Getting nailed by tight credit

Prices of commercial construction are falling, so this
is a good time to build ó if you can raise the money.

Last year was perhaps the worst in a decade for commercial builders in North Carolina, according to Carolinas AGC Inc., a trade group for general contractors. After two quarters, its construction barometer, which tracks employment, economic and financial trends to gauge the health of the industry, stood at the second-lowest level since it began 10 years ago. It was expected to drop in the third and fourth quarters. Tight credit and a sour economy forced delays, cancellations and changes in many projects. And 2009 will be even worse, says Tim Clancy, president of Raleigh-based Clancy & Theys Construction Co.

BNC: What do you expect this year?

Clancy: I see prices coming down. It wonít be a terrible year for us at Clancy & Theys, but it will be challenging. Statewide, Iíd be surprised if construction volume isnít lower than in 2008.

Donít contractors normally have a backlog to tide them over?

Most do, and we probably have enough to keep busy through 2009. But what weíre worried about is 2010 and 2011 because construction lags the economy so much ó normally two years. So letís say we began the recession at the end of 2007, as the government says. Add two years to that, and weíre through 2009. But then 2010 and 2011 could be really difficult years.

Will jobs already booked slow down?

It depends on the economic climate. Jobs we developed last year might take longer to get going than the things we booked in 2007 or 2006. Others, like public jobs, might pop up pretty quickly.

How will individual segments fare?

Retail and hospitality will be particularly weak. Office construction probably will be weak. Public work will slow down but probably be better than private work. Weíre not in the highway segment, but I hear a lot of gloom and doom from those guys. Health care will probably be a better market than others. Itís less affected by recession.

How will turmoil in the credit markets affect construction?

Everything we build is financed by debt. Weíre not into building things you can go out and buy with pocket change. So when the credit markets are challenged like they are now, itís going to have a large effect, probably the most significant effect of anything for the next couple of years.

How about within construction companies?

General contractors are not heavily capital-intensive, unlike road builders and others, so most of us donít have a lot of financing needs within our companies.

For those with capital, isnít this a good time to build?

Sure. For the next year or so, youíre going to see prices come down. But it all depends on what youíre building. If youíre building a shopping center and they arenít leasing, itís not a good time to build, no matter what the costs. Likewise with office buildings. If the government has money, itís probably a good time to build things like classrooms.

The Obama administration wants to pump hundreds of billions into construction to boost the economy.

Any time thereís more work out there, itís helpful. But I wouldnít be surprised if a lot of that doesnít go into road and bridge work, things weíre not involved in. Other things like airports and universities might be possibilities. Unfortunately, a lot of government money is based on political decisions and doesnít necessarily go where itís most needed or has the best economic value.

How does our construction climate compare with that of other states?

The Southeast is doing better than a lot of other places. Florida is challenged from a residential standpoint but not as bad commercially. Virginia is similar to North Carolina. The Triangle is better off than a lot of the country. We have a lot of government, universities and companies that are a little more recession-proof than, say, the automobile industry.

How can contractors insulate themselves from recession shocks?

Diversifying is expensive, and you canít do it overnight. About all you can do is to tighten operations and cut costs as much as possible. Buy what you need, not what you want. It helps to have a strong balance sheet going into this and to manage your accounts receivable well. Youíve got to avoid cash-flow problems.