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Construction activity to rise but remain ‘depressed’
By: Eddie Baeb Feb. 22, 2010
(Crain’s) — Local construction starts are forecast to climb 18% this year, as increases in single-family housing construction and public works projects help end a three-year decline.
Yet the gains won’t feel like much of a salve to the Chicago-area construction industry, as the $11.51-billion value of the projected starts in 2010 is just more than half the peak of $21.77 billion in 2006, according to McGraw-Hill Construction Research & Analytics.
“We’re still going to have a depressed construction market in 2010, it’s just that we’re coming out of that horrible experience in 2009,” says Kim Kennedy, manager of forecasting with McGraw-Hill Construction Research, a Bedford, Mass.-based unit of McGraw-Hill Cos.
Last year, construction starts plummeted 46% to $9.78 billion, marking the biggest decline here since McGraw-Hill began tracking the data in 1967. Public works and utilities were the only sectors to see gains in 2009, while the steepest falls were in commercial, industrial and institutional buildings.
From a bottom-line perspective, 2010 could be every bit as tough — or tougher — as the lack of work and the crowded competitive landscape has squeezed margins for contractors.
“It’s still painful,” says Steve Zuwala, president of Chicago-based Interior Construction Group Inc. (ICG), which specializes in upscale office buildouts. “In 2009 we had the benefit of some projects carrying over from 2008, when fees were a little bit better.”
Mr. Zuwala says ICG’s bid opportunities are up 40% compared to the same time last year, and if the firm wins enough of that work it may begin adding workers after slashing headcount some 30% from late 2008.
“It’s encouraging that the year started out with a lot of people deciding, ‘Let’s get this out for bid,’” he says. “There’ll be more activity, but the fees will be lower.”
Chicago’s 18% projected increase this year tops McGraw-Hill’s national forecast that starts will increase 11% to $466.18 billion.
Single-family housing starts are projected to climb 70% here to $1.97 billion, while multi-family housing is projected to remain flat at $940 million.
Low mortgage rates, loosening credit, falling prices and pent-up demand all stand to bolster the single-family market, where local construction starts have fallen four straight years, writes McGraw-Hill.
Apartment and condominium construction, meanwhile, won’t back bounce from three years of falling construction starts because of the big existing inventory of both apartments and condos.
“Oversupply will remain a daunting challenge in the overbuilt Chicago metro,” McGraw-Hill writes. “The building boom of 2003-2006 has created a deluge of units entering the market even while the market has turned dramatically negative.”
Chicago’s multi-family is lagging the national market, as McGraw-Hill forecasts starts will rise 16% nationwide this year.
The mainstays of the commercial sector, retail and office, are poised to have a third straight year of local declines. Construction starts of stores and shopping centers are forecast to fall 11% this year to $420 million, while starts of office and bank buildings are expected to drop 17% to $291 million.
Health care projects are poised to rise 22% in 2010 to $662 million. That comes on the heels of a precipitous 81% decline last year primarily because of the huge volume — $2.88 billion — that started in 2008, including four major hospital projects: the Ann & Robert H. Lurie Children’s Hospital; University of Chicago Hospital Pavilion; Rush East Tower Atrium, and Elmhurst Memorial Hospital.
Public works projects, buoyed by federal stimulus money, are expected to be a bright spot in 2010. Local highway and bridge construction starts are slated to climb 26% to $2.05 billion.
Roughly $86 million in stimulus transportation funds were allocated to Chicago, according to the McGraw-Hill report, with several major projects to get under way this year, including $11.6 million for Chicago Avenue improvements between Laramie and Grand avenues and $10 million for improvements to Congress Parkway.
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Lawsuits follow collapse of Krahl Construction
By Eddie Baeb, Feb. 03, 2010
(Crain’s) — Krahl Construction’s bank and a major insurer are suing Krahl President John Paderta for about $4.75 million to collect on personal guarantees Mr. Paderta provided the firms.
Fifth Third Bank and a unit of Travelers Cos. filed suit in federal court in Chicago against Mr. Paderta, whose firm shut down early last month just days after the FBI raided Krahl’s headquarters office in the West Loop as part of an ongoing federal investigation.
The lawsuits, which both allege breach of contract, don’t come as a surprise to industry sources given that such guarantees are common in the construction industry — particularly for mid-size firms like Krahl, which had a total of about 150 employees at its headquarters, 322 S. Green St., and another office outside Denver.
The suit from Hartford, Conn.-based Travelers Casualty & Surety Co. shows that Krahl was involved in some high-profile assignments here for major clients including Northwestern Memorial Hospital, Rush University Medical Center and San Francisco-based Digital Realty Trust Inc., owner of the massive data center at 350 E. Cermak Road.
Lawyers Jeffrey Schulman and Harold Rosen of Chicago firm Wolin Kelter & Rosen Ltd., who represent Mr. Paderta, didn’t return calls Tuesday seeking comment.
Cincinnati-based Fifth Third alleges in its suit that the bank lent more than $6 million to Krahl, where Mr. Paderta is the largest shareholder, through revolving note loan agreements dating back to May 2004. The bank says it was owed $4.25 million in principal, accrued interest and fees at the time its suit was filed Jan. 19 in U.S. District Court in Chicago.
Fifth Third says Mr. Paderta personally guaranteed repayment of the debt, and the bank seeks a judgment of $4.25 million. The bank also terminated an interest-rate swap agreement it had with Krahl after the company closed its doors. In a Jan. 15 letter included with the lawsuit, the bank says it is owed $156,250 for terminating the swap.
A Fifth Third spokeswoman declined to comment, and the bank’s lawyer in the matter didn’t return a call.
Travelers, which filed its suit Jan. 20, one day after Fifth Third, seeks a judgment of $499,000 against Mr. Paderta and a preliminary injunction that would stop him from selling or disposing of any assets and also give Travelers access to his and Krahl’s financial records.
“Unless the injunctive relief … is granted, the defendant is likely to sell, transfer, dispose, lien, secure or otherwise divest their assets from being used to discharge (Mr. Paderta’s) obligations to exonerate and indemnify Travelers,” the lawsuit says.
Travelers’ lawyer in the matter, John Sebastian of Chicago-based Hinshaw & Culbertson LLC, and a Travelers spokesman decline to comment.
The insurance company’s suit also provides a list of 22 Krahl projects where Travelers provided so-called surety bonds, which insure performance and payments to subcontractors. Those projects, most of which are local, totaled about $97 million. The biggest were:
• $53.67 million for two projects at the data center at 350 E. Cermak for Digital Lakeside LLC, a venture of Digital Realty Trust.
• $12.17 million related to an outpatient imaging center for Northwestern Memorial.
• $11.4 million to renovate the Fox WFLD-TV studio and newsroom at 225 N. Michigan Ave.
• $8.08 million for five jobs at Rush University Medical Center, the largest being $5.7 million to install a new fire alarm system at the Jelke Building, 1750 W. Harrison St.
Four of the five jobs Krahl had at Rush were completed, except for the new fire alarm, which is about 80% done, says Michael LaMont, Rush’s assistant vice-president for capital projects.
Mr. LaMont says Travelers is now obtaining bids to complete the job, which came to a halt when Krahl shut down. The work stoppage shouldn’t be problematic so long as a new contractor is brought on in the next few weeks, he says.
Mr. LaMont says Krahl isn’t involved in the $300-million new tower being built at Rush’s Near West Side campus, but that the firm had been making a concerted push into health care. Krahl’s other jobs at Rush included a pedestrian bridge from a parking garage and a patient-care procedure room.
“In the past three years they started to pick up more and more work here,” Mr. LaMont says.
Krahl’s assets are slated to be liquidated through a process known as an “assignment for the benefit of creditors.” The company at the end of last year had about 200 projects under way with potential gross revenue of $97.86 million, according to Rally Capital Services LLC, which is handling the assignment process.
Rally Capital President Howard B. Samuels says the lawsuits by Fifth Third and Travelers have no bearing on the assignment and that both the bank and insurance company are cooperating with his firm.
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Liquidation process starts for Krahl Construction
By: Eddie Baeb Jan. 20, 2010
(Crain’s) — Just two weeks after being raided by the FBI, Krahl Construction has begun the process of liquidating through a bankruptcy-like procedure that’s handled privately rather than in court.
The company, a general contractor based in the West Loop, has assets of $17.58 million vs. liabilities of $19.86 million, according to a letter sent Tuesday to Krahl’s creditors from Rally Capital Services LLC, which is conducting a so-called “assignment for the benefit of creditors” for the company.
Such procedures are typically sought in agreement with creditors as a cheaper and quicker alternative to a court-run Chapter 7 bankruptcy-protection case.
The letter to creditors, from Chicago-based Rally Capital President Howard B. Samuels, also sheds additional details on the swift and dramatic shutdown of Krahl, which had 150 employees and had been in business since 1913.
Mr. Samuels writes that on Jan. 8, three days after Krahl’s Chicago office was raided by the FBI and the U.S. attorney’s office in Chicago, the company’s “primary secured lender set off against Krahl’s bank accounts.”
That means the bank, which wasn’t identified, likely called a default on Krahl’s loan and swept up any cash it held for the company.
Krahl closed its doors that day, Mr. Samuels writes, and on Friday entered into the assignment agreement, “conveying all of the remaining assets of Krahl to (Mr. Samuels as trustee) for the purpose of sale or liquidation.”
The company, which was based at 322 S. Green St. and also had an office outside Denver, had about 200 projects under contract at year’s end with potential gross revenue of $97.86 million, according to the letter.
The letter says the Jan. 5 raid at Krahl’s Chicago office was “part of an unspecified and sealed ongoing federal investigation” and that the search warrant was executed “without comment.” An FBI spokesman has also said the raid was related to an ongoing investigation but wouldn’t comment further.
Related story: Krahl Construction raided by FBI
Krahl’s lawyer, Harold Rosen of Chicago firm Wolin Kelter & Rosen Ltd., declined to comment.
Mr. Samuels says in an interview that he doesn’t think the federal investigation will impede his work and that his charge is to keep the process orderly as he deals with more than 600 creditors. He’s asking creditors to file claims within 90 days and says the process could be completed in 125 days.
“I’m in the business of liquidating this company right now,” he says. “We’re establishing a protocol, and the start of this process is this letter.”
Almost all of Krahl’s assets are accounts receivable, while almost all of its liabilities are money due to subcontractors, according to the letter. The company has trade accounts receivable of $15.96 million vs. trade accounts payable of $15.25 million.
The remaining assets are: $306,345 in cash; $736,818 in vehicles, machinery, equipment and real estate, and $580,789 defined in the letter as simply “other.”
The real estate includes a single parcel in west suburban Berwyn, and Mr. Samuels writes that the property and other assets will be put up for sale.
As a general contractor, it stands to reason that Krahl had few significant assets, says Joshua Glazov, a construction lawyer and partner in the Chicago office of law firm DLA Piper.
“The receivables is the big asset and, of course, that’s the most difficult asset to monetize and get your hands on,” says Mr. Glazov, who has a client involved and earlier this week wrote on his blog about Rally’s assignment agreement. “I’ve got a great interest in this and am following it very closely.”
In addition to the $15.25 million owed to subcontractors, Krahl’s other liabilities are: $4.29 million owed to secured creditors; $257,747 in general accounts payable, and $57,195 in “other estimated liabilities,” according to the letter, which notes that the financial information was provided by Krahl management and hasn’t been audited or verified.
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ELECTRICIAN EMPLOYMENT: A SORT-OF SUNNY PICTURE
We're going to need more. Problems coming?
Special Report: 12.10.2009
By Joe Salimando
NOTE: This is the first of several Special Report blog entries on the prospects for journeymen inside wiremen (electricians). I'm not sure how many there will be, as there's a lot of information -- and data, predictions, etc. -- to convey. I'll try to keep the pontification to an absolute Zero, but . . .
In the past, I've predicted a shortage of skilled electricians for the U.S. -- to happen right about now. Was I right? I would say NO. I looked at the training rates and worker needs, and assumed economic growth. I didn't factor in the possibility of an economic cataclysm.
What's happening now should be pretty clear. Nonresidential construction, which eats up a lot of electrical labor, is in the toilet. The hoped-for boom in nuclear power plant building -- nukes really gobble up electricians, and don't disgorge them for nearly a decade -- isn't happening. And even housing, which (comparatively) doesn't use as much electrical labor, remains mired at the bottom. Sure, there is construction of windmills, and solar PV installs large and small . . . but this isn't big enough, just yet, to account for the time of all that many journeymen.
In fact, if one considers just how pared-back most forms of construction are at this particular moment, it's astonishing to consider the number of electrical workers reported in federal employment data (see the October numbers here). It's pretty close to a miracle: 620,000 people (not all of them electricians, of course) working in the field for electrical contractors. Sure, there is some "green" work; and electrical contractors do DO a lot of maintenance, service & repair work.
But I sometimes wonder: What the heck are all of these people actually DOING right now? And when I consider that 620,000 workers are needed by electrical contractors in this "down" time (relatively speaking) . . . I become even more certain that the future will include a shortage of skilled electricians in construction.
A Group That's Growing Older
Also a part of the present situation -- and almost certainly the near-term future -- is the prospect of the pool of skilled journeymen electricians extending their careers.
Normally, based on the physical demands of the job (remember, this is every day, day after day, of manual labor), the average retirement age has been 62. Sure, there are some people with great genetics or in magnificent physical condition that will are be exceptions to that rule; but that's been the rule.
Now, thanks in large part to what the economy did to the housing/debt situations of many individuals, and the devastation of 401(k) accounts and more, I am told that a lot of people approaching age 62 (or already there) can't afford to retire. This group includes electricians.
It's something to think carefully about. People in their mid- to late-60s don't get sicker, I don't think, all that more frequently than people in their 50s. However, they are more likely to suffer physical injuries and strains. They are likely to move a little more slowly.
YES, an electrician in his 50s or 60s is a smarter guy than he was in his 20s and 30s -- he knows more shortcuts and ways to save time and effort. Ideally, a typical electrical crew has one or two guys aged 50 or 60 on it. In such an environment, perhaps the older fellows can be assigned to the work that requires a higher skill level but less wear-and-tear. This sounds good, and it might actually have happened, or still be happening, for all I know.
However, when half of the crew is age 59, 60, 61, 62, and up . . . everyone can't be assigned to the work that requires a high level of knowledge, skills, and abilities. Someone has got to get down on his knees for 8 hours and wire receptacles. That particular day isn't all that easy on the body of a 31-year-old; it's murder on that body of someone 25 or 30 years older!
Put succinctly: Any electrical contractor would be happy to have a certain amount of savvy, experience, and "brains" on a given job. But there's a point at which there are diminishing returns to adding more of this, and having less youth, undamaged bodies, and enthusiasm.
There IS a lot more to consider, and it is (potentially) important. See the next few Special Reports for more.
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WHAT BEING IN A CONSTRUCTION CRATER FEELS LIKE
FMI's 'outlook' takes us back to where we were - in 2013.
By Joe Salimando
Not long ago, a two-part blog was posted here on McGraw-Hill Construction's 2010 Outlook -- part one (which has lots of graphics) and part two (the uglier brother). But, as you might know, MHC isn't the only voice on this subject. What's below looks at what FMI has to say; then there's also Reed, NAHB, PCA< and AGC (among others).
FMI is the leading management consulting firm serving the construction industry. Every quarter, it emits an update to its "Construction Outlook." The Q3 report, a 16-page PDF, can be downloaded from this page.
On page 15, there is a page full of numbers. It includes construction put-in-place data as reported by the Commerce Department going back to 1999, broken down by the various components (housing, nonresidential and its various sectors, "nonbuilding" and its components). There are numbers for 2009 (an estimate) and 2010 (a forecast).
But there are also figures for 2011 to 2013 as well -- more forecasts. Above, a graphic from the thing (which stops at 2012, for reasons known only to FMI).
It's this longer-term outlook that interests me today.
Coming Full Circle?
U.S. construction first exceeded $1 trillion in 2005. It topped that number in each of 2006, 2007, and even 2008. But it's not expected to get there when 2009's various numbers are finalized.
And, according to FMI, it's not going to get back there until the year 2013. Here are the figures for comparison's sake:
Total Construction Put-In-Place
(a/k/a "construction spending") -- note that these numbers are NOT adjusted for inflation. The Estimate (E) and Forecasts (F) are from FMI, not Joe S.
2006 = all-time high = $1,167,556,000
2007 = $1,150,688,000
2008 = $1,072,133,000
2009E = $926,317,000
2010F = $875,683,000
2011F = $915,316,000
2012F = $981,663,000
2013F = $1,056,608,000
Several comments might be worthwhile here:
1. 2013's $1T won't be equivalent to 2006's $1T. Not only are the numbers NOT the same, but there has been and will be inflation in the intervening years (especially if you measure the value of these dollars in ounces of gold, say).
2. You might have turned blue in the face for a second there, reading about a decline in construction -- total -- of almost 24% from 2007 to 2010. But, in truth, this is a rather gentle deterioration, not a collapse. Isn't that surprising?
3. Now might be a good time to remind everyone that this is one firm's prediction, not a certainty. Things could be a lot better than this, or a lot different from the way FMI sees them. That's not a knock on FMI; Yogi said that thing about how hard it is to make predictions, especially about the future -- right? And who can argue with Yogi?
Also: FMI revises its outlook every 90 days. So maybe this isn't the last word?
4. Finally -- this is dealt with below -- $1T isn't $1T isn't $1T. The various construction niches won't be the same in 2013 as they were in 2006 (or 2009, for that matter). FMI's prediction is for change in the various components -- "the mix," if you will.
Mix Changes
RESIDENTIAL -- peaked out @ $619 billion in 2006. Will be only $351B in 2013, FMI predicted.
Single-family is taking the beating. After topping out in 2005 at $434B, it fell of the proverbial cliff to land (estimated) just below $122B in 2009. The rebound is big -- 48% -- to 2013, but that takes SF to only $181.4B . . . still a shade on the '05 number, or the $417B in 2006, or even the $307B in 2007.
NONRESIDENTIAL -- peak year was 2008, @ $505B. FMI has this slated for a two-year crater of $367B in 2010 and $365B in 2011, before bouncing up to $418B in 2013.
As it turns out, FMI's prediction shows Educational construction (the biggest single component of NonRes) doing OK, going from $104B in 2008 to $120.7B in 2013 (with only a slight dip in between). Health Care is shown with $47.7B in 2008, dipping slightly but rising to $55B in 2013. But elsewhere the predictions are for sustained lousiness -- Office from $70B in '08 to $43.5B in '13; manufacturing from $61B to $39B; "other commercial" from almost $85B in '08 to $45B in '13. And so forth. YUCK.
NONBUILDING STRUCTURES -- the peak year is COMING here -- thanks to the stimulus, and The Smart Grid, and the fact that our roads, bridges, and streets are falling apart, I guess. 2008 had $209B in construction chalked up here (double what it was in 1999). In the years to come, the figure rises EVERY YEAR (2009 is bigger than 2008, next year is bigger than this year, and so forth) -- until 2013 comes in at almost $287B.
Note that "Power" construction goes up every year from $35B in '05 to $39.7B in '06, $59B in '07, $80B in '08, $86.6B in '09, and so forth, rising to $122B in 2013. And, of course, the song is exactly the same for Highway & Street -- rising from $80B last year to $104B in '13.
BUILDING CONSTRUCTION -- if you take the FMI numbers for "total construction" and subtract the "Nonbuilding construction," you get . . . the forecast for Building Construction (don't you?). Here's a look at that:
2005 -- the peak year for residential. Building Construction added up to $1.01 trillion.
2008 -- peak for nonresidential. Building Construction was almost $863B.
2009 -- the estimate is for Building Construction @ $706B.
2010 -- forecast is $644B for BC.
2011 -- forecast is $669B for BC.
2012 -- forecast is $716B for BC.
2013 -- forecast comes up just short of $770B for BC.
To sum FMI's outlook up in words: We'll get back to where we were in 2009, FMI thinks, by 2012. But 2013's figure will still be 11% short of 2008, and woefully beneath where we were in 2005.
Conclusion
I'd like to be able to tell you that I've closely monitoring FMI's past predictions, and that the forecasts in the past were Yin or Yang. I can't, because I haven't. So what you have here is, I think, a "vision" of the future. I have never regarded FMI as especially gloomy -- so I don't think this is a "let's all quit our jobs and drink Jim Jones' cool aid" kind of prediction.
It is what it is. I thought you needed to see it.
Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
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