Will 2001 again see last year's "dream market" for retail construction?

Last year was a fabulous one for retail construction. The start of the millennium (or the end of the old one, depending upon your view of what 2000 means) saw activity across the retail board from new regional malls to urban store renovations. In Shopping Center World's 2000 Top Contractors Survey, some contractors called the demand they were experiencing "a dream market."

With the start of the new year, we thought it an appropriate time to ask selected contractors how good a year they had had in '00 and what they think the industry's fortunes will be in 2001.

And, we asked them about possible industry trends, in order to be an early beneficiary of their knowledge bank of upcoming projects.

The 10 roundtable discussion participants include:

- Stan Robinson, vice president of operations, Coastland Construction Inc., Angleton, Texas;

- Tommaso Latini, president and CEO, contracts division, Fisher Development Inc., San Francisco;

- Stacey Berthon, vice president, Hoar Construction, Birmingham, Ala.;

- Jeff Miller, executive vice president, KHS&S Contractors, Tampa, Fla.;

- Kent A. Moon, Lakeview Construction Inc.;

- Carl Johnson, president, Near-Cal Corp., Lake Elsinore, Calif.;

- Thomas O'Brien, vice president, Novak Construction Co., Chicago;

- Chris Strom, national director of business development, R.A.S. Builders Inc., Denver;

- Gene Colley, CEO/president, Royal Seal Construction Inc., Dallas;

- Gus Vratsinas, president, Vratsinas Construction Co., Little Rock, Ark.

The questions we posed to this busy panel of contractors are followed by their replies in the manner of a "virtual" roundtable. The order of the participants is alphabetical, according to their companies' names.

1. Did your company see an increase in business in 2000, called a "dream market" by some contractors in SCW's 2000 Top Contractors Survey?

(If yes, go to question #2; if no, go to question #3.)

Robinson: No. However, its effects were evident.

Latini: In fiscal year 2000 our combined North American divisions increased business by 29.5%, for a total of $643 million. Our European division increased by 233.6%, for a total of $91.5 million.

Berthon: Business was booming in 2000. Overall, our company had its best year ever and our retail segment had its best year in a long time.

Miller: KHS&S saw a significant increase in revenue in 2000. Companywide, revenues were up more than 25% over 1999.

Moon: Yes, but many factors contributed to the business increase and success in 2000.

Johnson: Our company saw an increase in business of 10% in 2000.

O'Brien: Yes, we saw a 10% increase in business for both 2000 and 2001 backlog.

Strom: Yes and no. RAS saw increases in regions such as Texas, Colorado and Illinois, where availability of resources and management would allow continued growth. RAS maintained construction volumes in regions such as Arizona, Nevada and California, not from lack of demand but shortage of resources.

Colley: The year 2000 created many challenges. Coming off of 1999, our best year in the history of Royal Seal, we had a hard act to follow. With the shortage of construction personnel, we were able to let some of our focus shift over to the development side of our company. This added to our revenue stream for this year. 2000 also was a year in which several of our clients realized that they could fast-track a project by bringing us in earlier in the design phase and negotiating the construction contract while sending out plans for bid.

Vratsinas: Yes.

2. If yes, what were the factors contributing to the uptick, such as a bustling economy and/or a particular focus at your company?

Latini: Without question, the strong economy, population growth and consumer spending helped fuel this growth. Many of our major retail clients have come to us because of our "horsepower," including financial stability, enormous subcontractor and vendor base and international capabilities.

Berthon: I believe the primary reason for this "uptick" was the bustling economy. I believe this gave the final "shove" to several projects that had been in the planning stages for years and were not able to come to fruition. There had been several new malls that were finally able to obtain adequate financing and leasing.

Miller: Multiple factors contributed to a strong 2000. First, we came into the year with a substantial backlog of large projects due to the strong economy of 1999. This gave us an excellent starting position. Second, KHS&S has developed some very specialized market niches - one being the construction of high-end themed and specialty finishes. Our expertise in this area, combined with our more traditional wall and ceiling construction work, allowed us to perform work on multiple retail venues - from traditional mall renovations and expansions to construction of high-profile retail and entertainment centers across the nation.

Moon: A booming economy has been beneficial to the retail world. In 2000, Lakeview Construction was fortunate to have worked with clients that were in "growth mode." We were also able to focus on doing a better job, not more of them. I know some GC's were hiring less qualified superintendents to take advantage of the increase in business. Lakeview felt that this was not the kind of company we wanted to be. We take pride in doing good work and would not compromise a project if we didn't have the right person for the job.

Johnson: Factors that contributed to the increase were a) the economy in California is going great; b) we have contacts with key developers that are aggressively building, such as Lowe's and Wal-Mart; c) Developers are getting more into the active role of developing.

O'Brien: Contributing factors were long-term pre-existing relationships with repeat clients in retail and other market sectors we serve, coupled with newly established clients that are in a major expansion or retooling mode. Examples include Jewel Food Stores, Costco, Home Depot, Walgreen's, etc. The economy's meteoric expansion, coupled with our firm's client-driven "make it happen" approach to projects, has been a great formula for our firm's growth. Once a client works with Novak and recognizes our unique level of service, a long-term relationship is created. This philosophy translates into an inherent growth factor for our company, but, mostly, our retail clients get their facilities "cheaper, better, faster."

Colley: We have a solid client base, some we have been building for since we went into business in 1982. With cooperation from our clients, we were able to utilize our staff to their fullest extent. Royal Seal was also fortunate to have several excellent individuals join our organization in 2000, not only in our construction department, but our architectural and development side of the company as well.

Vratsinas: The good economy over the past several years led many of our developer clients to proceed with projects that had been in the pipeline. Being a diverse retail contractor, VCC was involved in two major malls, several power centers, big boxes and mall remodels.

3. If no, what factors caused the downturn, such as increased competition, labor shortages, or increases in material costs?

Robinson: In the year 2000, Coastland Construction Inc. saw an increase in competition because of shrinking profit margins. We believe this was due to the lack of subcontractor participation and labor availability. The overall number of commercial construction projects has absorbed the current subcontractor base. Therefore, lack of qualified subcontractors to bid projects affected the outcome of many of our competitive bid projects. We relied heavily on our historical data to bid and win projects this past year. As always, the construction industry is an industry of change - today more so than ever.

In 2000, we were also affected by the shortage of experienced project managers. The competition among general contractors to hire and keep professional help definitely affected our year as a whole. As a result, we accessed the current in-house talent and molded our marketing focus to fit. This enabled us to diversify into new segments within the retail construction marketplace.

Berthon: We are concerned that the loss of theater construction will hurt our volume for 2001. Fortunately, we saw this downturn coming and have found other markets [in which] to get work, most notably major department stores.

4. What do you see ahead for shopping center industry growth in 2001?

Robinson: Within our immediate region in Texas, we believe that construction has presently peaked and leveled off. However, should suburban growth continue or accelerate after the first of the year, we also believe that construction activity can be sustained at the current level.

Coastland Construction is fortunate to be licensed throughout the nation. As a national contractor, we are following select areas on the East Coast that seem to have a continuing cycle of expansion and growth. Our operations in the Caribbean also are experiencing a present upturn in activity. We have recently opened a permanent office in Puerto Rico to better serve our clients in those regions. Coastland Construction is looking forward to our first international project as well. We are excited about the upcoming year ahead.

Latini: Looking ahead, as the economy questions its direction, money will become tighter causing several trends:

* restricted retail roll-outs;

* more competition between general contractors, subcontractors and vendors;

* consolidation and/or reduction of relatively new construction companies surviving on borrowed money;

* availability of a work force more interested in long-term stability and growth vs. short-term inflated wages.

Berthon: We still believe 2001 will be a strong year mainly because there seems to be a significant backlog of projects still working their way through the pipeline. It is still unclear whether or not this can be sustained into 2002.

Miller: On the national level as a whole, we expect retail construction to slow in 2001. But we still see pockets of strong opportunity for the construction of large mixed-use retail and entertainment centers that provide an extra attraction for the consumer. That extra attraction could be its theme or its entertainment mix - whatever it takes to make it unique. Today's shoppers have so many choices, that, in many markets, developers have had to go beyond the ordinary to attract new customers.

Moon: We see the economy softening. With the uncertainty of the presidential election, a volatile stock market, and a downward trend in the auto industry, we anticipate change, but it takes "a long time to stop a big ship." Lakeview is a conservative company and we have prepared ourselves financially for what may lie ahead.

Johnson: Growth will most likely be the same as in the year 2000.

O'Brien: Shopping centers, in all their various forms, will continue to evolve in an attempt to respond to a customer base that simultaneously demands quality, value and responsive service. Many thought the Internet was the answer. I think the jury is still out regarding e-commerce's impact on the "bricks and sticks"-oriented form of retailing. Fulfillment and logistical issues will continue to challenge e-commerce retailers. Just because you increase efficiency, or ease of order placement, doesn't mean you've overcome the logistical challenges of getting someone's order to them any sooner.

People, to a great extent, like to physically touch and feel, try on and "kick the tires," in a sense, before purchasing. The expansion programs of Home Depot, Jewel, Walgreen's, Costco and numerous others are strong indicators of a consumer-buying approach that remains tilted toward the "bricks over clicks." Having said that, I do believe that e-commerce will continue to penetrate retail markets as an alternative to traditional purchasing venues, though perhaps not as quickly or intensely as originally thought. Consumer acceptance and utilization has ultimately been recalibrated by confidence in the "dot.comers' " ability to assure timely fulfillment, service, security and financial viability, whether real or perceived.

I think you will continue to see evolving integration of entertainment and retail venues as shopping centers search for ways to capture consumer attention and keep it.

Colley: Amazingly enough, I still see the market growing. Our projections for 2001 show an increase in sales with both retailers and restaurants. We still see the trend increasing for renovations due to relocations and market consolidation.

More retailers continue to outsource development functions as they are being squeezed by overhead constraints because of the fluctuating stock market as well as the shortage of available qualified staff. Royal Seal is poised for this continued shifting in the marketplace.

Many retailers also have made a conscious effort to eliminate real estate ownership to concentrate on their core business. The build-to-suit part of our company saw a tremendous increase in sales from 1999 to 2000 and the projection for 2001 is even greater.

Vratsinas: VCC sees some cautions in the market because of the slowing economy and changes by our developers' clients - the tenants.

5. What types of projects were you working on this year? Were they illustrative of any trends?

Robinson: This past year we continued relationships with retailers such as Borders Group, Harry & David, Drapers & Damons, Motherhood, Supercuts, Mastercuts, Regis, Fashion Bug, Mimi Maternity, KB Toys, Origins, Payless Shoes and others.

New clients for the year included Cartoys, Paradise Bakery, Clark Co., Wal-Mart, Belz & H.E. Butt Co. Our projects for Borders Group included locations in Texas, Florida, Washington, D.C., and Puerto Rico. These projects ranged from $600,000 to $2.2 million. Our first project with Wal-Mart, an open remodel in Dallas, is valued at $950,000. Our Katy, Texas, project for H.E. Butt is a 78,000 sq. ft. new concept store, valued at $4.2 million. In Puerto Rico, Coastland Construction has teamed up with Belz Enterprises on their Factory Outlet World, which is valued at $6 million. Our total volume for the year will exceed $25 million for 2000.

Latini: Although the bulk of our work for 2000 and 2001 is approximately 85% retail, we have expanded into "core and shell" commercial and restaurant construction. Furthermore, as a registered general contractor in France, England and Germany, we envision continued growth throughout Europe for both American and European clients.

Berthon: Our largest volume of work consisted of new malls, mall expansions and department stores. These included: Dolphin Mall in Miami; Triangle Town Center in Raleigh, N.C.; Quintard Mall in Oxford, Ala.; Santa Rosa Mall in Mary Esther, Fla.; and Neiman Marcus in Tampa, Fla.

Miller: In 2000, KHS&S completed its largest project to date - Las Vegas's Desert Passage. This project's level of detail and use of interactive theming offers a prime example of "experiential entertainment" - touted as the next evolution of themed entertainment.

Other projects started in 2000 that will continue to 2001 include the following:

* TrizecHahn's Hollywood and Highland[R] - This city-block-sized project in Los Angeles will be the new home to the annual Academy Awards program. KHS&S will complete more than 800,000 sq. ft. of exterior framing, themed EIFS and plaster for this project. Construction will include themed elements from Hollywood's glamorous silent movie era.

* International Plaza in Tampa, Fla. - Tampa's most upscale shopping destination will introduce the area's only Nordstrom's, Neiman Marcus and Lord & Taylor. The 1.2 million sq. ft. mall includes a 150,000 sq. ft. open-air themed outdoor entertainment center - Bay Street at the Plaza.

* Opryland Hotel Florida in Orlando, Fla. - Exterior hotel construction and themed retail component of Opryland Hotel's first expansion outside of Nashville. The theme includes finishes and landscaping that will help the project recreate Florida's varied architectural and ecological elements.

Moon: We've built approximately 550 projects this year, ranging from $5,000 to $590,000 throughout the United States and Puerto Rico.

We recently completed some memorable projects in Puerto Rico. Two special jobs that really shine are the Bailey, Banks & Biddle, a premiere store for the Zale Corp., and the Godiva Chocolatier store for Godiva Chocolatier Inc. Both were difficult mall expansion projects at the Plaza Las Americas in Puerto Rico, and also happened to be the first store for either company on the island.

We also completed The Children's Place store at Deer Park Town Center, a new high-end strip center in Deer Park, Ill. It was tackled with the use of union subs, which were saturated with work at their busiest time of the year. Being a new center, we did not have power, water or phone lines until project's mid-end. Needless to say, the store was successfully turned over.

Last but not least is the Talbot's store at Rookwood Commons in Norwood, Ohio. This store was completed at a new center where the water, power and phone lines were connected after the store was built. It was a success because of teamwork and continuous communication between tenant coordination, Talbot's and Lakeview.

These well-established clients have been providing great products and services for years. Their outstanding business reputations work in any economy. I feel that Lakeview works well with these clients because we have similar ideals and beliefs, namely customer service!

Johnson: These are just a few of the jobs we are currently working on or have completed in the year 2000:

- Wal-Mart Store, 150,000 sq. ft. in Murrieta, Calif.

- Lowe's Hardware Store, 130,000 sq. ft. in Mission Valley, Calif.

- Edwards Grand Mayan 20-screen theater with stadium seating, 124,914 sq. ft. in South Gate, Calif.

- Lowe's Hardware Store, 130,000 sq. ft. in Victorville, Calif.

- Wal-Mart Store, 129,846 sq. ft. in San Diego

- Sam's Club, a 129,485 sq. ft. store in San Diego

- Lowe's Hardware, Palmdale, Calif.

We continue to seek a talented work force and quality clients.

O'Brien: We have been working on a broad spectrum of smaller freestanding to large-scale big-box and higher-end department store assignments. Our portfolio is fairly diverse. Some examples are Walgreen's, Jewel/Osco, Home Depot, Costco, Marshall Field's and Lord & Taylor. Costco is an example of a trend where consumers are looking for value and quality where they haven't found it before. Retailers are attempting to penetrate those markets previously not pursued, [adding] refinement and stratification through niche marketing (e.g., Home Depot creating Home Expo to better respond to more discriminating designer-oriented customers, and many others). [We're also involved in the] replacement of outmoded facilities that have outlived their asset life and don't respond to customer needs. Examples of extensive replacement or re-tooling programs are Jewel, Walgreen's and Dominick's.

Replacement of older facilities with those that will better attract and serve customers, coupled with an expansion into markets not previously served, is a key trend we see.

Strom: Some of the projects RAS Builders worked on are Eddie Bauer, Casual Corner, Sam Goody, Build-A-Bear, J. Jill, Victoria Secret, Lucky Brand, Kmart Garden Program, Limited, Express, just to name a few.

Colley: Royal Seal continues to build for Tricon, the parent of Pizza Hut, Taco Bell and KFC. This has been a major client since 1982. This year saw the increase of dual concept projects. This seems to be a natural trend as fast food continues to change with the demographic changes in our society. There is also on obvious economic benefit of two or more concepts in one building. Real estate prices are continuing to increase so the big players are more creative in building value with their dollars.

We are also the primary builders for Lifeway Christian Stores. I think the growth of the Christian bookstore industry in our country could be signaling a reawakening of our moral values in this country. Our partnering with Lifeway demonstrates trust in a relationship that has lasted four years and over 40 projects. We are able to discuss price trends each year as well as project future costs and potential ways to improve the process. One of the side benefits of building for Lifeway is the real honesty and sincerity of the people we work with.

Family Dollar, one of our build-to-suit clients, has become a growing force in the dollar store phenomenon. As they continue to grow they require freestanding buildings where existing in-line spaces are too expensive or not available. This has been great for our development department. We continue to see the expansion of Family Dollar into smaller markets as well as major metropolitan areas. Not only do they market to a lower-income level, they are attractive to the value-conscious consumer.

Our company philosophy is to build for national clients, but we broke the rules when we started building for a wonderful family-owned company called Trail Dust Steak House. We have been instrumental in doubling the number of units in Texas and Colorado. As they continue to add one or two new restaurants each year, we will be at their side as their development arm. Again, this is following the trend of outsourcing and partnering that we continue to see as the preferred method for smaller companies.

Vratsinas: We were involved in several different types of projects. These include:

* Stonebriar Mall in Frisco, Texas, for General Growth Properties

* Roseville Galleria in Roseville, Calif., for Urban Retail Development

* Glendale Fashion Mall in Glendale, Calif., for Vestar/Lend Lease

* Empire Mall Remodel in Sioux City, S.D., for Macerich

* Plaza at Cedar Hill in Cedar Hill, Texas, for Christon Co.

* Las Colinas Village in Irving, Texas, for Las Colinas Village Ltd.

* Fayette Pavilion in Fayetteville, Ga., for Thomas Enterprises

* Augusta Exchange in Augusta, Ga., for Augusta Exchange, LLC

6. Going forward, what new or ongoing trends in the industry do you see?

Robinson: As Coastland Construction moves into 2001, our strategic plans are shifting with the industry. Our first goal is to focus on customer service and maintain our current client relationships. Our next goal is to establish new relations with developers that are working with our current clients to capitalize on new strategies being utilized within the retail construction industries. The year 2001 will include many new opportunities. At Coastland Construction, our people are our greatest resource. We are enthusiastic about the new year and the new millennium in the retail construction industry.

Berthon: An industry trend we foresee is the continued growth for expansions and renovations of profitable malls. Florida is still a major market and we foresee a lot of construction in all areas of the state. Lifestyle centers will continue to try and cut into the regional malls' traffic.

Miller: Because of our themed finishes business, we see some very savvy developers that are taking note of the successes of specialty retail destinations such as the Forum shops and Desert Passage in Las Vegas. Although they are expensive to build, we see developers willing to spend the dollars upfront on quality construction based on the reward of increased sales per square foot. This means more elaborate designs, more intricate detailing, and increased emphasis on unique presentations that create a shopping experience for the customer.

From KHS&S's standpoint, this means we keep innovating new construction techniques that can cost-effectively provide our customers with what they demand. It's a challenge, but as theme contractors, that's what keeps us excited about coming to work every day!

Moon: I remember in years past hearing of the online shopping trend. Some critics predicted the collapse of traditional shopping due to the convenience of shopping from your home PC. Though it has become quite popular with consumers through its convenience, I sense that the average shopper still prefers to venture out and have a chance to see what's out there before making a purchase. I know many retailers have had success through online sales but the romance of doing your holiday shopping at a fine mall is something I find hard to believe will ever fade.

O'Brien: This is a fascinating question given the excitement and trepidation prevailing in the marketplace right now. In a broad-brush sense, the retail industry will continue to be buoyed by the inherent need by retailers to retool and/or replace facilities to better position themselves to compete and respond to customers. The importance of the physical building or "bricks" will continue to dominate retailing as the preferred buying venue over the dot.com form of purchasing. But the Internet will continue to increase as an option for our industry. The key element is choice: consumers want and respond to choices.

Retailers that are looking to penetrate traditionally unserved markets, such as Costco in the Chicago metro area, will continue to drive market momentum as they, too, posture as another and better choice for consumers. Sears and other retailers will bring new concept rollout programs to market, attempting to respond to competitors who have seen success serving previously neglected or non-existent niches. Home Expo vs. The Great Indoors will be an interesting joust among two retail titans. Ultimately, the consumer wins because of increased choices. The bottom line for our industry is the need for quality real estate, design and construction services.

2001 will prove to be a continuation of a strong retail industry with regard to real estate and construction. We are excited about working with current and prospective clients during this dynamic period and are committed to being responsive and client-driven, continuing to build on our solid reputation for high-caliber services.

Strom: A trend we see is national tenants going into smaller lifestyle centers. New or renovated strip malls are being converted into lifestyle centers giving national retailers even more local presence with the emphasis on having an outdoor feel. The Eddie Bauer store that R.A.S. Builders built at Flatiron Crossing Mall in Broomfield, Colo., illustrates the trend toward giving the shopper an outdoor feel, with skylights and backlighting of focal walls giving the appearance of being outside. This Eddie Bauer was the first store to open at the new mall. It represents one of the biggest projects of the year for Eddie Bauer and is also being used as a prototype for future stores.

Colley: We will see the shrinking of the workforce in our industry. Graduates are more interested in high-tech positions than they are learning how to build America from the ground up. This creates an opportunity for multi-faceted companies, such as Royal Seal, to help clients continue expanding, even though they may not have a large development department any longer. This gives flexibility to national chains to ramp up or down with economic cycles.

I also see technological advances helping the contractor more than has been possible in the past. Margins are still tight for the general contractors (although this trend is not true on the subcontractor side) so the lower prices for computers and digital cameras helps us to use more efficient methods every day.

Consolidation in the retail industry creates unique situations. First, big companies swallow up little companies, creating remodeling opportunities and room for the next small company to start up. As long as America allows opportunity, the small company will still exist. As large companies take on debt to make acquisitions, we will have them reorganizing and spinning off divisions to alleviate debt. This again creates remodeling and renovation opportunities.

Vratsinas: We see new trends such as lifestyle centers influencing the industry, and a continuing emphasis on the remodeling and renovation of malls, department stores and big-box users.