Electrical contractors take a pragmatic approach to construction as they look to 2003.
The construction market is sliding down a slippery slope, said the owner of a Massachusetts electrical contracting firm. “Construction now is like it was in the 1970s and 1980s,” says Wayne Griffin, president of Wayne J. Griffin Electric, Holliston, Mass. “You are using old skills of resilience such as hard work, client relationships, and integrity to make it through.”
Griffin has survived two recessions in his 25 years of business. Like many contractors, his company has experienced slim margins and sagging markets in 2002. He expects 2003 to remain flat at best, and market analysts share his vision.
The Dodge division of McGraw-Hill Construction forecasts that the economy will grow about 3% in 2003, but the value of total construction starts will drop 1% from 2002 levels (see Table below). To weather the economic downturn, many of the nation’s largest contractors are branching out into new market segments to increase profit margins. Jeff Levy, president of Norwalk, Conn.-based Emcor Group, the third largest electrical contractor with 2001 sales of $1.37 billion, says his company has shifted its focus from the commercial sector to the education, health care, water, waste, and transportation markets.
“We’ve been able to redeploy the forces,” Levy says. “The contractors who were doing steel mills are now doing power plants, and the ones who were doing office buildings are now doing hospitals. We have the flexibility and technical expertise in our company to move into sectors as they become more active.”
The construction boom may be over, but like any other time in history, the market will come back again, says Jim Spellane of the Washington, D.C.-based International Brotherhood of Electrical Workers.
“Construction is cyclical by nature,” he says. “We’ve come off a very good spell where things were pretty good for a long time. We had a lot of projects that had been initiated during better economic times that we are still working on. Many of them are coming to completion now or money is running out. It’s getting tight out there.”
While many contractors have had to lay off staff, trim budgets, or close up shop, some are thriving even in a down economy. The following regional construction outlooks should help you determine what markets are worth pursuing and what challenges you should expect to face in the coming year.
Cupertino Electric, an electrical contractor headquartered in the heart of Silicon Valley, grew up in the high-tech industry. In 2000, the explosive data center market took off, and Cupertino built 12 data centers in Texas, Florida, California, Washington, and Arizona. During the dot.com boom, 40% of Cupertino’s business came from building data centers. Two years later, it accounts for just 2% of their business.
“It was great high-tech work that was challenging and right up our alley,” says Chief Operating Officer Gene Ryley.
Today, the data center market has all but disappeared.
“There’s a little bit of it, but very little,” he says. “A lot of the ones that we have done in the past are sitting vacant or have 25% occupancy.”
Rather than building new data centers, many companies are opting to rent space for a fraction of the cost. The abrupt end to the dot.com boom forced Cupertino to return to their bread-and-butter markets, such as sewage treatment plants and schools. The contractor also launched an energy group to work on peaking plants and cogeneration facilities, but the energy crisis in California never reached its forecasted proportions. Dodge reports that the electric utility market will face sharply reduced contracting again in 2003.
“We had bid a number of facilities and were prepared to start them and the owners put them on hold,” he says. “It’s like a data center situation. There was more capacity than was needed so people decided not to build most of them.”
As a result of the declining markets, Cupertino has reduced its workforce by 50% to try to meet its current workload and revenues, which have dropped from $510 million in 2001 to about $260 million in 2002.
Steven Moore, chairman of Rex Moore Electrical Contractors and Engineers, West Sacramento, Calif., has also seen construction come to a screeching halt in the Bay Area.
“All the dot.com people just about put a freeze on building,” Moore says. “There’s public work down there obviously, but the private work is very slow. You just have to shift markets and follow the work.”
Raymond Owens III, vice president and senior economist for the Federal Reserve Bank, estimated that about 20 million sq ft of office space was built between 1998 and 2000, and high-tech companies occupied 11.5 million sq ft of it. The dot.com companies contracted for more space than they needed, and when many of them went out of business, vacancy rates soared in California. After dropping 21% in 2002, the national office building market will decline another 3% in 2003. This is supported by the rise in office vacancy rates as noted in the Chart above.
California contractors aren’t the only electrical firms facing a dramatic slowdown in construction due to the decline in tech spending. Todd Grasle, executive vice president and chief financial officer of Oregon Electric Group, Portland, Ore., forecasts that his 2002 sales will dip from $108 million to $88 million, and then gradually increase in 2003.
“There’s not a lot of construction work going on right now,” Grasle says. “A lot of the high-tech companies are not building anything new.”
In Oregon, the commercial and industrial markets are flat, and new schools and other institutional work are the only active markets.
“Because of the lack of projects, the contractors are focusing harder on what little work there is,” he says. “The margins are a lot more competitive.”
Oregon Electric Group has been successful in obtaining contracts due to its financial strength and bonding ability. Like many other firms nationwide, however, the company has had to lay off employees due to the volatility in the semiconductor and chip manufacturing industries, which tend to be more cyclical than other markets.
“They have a lot higher ups and lower lows than the typical industry,” Grasle says. “It’s either going well or not going very well. There’s not a lot of in-between.”
While Dodge envisions a slight jump in construction in the West for 2003 (see Table on page 41), Grasle expects the first few quarters to be flat.
“The economy and the construction industry is not as healthy here as it is in other parts of the country,” Grasle says. “There’s more high-tech in this particular area and that has had one of the steepest declines in their industry’s history. That’s really affected us quite a bit. Last year, it represented about 30% of our work, and this year it’s about 15%.”
The construction market on the West Coast took off during the dot.com boom and then shriveled when the economy hit rock bottom. The North Central market, however, has remained fairly stable, says Kevin Lasater, vice president of Sachs Electric, St. Louis.
“We don’t get too high, and we don’t get too low,” he says. “It’s the old Midwest conservative work ethic.”
Lasater, who has been in the construction business for 25 years, says the St. Louis construction market has tightened up in the last few months. Three significant projects, however, are on the horizon, including the expansion of the Metro Link light-rail system, a multi-billion dollar project at Lambert-St. Louis International Airport, and the construction of a new downtown baseball stadium for the St. Louis Cardinals. Sachs plans to heavily pursue the stadium’s electrical and voice/data/video contracts, which could top $30 million.
Along with bidding the stadium job, Sachs has also been awarded several health-care contracts, such as the Tower “C” expansion for St. Louis-based St. John’s Hospital, which is in the midst of a $400 million capital improvement program that will be stretched out over eight to 10 years. Plans call for a new cancer center, a $25 million energy center with a loop system around the campus, and vertical expansion of outpatient surgery.
The health-care market is booming in St. Louis, and Dodge reports that the growth will continue into 2003 (see Table below). Hospital work across the nation posted a 17% gain in 2002 and will continue to increase by 2.9% next year.
While the health-care market is thriving, two of Sachs’ core markets—automotive and power—have dropped off considerably. Unfortunately, the decline in the St. Louis utility market reflects a nationwide trend. After declining 29% in 2002, Dodge predicts that new electrical utility contract awards will plunge 24% in 2003, on top of the 49% decline this year. The $11-billion market, however, is still up 17% from 1999 levels.
With office vacancy rates rising, proposed new office projects are also essentially nonexistent. Three major firms that were founded in St. Louis—A.G. Edwards, Edward Jones, and Enterprise Rent-A-Car—are no longer in a major growth pattern.
“These firms were in some heavy growth for awhile in terms of space requirements,” Lasater says. “Because of the changes in the stock market and how Americans invest, they have slowed down their expansion plans and are doing more infrastructure upgrades in preparation for future needs.”
The Chicago construction market has also slowed down significantly. Tom McLinden, vice president of business development for Aldridge Electric, Libertyville, Ill., says more electrical contractors are bidding on fewer projects. To remain competitive, Aldridge is working in seven different markets, including highway, airport, industrial, telecommunications, utilities, and transit. The telecommunications market has plummeted, but McLinden says the transportation market still has some strong money for 2003.
“A lot of our competitors are screaming that they do not have work,” he says. “They’re having layoffs and we haven’t been faced with that. When one of our divisions goes down, it seems like there’s always a division that’s picking up.”
The Florida construction market is a shining exception to the bleak 2003 forecast. Miller Electric, which is celebrating its 75th anniversary in January, is enjoying the thriving construction market in Jacksonville, Fla.
“Virtually every market in our company is looking at increased revenues next year,” says Senior Vice President Ron Autrey.
Autrey said his company had a significant downturn in billings from November 2001 through April 2002, but the recovery was quick, and by September the company was setting new growth records. One reason for the booming construction in this region is the passage of the Better Jacksonville Plan, which included a half-cent sales tax increase to raise $2.2 billion. Half of the funds will go toward roadway and other infrastructure improvements, and the rest will be spent on projects like a $34 million ballpark, $130 million sports arena, $211 million county courthouse, and $95 million library.
“Those projects are still in progress, so the economic impact that they have will be felt into 2003,” Autrey says. “After the larger projects are through, it will certainly fall off, but the hopes are that Jacksonville continues to become a choice for companies to relocate.”
Although the Florida construction has the potential to hit record levels in 2003, it could be hampered by a Constitutional mandate to reduce K-12 class sizes and build more classrooms. While this is good news for the school market, it could have an adverse effect on the rest of construction.
“We’ll have to add onto existing schools and build new schools over the next 10 years to comply with that mandate,” Autrey says. “The money will shift out of one sector and into another. It may be good short-term for the construction industry but it’s bad long-term for the state of Florida.”
While the Florida market is booming, the nearby Atlanta market, however, has dropped 30% to 40% in the past year, says Jeff Giglio, president of Inglett and Stubbs.
“The construction market is rather depressed in Atlanta,” Giglio says. “Investors got overanxious in what they thought the market could bear, and Atlanta was overbuilt pre-recession. Our absorption is taking longer than it was in other places in the country.”
Because the construction market is so tight in Atlanta, Inglett and Stubbs is looking to expand into new markets like water treatment, low-voltage, residential, and health-care.
“You continue to have baby boomers that are growing up and needing more medical attention,” Giglio says. “That’s going to keep on driving a need for more health-care.”
Although his company’s 2002 sales dropped to $90 million, Giglio expects sales to jump back up to $100 million in 2003.
“Things will be a little bit better,” he says. “We are in the middle of doing our budgeting right now, and our prospects look better next year than they did this year.”
Another Atlanta contractor, Cleveland Electric, also expects construction to pick up slightly in 2003 with high-dollar projects like the expansion of the Hartsfield International Airport. The Centers for Disease Control (CDC), headquartered in Atlanta, are also undergoing a major expansion program and have hired six general contractors to build laboratories and upgrade the campus. Cleveland Electric is currently working on one of the labs and hopes to win more contracts to provide the electrical work for the CDC.
Vann Cleveland, director of business development, says some of the major auto manufacturing plants in the South are also expanding. Daimler Chrysler announced plans to build a cargo van plant in Savannah, Ga., and Toyota may build more plants in northern Alabama. As you can see in the Table below, the Dodge construction outlook for the South Atlantic region projects positive growth.
“In the past few years, a lot of service businesses have relocated to Atlanta, which has placed a greater demand on hospitals and puts a strain on the water treatment facilities,” Cleveland says. “People have come here to take advantage of the job opportunities, and all the infrastructure must expand to keep up with the growth.”
Twenty percent of Integrated Electric Service’s (IES) revenue comes from Texas, which remains a solid market, says Christine Resler, senior director of business development.
“Texas remains pretty strong for us,” she says. “There’s been some pockets of weakness in Texas, but overall Texas has remained robust. Houston continues to grow and spend, as does Dallas, and those are two of our bigger markets in the state. Whether the market is stronger or we are just getting better projects, it’s hard to tell, but it seems like Texas remains pretty robust from a growth standpoint.”
Both Dallas/Fort Worth International and George Bush Intercontinental Airports are undergoing major expansion projects. Despite strong market segments, the Houston-based contractor reported that its revenues dropped from $1.693 billion to $1.475 billion.
“We were impacted by a decline in communications, commercial, and industrial spending,” Resler says. “The industrial market has really fallen off. There’s a lot less manufacturing plant and high-tech work going on than there was two years ago. Those are the markets where we’re seeing some of the most significant cutbacks.”
While manufacturing facilities across the United States took a major hit in 2002, Dodge expects this market sector to rise 6% in 2003. Unfortunately, this is still 22% below 2001 and 50% below the 1997 peak. The institutional and multi-family housing markets, however, will increase in the South Central region in 2003 (see Table below).
Alexandria, La.-based Red Simpson also expects to post a modest gain in sales for 2003. The powerline contractor works with electric utilities throughout the South on their infrastructure and non-power plant needs, such as distribution, transmission and substation-related projects. Red Simpson has nearly doubled its workforce from 1,000 employees in 1996 to 1,900 in 2002. Ron Schenk says his company expects a 5% to 7% increase in 2003.
“We’ve grown fairly rapidly because electric utilities have been outsourcing a lot of their construction and maintenance needs on their power distribution systems for a couple of years now,” he says.
The aftershock of the Sept. 11 terrorist attack has wreaked havoc on the New York City construction market. Bob Mann, chairman of E-J Electric Installation Co., Long Island City, N.Y., says the New York City electrical industry currently has a 15% unemployment rate. Due to the number of electricians out of work, E-J is one of several union contractors in the area who had to go on a furlough.
“The furloughs work out so that everybody gets rotated over the period of a year and gets to work,” Mann says. “We are told what percentage of our workforce we have to send back to the hall and what percentage we get from the union.”
Mann recalls the last time that electricians were put on furlough was three or four years ago.
“New York is having a terrific problem because a lot of the main tenants don’t need their space so they are subletting it,” Mann says. “There is so much old space that you can get for one-third the price. There are a couple of buildings under construction, but there are basically no new ones coming up.”
The office renovation and construction market plunged after Sept. 11, and the industry is concerned over the growth in the office vacancy rate due to company downsizing. This is reflected in Dodge’s bleak regional outlook for the Northeast (see Table below).
On a more positive note, E-J won the contract for the base of the Seven World Trade Center, the first in the effort to rebuild Ground Zero. The rest of the plans, however, aren’t firmed up yet.
“Seven World Trade Center is the only one going ahead at this point,” Mann says. “There’s not going to be a lot of construction for another year or so.”
The New York office construction market experienced a whopping 94% increase in 2001, but dropped by 33% in the first nine months of 2002, according to Dodge. Even the John F. Kennedy Airport, which at one time was undergoing significant construction, is now at a standstill.
“The slowing economy and the 9/11 problems in New York are causing everyone to get slower,” Mann says. “The airport work has dropped down quite a bit because the passenger load has decreased.”
Levy of Norwalk, Conn.-based Emcor, agrees.
“There’s still a good deal of activity in the New York City area, but most of that work has been long planned, committed, and in the ground or soon to be,” he says. “There are very few new projects.”
Levy expects to see a lot of activity in the Northeast construction market, but the deployment across trades is going to vary because of the changing sectors in which the work is performed.
“If you are pouring concrete for highways and bridges, you don’t need many electricians,” he says. “The shifts in the sectors and the timing on new construction projects are affecting the employment and trades. We’ll see some cycling patterns this year that we haven’t seen for awhile.”
While consumer spending is relatively high considering the slowing economy, the state and federal spending has been cut back, says Wayne Griffin of Wayne J. Griffin Electric.
“Some things are happening with private clients, high-tech, pharmaceutical, and biotech clients, but surely not in the same robust way that they were two or three years ago,” he says. “Hotel construction, office buildings, high-tech projects, bioscience projects—all of those private industries of general building construction have dropped right off. Those can be the bread and butter of a contractor’s livelihood.”
Griffin says his company now has about $160 million in its two-year backlog.
“Next year will be similar with flat volume and not much growth,” he says. “Without a wizard hat, I can’t see much beyond 16 months. We don’t see much sparking in the economy at this time.”