don’t want additional exposure to commercial real estate at this point. There’s nothing we can do about it but wait this out.”

Valuable Tower

A completed building on that site would have fetched $1,500 a square foot during the peak of the real estate market in 2007, Fasulo said. That would value the tower at $1.5 billion and made it one of the most expensive in the city, he said.

Boston Properties acquired some of the development rights for the West 55th Street site in May 2008 for about $34.2 million, according to company filings. It said it had invested $401.7 million in the project as of Sept. 30, 2008. It estimated its total investment would be $980 million, according to regulatory filings.

Boston Properties said today it expects to suspend its capital commitments by about $450 million through 2011 and is evaluating how the tower decision will affect earnings.

Last week the company said it had been negotiating with a top law firm and reached agreement. It didn’t name the firm.  >more

The $825-billion economic stimulus proposal that House Democrats unveiled yesterday provides the first solid numbers for those in the design and construction industry who have been searching anxiously for hints about the plan.

Infrastructure advocates panned the proposal as far short of what is needed. But with House committee and floor votes and Senate action still to come, the package is far from the last word on the stimulus.

As drafted, the plan calls for roughly $550 billion in spending and $275 billion in tax cuts over two years. The plan would have a major impact on construction: By Engineering News-Record’s calculation, about $135 billion of the spending portion of the plan would go toward construction. Additionally, construction firms would benefit from the plan’s tax incentives, which includes an extension of a provision that allows small companies to write off the costs of equipment and other capital purchases in the year those items are purchased.

One of the largest allocations in the package is $20 billion for upgrading educational facilities, including $14 billion for repairs to K-12 schools and $6 billion for higher education (community colleges, colleges, and universities). The plan also would provide $7.7 billion to the General Services Administration for construction, repairs, and operations of federal buildings. Of the $7.7 billion, $6 billion would go toward boosting energy conservation and energy efficiency in federal buildings. >more

Pat McCown and Brett Gordon point to their company’s Shawnee Justice Center project as proof that there is commercial building work to be found in the Midwest, even as the nation’s economy continues its freefall.

Kansas City, Mo.-based McCownGordon Construction completed the Justice Center project – a new municipal building housing the police station, fire station and courthouse complex in the city of Shawnee, Kansas – in just 17 months. That included both construction and design work.

Contractors built the center, which covers 29 acres in a campus-like setting, using the design/build construction method. Because all the contracting teams involved in the project were selected at the same time, the city was able to start construction of the building even while the interior finishes were still being designed, saving precious time.

“This project would have taken at least an additional four months – and that’s only if everything went right – if we had gone with an alternative design method,” said Arlen Kleinsorge, division manager with McCownGordon Construction.

Kleinsorge, along with other construction pros interviewed for this story, agreed that build-to-suit projects are becoming more popular among municipalities, especially as these municipalities seek ways to keep their budgets under control in tough economic times.

“More municipalities are looking for expedited delivery of their projects,” McCown said. “Going with the design/build method is one way for municipalities to move projects along quickly and save money. You get the best team in place to execute a project. You’re not working with companies who happened to be the low bidders and are only responsible for one portion of the project. In design/build, you’re working with a team dedicated to bringing the project in on time and on budget.”

The growing popularity of the design/build method of construction is just one trend that commercial construction professionals cited when looking at the state of their industry as 2008 nears its end. They also pointed to continued demand for new healthcare facilities and research-and-development centers as providing a boost to a commercial construction market that is in the midst of a slowdown.

Interviewees also had kind words for municipal public works projects as one other area of the commercial construction industry that continues to thrive.

But other sectors – retail, certainly, and industrial and office in many markets – are slowing down. This means that it’s those general contractors and developers who adapt to what is certainly a changing market are those who will survive the slump, developers said.

“When things were on a roll, everyone and their mothers were opening a construction company,” said Bill Plesich, director of marketing with Columbus, Ohio-based Renier Construction. “These more challenging times will weed out a lot of the weaker contractors. The ones who are financially set, who are able to adapt to current market conditions, are the ones who are still going to be here when the economy starts to improve again. It’s just like in the housing industry. The ones who weren’t financially secure have gone out of business already.”

Preparing for a tough 2009

Commercial construction work may have slowed in 2008. But industry experts worry that this year may only be the beginning of a long stretch of sluggish building activity.

Commercial developers interviewed for this story said that 2009 may prove to be a tough year for the industry. The commercial markets in the Midwest tend to react to economic woes anywhere from six to nine months after they hit. Because the nation’s economy is suffering now, it makes sense, then, that the region will see a significant slowdown in commercial construction next year.

Part of the challenge is that developers will continue to find it difficult to obtain financing for their projects, said R. Hank Bellina, director of the division of major accounts for St. Louis-based ARCO Construction.

Banks and lending institutions are already requiring more equity on all types of construction projects, Bellina said. They are also looking for projects that already have several tenants attached to them.

“There is no such thing as a slam dunk for financing anymore for construction projects,” Bellina said. “It doesn’t matter how great your credit rating is. There are no more slam dunks.”

Speculative projects are drying up, and will continue to do so in 2009, he said. At the same time, the number of new retail projects, industrial centers and warehouse distribution centers is steadily falling, Bellina said, something that will only intensify in 2009.

“A lot of those projects have been put on hold,” he said. “It doesn’t look great for 2009. There are a lot of sectors that are definitely slowing down.”

Bellina does see some good news, though. The demand for healthcare and medical facilities continues to grow, and should do so throughout 2009, he said. Midwest construction companies are being called upon to build more biotech research laboratories and the developments that spring up around them.

Senior-living facilities are becoming a mainstay in the commercial construction industry, Bellina said. And public-works and university-sponsored construction projects are also providing a boost to the industry, he said.

“The universities and the public sector have money. They don’t necessarily have to go out and acquire these more difficult-to-get loans and project-financing that a typical developer would have to get,” Bellina said. “That’s part of the reason that those markets are still active.”

Staying active

Woodridge, Ill.-based Morgan/Harbour Construction is one of those construction firms that is adapting. The company, which specializes in design/build projects, is currently developing a 120,000-square-foot two-story public works facility for the village of Wheeling, Ill.

The facility, which will sit on nearly 12 acres of land, is another example of both the public-works projects and design/build construction method that is now fueling building activity.

As Warren Seil, vice president with Morgan/Harbour, says, the Wheeling project is a true public-works project. The village will house its police, public-works department, engineering staff, vehicles and equipment and road-salt dump in the facility.

“They have everything covered there,” Seil said.

Greg Freehauf, vice president with Morgan/Harbour, said he expects to see municipalities continue to rely on the design/build method even more frequently in the coming months and years.

“Design/build for the most part has been popular in the private sector. But now we’re seeing more of it in the public sector,” Freehauf said. “It is attractive to both the builder and the public municipality because it gives you the advantage of fast-tracking a project and compressing its schedule. It gives you a better value for your dollar. Right now the private-sector work is slow. The public work is helping us maintain our construction volume.”

The village has been schedule-conscious throughout the process, Seil said. That’s why going with design/build, and the speed and flexibility that it allows, was so important, he said. The goal now, he said, is to complete the project by Jan. 31.

It’s a compressed timetable that never would have been possible with more traditional construction methods, Seil said.

“We don’t necessarily have to do all the drawings, put them out for pricing and then wait for responses,” Freehauf said. “We can go out for pricing on those items that do require a long lead time, the pre-cast and the steel, say, and get those in order so we can rush the schedule for both design and construction.”

Under traditional construction methods, the possibility of delays is high, Freehauf said. In the standard way of building, the owner of a project hires an architect and then puts those drawings out to bid. This very beginning stage of the process is a lengthy one itself, as it can take anywhere from a month to two months for the architecture team to draw the plans and about four more weeks for the bidding process to play out.

There could be early problems, too. What if the bids all come in too high? The design process has to start over again, costing more precious time.

This is avoided in the design/build method.

“In design/build, we are working with pricing much closer,” Seil said. “We can put together a budget much quicker. That’s what we did on this particular project, and it is paying off in a compressed construction schedule.”

William Birck, president of Chicago-based Reed Illinois Corporation, a general contractor and construction manager, says that his firm has relied upon a diverse pipeline of projects to ride out the construction slowdown so far.

Reed is doing what other survivors are doing: The company does not focus its efforts on one particular sector of the market. Instead, it tackles projects in all fields.

“We are strong believers in diversification,” Birck said. “We are active now in health care, in corporate construction and in institutional markets. We will even get involved in hospitality and retail projects. Of course, at this point in time those markets have slowed, it not stopped.”

And that’s the point. Reed is able to overcome the slowdown in the retail and hospitality businesses by focusing on the other areas of its practice that are doing well, such as healthcare and public-works projects. In fact, Reed is now involved in about a dozen hospital projects in the Chicago area, Birck said.

This focus on diversity has led Reed to have an active first two quarters of the year. Business has slowed in the third and fourth quarters, Birck said, but his company will still have a profitable and successful year.

“You have to always be looking for those markets that are doing well,” Birck said. “If you look at healthcare, you see that hospitals are driven by the demographics of the population. No one is getting any younger. Hospitals also benefit from the development of new technology. That’s a driver to more hospital work, too. As new technology comes in, hospitals have to embrace it.”

Several different projects have helped keep Reed busy during even these slow economic times.

“Our company has been through the Great Depression. We’ve been through two World Wars,” Birck said. “We’ve survived the recessions of the ’70s, ’80s and ’90s. What we’ve learned is that all you can do is maintain good relationships with your clients, and provide them with the best service you can. That is what has kept us going this long. It’s not exciting, but it works.”

Happy to be in the Midwest

When Paul Chuma reads the headlines that bemoan the state of the housing and construction industries across the country, he has one quick thought: “I’m glad I work in the Midwest.”

Chuma is president of Meridian Design Build in Deerfield, Ill. His company has seen the effects of the slowdown, of course. But it’s also staying active with several projects, including many that are renovations and adaptive re-uses, work that has remained steady in the Midwest.

“When the economy goes through its cycles, being in the middle of the country and in the Midwest seems to really help,” Chuma said. “We don’t experience the high highs or the low lows that other parts of the country experience. It definitely helps.”

That being said, Chuma isn’t denying that the construction industry is a bit sluggish these days, even in traditionally steady markets like Chicago.

“The velocity in the market has definitely declined,” he said. “There is definitely cause for concern, but there are opportunities out there for those companies that are willing to put forth the effort to figure out how to get a deal done.”

For Meridian, that involves tackling the company’s specialty, design/build projects. The company is now working on a 30,000-square-foot facility near the old stock yards area in Chicago for Gypsum Supply Co. and a 103,000-square-foot build-to-suit headquarters for Auto Truck Group in Bartlett, Ill.

“The big-box spec development has slowed,” Chuma said. “It hasn’t stopped entirely, but it certainly has significantly slowed. We’ve seen several developers who had planned projects that are sitting on the sidelines now. They may eventually happen, but now is not the time. Now it seems that the developers and the commercial brokers are focusing more on pursuing build-to-suit clients.”

Russ Henke, principle at Edwardsville, Ill.-based Contegra Construction, said that not all is gloom-and-doom in his industry. It’s impossible to predict when the commercial market will shake out of its doldrums, Henke said, but he’s looking for positive signs to start showing up as soon as the November presidential elections wrap up.

“We could definitely use some positive news,” Henke said. “There have been enough people waiting it out. I think people are looking for any reason to kick loose and move ahead. Look at it this way, owners are going to see in this coming fourth quarter and the first quarter of next year some of the best construction pricing from a materials and installation standpoint than they are going to see in a long time.

“There are still companies wanting and planning to grow,” he said. “That is the good news. There is nothing worse than the status quo. There are still market sectors that are strong. There are still opportunities on the horizon to take advantage of.”

Source:  RE Journals