2005 Industry Report: Construction

Conditions put it together for builders

Change Orders

TREND: Privately funded commercial projects are increasing.

OUTLOOK: The availability of labor and materials at more stable prices will fuel more growth.

For two years, commercial builders leaned heavily on publicly funded projects to survive. But an improving economy stimulated a rebound in the private sector last year. “There’s just not much bad news out there,” says Tony Plath, a UNC Charlotte banking professor and consultant to the Carolinas Associated General Contractors.

Not that there weren’t problems. Labor became scarce as projects multiplied, and a construction boom in China boosted the cost of building materials worldwide. “It was a problem for projects already bid,” says Chuck Wilson, president of Durham-based C.T. Wilson Construction. “Over an eight-month period, steel almost doubled in price.”

That meant higher costs than builders anticipated, which trimmed margins. Nevertheless, Wilson doubled revenue to $46 million in 2004, thanks to public and private projects, which included $8 million in renovations for four buildings at N.C. Central University in Durham, a $6 million arts-and-humanities building at UNC Chapel Hill and a $1.8 million conversion of two tobacco warehouses into a restaurant and office space in downtown Durham. “We’ve been awfully fortunate to have the university bond-issue work.”

Ike Grainger, vice president of business development for Charlotte-based Shelco, also saw work increase through private and public projects. Among his company’s projects in Charlotte are Piedmont Town Center — two eight-story buildings that will combine retail, office and residential space — an office building for Carolinas HealthCare System and office buildings for Piedmont Natural Gas. “We’re coming out of the recession, and the overbuilt market is tightening up a bit.”

Andrew Jenkins, managing partner of Karnes Research, which tracks commercial construction in Charlotte and the Triangle, says both markets have recovered in different ways. Most of the development in Charlotte follows Interstate 485, the loop being built around the city. The Bissell Cos. is developing speculative office buildings in its Ballantyne Corporate Park in south Charlotte. Most manufacturing development is in southwest Charlotte.

There has been little office, retail or flexible space built downtown since the first quarter of 2003. This year might be busier. The city is building a $265 million basketball arena, which should be completed this fall, and Charlotte-based Wachovia is planning a 34-story, 750,000-square-foot office building downtown that would be developed by Atlanta-based Childress Klein Properties.

There was more activity in other downtowns. In Durham, about 480,000 square feet of tobacco warehouses were redeveloped by Wilson and others into homes, stores and offices during the second quarter. In Raleigh, Progress Energy’s new headquarters, which has office space for other companies, was finished in the third quarter. In both cases, developers lined up tenants before starting construction the year before. “2003 was a very cautious year for new development,” Jenkins says.

Plath thinks commercial construction will remain strong in 2005. But not all parts of the state will prosper equally. Cities and suburbs are growing, especially around main roads, but there’s little construction under way in the rural parts of the state. “Once you get east of I-95, it just dies.”

Companies should have an easier time managing costs in 2005. The rate of construction in China is slowing, he says, so there shouldn’t be as much competition for materials. And labor costs shouldn’t be a big issue. “As the textile industry implodes, it’s keeping construction wages down by ameliorating labor shortages,” Plath says.

Residential construction also is thriving. Bernard Helm, president of Rocky Mount-based Market Opportunity Research Enterprises, which tracks residential construction, says employment gains through the second quarter of 2004, continued low interest rates and a competitive marketplace have fueled growth.

A rise in interest rates could curb demand for some homes. But otherwise, Helm says, the industry will stay strong. “As long as there is job creation, we are going to have a relatively strong market.”