It's Time To Build

February 11, 2007
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With tower cranes dotting the skyline, a ballooning health care cluster, and even the occasional industrial expansion, West Michigan has outperformed the Michigan construction market as a whole. In most non-resaidential sectors, volume was up in 2006 over 2005, and the market is expecting steady or increased volume in 2007.

Yet, it hasn’t been smooth sailing for local construction firms, as stagnant markets for local housing and statewide commercial building have heightened interest in the region’s non-residential projects, resulting in a fiercely competitive environment that has drastically cut prices and profit margins.

“If you’re an owner that’s on the fence, now is the time to make a move,” said Paul Bergsma, director of business development for Pioneer Construction Inc. “It is a buyers’ market. … If they can pull the trigger, they’ll get a great deal.”

Nationally, U.S. construction was flat in 2006 at $663 billion, essentially the same as 2005, according to a report from New York-based McGraw Hill Construction. However, a 12 percent downturn in residential construction (22 percent in the Midwest) masked 14 percent growth in non-residential construction and 19 percent growth in non-building (road and waterway) construction.

The same pattern can be seen in West Michigan, especially in Kent County, where housing starts were off by 18 percent in 2006, but non-residential was steady. The cities of Walker and Wyoming, for instance, issued roughly half as many housing building permits in 2006 than 2005, but commercial activity more than doubled (see related story, page B10).

“We’re pretty confident that the market will be as good or better this year,” said John Doherty, president and CEO of the West Michigan chapter of Associated Builders and Contractors. “Construction in Michigan is down, but I think West Michigan, particularly Kent County, runs counter to that.”

Member contractors and specialty contractors reported strong volume in 2006, Doherty said, with some weakness among smaller contractors and subcontractors. Health care is booming, he said, with growth in retail and hospitality in both urban and suburban areas. There is surprising optimism for industrial building.

The latest commercial real estate forecast from Grubb & Ellis|Paramount Commerce supports his observations, reporting strong retail and industrial investment, and Grand Rapids office construction at its highest point in a decade, nearly 400,000 square feet in 2006.

Doherty was also surprised by growth in education projects, which had been declining.

“I think the slowdown is behind us,” said Bill Schoonveld, president of Owen-Ames-Kimball Co., which last year worked on public school projects in Grand Rapids, East Grand Rapids, Byron Center and Fennville. “Compared to the late ’90s, the first three or four years of this decade were a crash. There is pent-up demand.”

Doherty has also heard positive comments from members concerning the unseasonably warm weather in November, December and early January. Evart Helms, president of specialty contractor Helms Masonry in Byron Center, estimated — conservatively — that the extra hours and increased productivity added up to 15 percent to his bottom line during those months. Michael Kelly, president of Wolverine Building Group, estimated a 2 percent impact on work performed during the warm spell, projects bid with only a 2 percent to 5 percent margin, and an extra week of productivity behind it as a result.

The $130-million Wolverine, which also owns and operates the $40 million Fryling Construction Co., is finding success on the “Medical Mile,” in downtown Grand Rapids, and in suburban retail and industrial. The $200-million Owen-Ames-Kimball has seen similar success with projects such as the Van Andel Institute expansion, Meijer Majestic Theatre and projects for Herman Miller and X-Rite.

“It seems there are the haves and the have-nots,” said Kelly. “Some are busy; some are saying it’s the worst they’ve seen it in 20 years. We think there is work out there, but there won’t be a lot of profits, and you’ll work twice as hard for everything you get.”

Helms, the masonry subcontractor, said the strong volume in the region has been deceiving. Rather than a large number of small to medium-sized projects, most of the volume is concentrated in large to massive projects.

“Only one contractor is going to do a million-dollar masonry job,” he said. “But if you’ve got four $250,000 jobs, that’s four different contractors. Consequently, it’s extremely competitive.”

It’s actually much more competitive than that, said Pioneer’s Bergsma. The housing slump created a steady stream of home builders and subcontractors bidding on lower tier commercial projects. On the upper end, elite competitors from Lansing, Kalamazoo and southeast Michigan, as well as national firms, have recently entered the West Michigan market.

“The rest of the state is struggling,” said James Conner, West Michigan regional manager for Lansing-based Granger Construction. “In Lansing, you’ve got three things: the state (government), Michigan State (University) and GM. Two of those are hiccupping, so it makes Lansing a tough place to be. In West Michigan, you’ve got a much more diverse economy.”

Granger, one of the larger general contractors in the state, established a West Michigan presence in 2005, and has since won some high-profile projects, including the concrete work on the JW Marriott hotel. A year earlier, CSM Group opened a Grand Rapids office.

Christman Co., a statewide Lansing-based firm operating in Grand Rapids since 1991, has found a larger percentage of its revenue in West Michigan, nearly $100 million in 2006.

“It’s been that way for three years,” said Dan LaMore, the firm’s Grand Rapids-based vice president. “It’s been tough to find new business in West Michigan, but it’s even tougher in other parts of the state.”

Christman has played a key role in the region’s health care cluster. It is the construction manager, in partnership with New York-based Turner Construction, of the new Metro Health Village, and a partner with RDV Corp. in the Michigan Street Development.

Many contractors are adapting to remain competitive. Triangle Associates, a $100 million general contractor, shifted its focus from construction management to self-performing work this year, sacrificing 10 percent of its revenues to meet profitability goals. It has had some Medical Mile and national retail work, but its highest growth area is heavy industrial — primarily municipal water and waste water treatment — where it found $50 million in new work this year.

Dan Vos Construction Co. has developed a niche in food processing and church construction, but struggled in the general market this year.

“Don’t let the tower cranes fool you,” said Dan T. Vos, vice president and senior manager of the $45 million general contractor. “It looks like it’s going crazy, but that doesn’t mean it’s not a buyers’ market.”

Dave Turner, COO of Kent Companies Inc., a $40 million concrete and masonry specialty contractor, agrees that the visible construction in downtown Grand Rapids is misleading. His firm has been a part of that, most recently with the River House condominium tower.

“I think everyone will tell you that margins are tighter,” he said. “And if I was a building owner thinking about construction, I’d jump right in.”

Turner noted an interesting, although possibly coincidental, effect of the competition — national retailers and other large organizations appear to be taking advantage of the lower prices, adding new stores or other facilities and renovating old ones.

Craig Datema, president and CEO of Triangle Associates, is concerned that some subcontractors may be overextending themselves under the pressure, and expects that there will be some consolidation in the near future.

Michael VanGessel, president of Rockford Construction, the area’s largest general contractor, said that rising raw material costs could exacerbate that problem, and for that reason, he does not believe it is a buyers’ market.

“I think owners right now have the attention of contractors in the marketplace, and they’re going to get good pricing, but you still need to put value into that,” he said. “We’re seeing a lot of nice things, and it’s been competitive. … We’re benefiting from the strong relationships we’ve developed over the years.”     

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