A paucity of projects in the pipeline dampens expectations that contractors will see a building boom anytime soon.
In downtown Charlotte, the $195 million NASCAR Hall of Fame’s swooping lines evoke speeding race cars, while three hours to the west in the Smoky Mountains, the Cherokee Central Schools complex — 10 buildings, including three schools — is an earth-toned $108 million project blended into its natural surroundings. Charlotte-based BE&K Building Group LLC completed both last year, and as with most Tar Heel construction companies, both were already in its pipeline before the economy sprang a leak.
“In 2009 and the first 10 months of 2010, we’ve been working off a backlog of projects won several years ago,” says Luther Cochrane, chairman and CEO of BE&K, which ranks as the state’s second-largest construction company for the second year in a row. “The construction industry tends to lag the rest of the economy going into a recession and coming out.” That foreshadows another somber year for contractors.
Despite some loosening of tight capital, pipelines such as BE&K’s are going into 2011 only marginally fuller than in 2010. “It’s pretty dry right now,” says Tim Clancy, CEO of Raleigh-based Clancy & Theys Construction Co., which moved from ninth to sixth on the list, despite revenue that slipped from $265 million to $222 million. Adds Robert Barnhill Jr., chairman and CEO of Tarboro-based Barnhill Contracting Co., “We’re not looking for it to be any better, if as good.”
Barnhill Contracting does private and public projects, the latter aided by $745 million in federal stimulus money that North Carolina earmarked for highway and bridge construction. Those funds had to be spent by September, and N.C. Department of Transportation planners have cautioned contractors to expect to return to routine spending in the coming year. The pipeline at Barnhill Contracting, where total employment has declined from a pre- recession 1,250 to about 950, has seen private contracts remain at a trickle. Barnhill dropped from No. 1 to No. 3. Clancy & Theys employment has fallen from about 600 to 350.
Contractors have been hit by a nasty confluence of recession, overbuilding — particularly in the Triangle and Charlotte before the recession began in December 2007 — and clients hamstrung by skittish lenders. Charlotte-based Shelco Inc. climbed from 10th in the previous year’s ranking to seventh despite a drop in revenue, but its private projects were meager. “Eighty-five percent of our business right now is public,” says Ike Grainger, vice president for business development. “There’s lots of office space available, and we hear from developers that lending requirements are still difficult. Equity requirements are a lot greater. Banks could be a little more lenient.” Not all builders blame lenders. “In the banks’ defense, I haven’t seen many deals I’d invest in the last couple of years,” one CEO says.
“If you look at the reasons people build buildings, they’re public buildings supported by tax collections, and tax collections are down, reflecting overall economic activity,” Cochrane says. “Or they’re motivated by a demand for retail space, commercial space or condominiums — demographics. People want something new and better. That demand is not out there now.”
Another factor emerged in early November. Contractors are uncertain of the impact of Republican victories in state and national races and pledges to cut public spending and repeal health-care reform. Health-care building has fared better than other segments in the last two years.
Now, prospective building clients face a paradox. Material costs are the lowest in years — some contractors estimate 30% less than before the recession — as are interest rates. “If you can get the money, now’s the time to build,” Barnhill says. “But the only ones building in this environment are the ones that are very sound — very bankable — or those that can self-fund.” Take Charlotte-based Bank of America Corp. Its $390 million 1 Bank of America Center project, which includes an office tower and hotel, began in 2007 and was completed this year. That helped propel Balfour Beatty Construction LLC to the top of the list.