Like the nation's economy, the state of the commercial real estate market is strong. The demand for office, industrial and retail buildings remains high, and, as Internet-based companies continue to grow, specialized facilities have become more popular than ever.
To save money on construction costs for customized buildings, many developers are using the design/build strategy and implementing pre-engineered products into construction. Those methods also maximize the industry's tight labor pool and allow builders and developers to achieve success in commercial construction.
Steady growth Despite stock market turbulence and fluctuating interest rates, the pace of commercial construction is not slowing, at least not yet, according to Jeffrey Raday, president of McShane Construction Corp., a Rosemont, Ill.-based design/build construction firm. "The commercial construction industry remains strong, reflecting the needs and continued growth of the overall economy, and this sustained period of national economic growth does not appear to be weakening," says Raday. "This year should already be on the books for most contractors. All signs indicate a strong year for commercial construction, edging out last year's levels of activity in terms of work put in place. Based on the level of activity we are experiencing for projects that will break ground late this year, 2001 should result in a continuation of this strong market."
Indeed, now is a good time to be in the construction business, according to Clyde Wills, president of the Buildings Division of Butler Manufacturing Co., a Kansas City, Mo.-based maker of building construction products. "Commercial construction activity is reflecting both the breadth and the depth of the economic expansion in the United States and the tremendous commercial growth taking place in growing economies abroad," says Wills.
At the same time, retail sales are advancing at an extremely fast pace, creating the need for more stores, distribution centers, truck terminals and service centers. "The construction business has never seen a period like this," says Bob Clark, chairman and CEO of Clayco Construction Co., a design-build firm headquartered in St. Louis, with offices in, Dallas and Detroit. The company works in 26 cities across the nation and anticipates approximately $450 million in revenue in 2000.
Clayco currently is building a multi-use project in St. Louis for locally based THF Realty. It features 280,000 sq. ft. of office space, 28,000 sq. ft. of retail and 360,000 sq. ft. of luxury condominiums, with a 1,300-car enclosed parking structure. Construction started in March. New York-based Ernst & Young will occupy roughly 100,000 sq. ft. of the office space by August 2001.
In almost every sector, and in most regions, the design and construction industry is booming, says Clark. "Some of this activity has been fueled by the technology revolution, but I think more of it has come about as a simple result of the most robust economy in U.S. history," he says.
The industrial sector, for example, appears steady. There is a significant amount of activity in this sector by owners who are expanding their manufacturing and warehousing operations on their existing sites.
Likewise, upscale, multifamily residential is very strong, particularly in the downtown Chicago market, where McShane is currently constructing a three-story, 24-unit condominium project.
Itasca, Ill.-based FCL Builders Inc., also is working in Chicago, as city officials selected FCL to relocate the South Water Market (produce market). The company also is constructing a 750,000 sq. ft. building for Suncast and new rental car facilities at Midway Airport.
"We've been riding a pretty good high with the amount of construction that has been going on," says Michael Boro, president of FCL Builders. "But this wave has got to come to an end sometime."
Technology takes the lead As more Internet- and technology-based companies launch, however, the need for new construction will not diminish. Firms such as Amazon.com, WebVan, iMotors and others need efficient, well-placed distribution centers to stock and ship merchandise with the quick turnaround that online consumers have come to expect.
Other companies need capacity to manage their online operations. "We've been seeing a large surge in demand for operational-type office space with large floor plates, high levels of electrical and HVAC capacity and double normal parking requirements; and it continues to get stronger," Clark says.
As technology becomes more important in all business, builders are working to develop sites with high capacity. "Today's tenants are seeking modern, technologically advanced facilities that can handle their data and telecommunications requirements, as well as environmental systems that can accommodate a dense office population," says McShane's Raday.
McShane is currently building a six-story, 262,037 sq. ft. new suburban headquarters in Warrenville, Ill., for global truck manufacturer Navistar International. The Class-A office building, owned by Dallas-based ORIX Real Estate Equities, incorporates the latest in office technology. The project was executed on a design/ build basis.
Design/Build There are a number of trends at work in the commercial construction industry when it comes to ways to get work done faster, better and inexpensively. The design/build methodology frequently comes into play to save time and money.
Market trends indicate continued movement toward use of the design/ build project delivery, wherein one entity takes complete responsibility for design and construction. In fact, 75% of the inquiries McShane Construction receives are for projects that the owner wants executed on a design/build basis, says Raday.
Reasons behind the momentum toward design/build include:
* Speed: The speed of the design/build construction process results in a time savings of approximately 20% to 30%, compared with traditional general construction.
* Costs: Construction costs can be established and committed to the owner early in the process.
* Quality: Since the construction of an office, industrial, hospitality, senior living, recreational or multifamily project is a long-term investment, quality is typically a hallmark of the design/build process. That can provide both initial and ongoing cost savings to the owner.
* Accountability: By making one entity responsible for both design and construction, the owner does not get caught mediating disputes between the architect and contractor.
* Outsourcing benefits: Design/build demands less of the owner's time to manage, allowing more time to concentrate on primary business.
Pre-engineered products While design/build has proven to be an efficient methodology, use of pre-engineered systems also has helped builders to complete their projects in a timely manner. With a tightening labor market and a reduction in readily available materials, pre-engineered products can be a lifesaver.
>From a materials standpoint, structural steel is again becoming difficult >to obtain on a timely basis, according to Raday. The government's >tightening of foreign imports has pushed U.S. mills to capacity, thereby >creating the need for long lead times in ordering. Similar conditions >exist for local pre-cast concrete fabricating firms whose capacity has >already been committed through this fall. The situation has prompted many >firms, including McShane, to develop site-cast tilt-up concrete expertise >as a viable alternative when scheduling is critical.
Meanwhile, the drywall shortages that the construction industry endured last year have eased since several new U.S. plants became operational late last year. However, prices still remain approximately 30% higher than last year.
The greatest benefit of pre-engineered systems is the time saved, according to Wills. "In our particular segment of commercial construction, we continue to capitalize on speed of erection and the fit-together efficiencies of factory-engineered systems," says Wills. "We have also been responding to developing trends favoring more architecturally attractive wall systems for higher- appearance projects favored by commercial building buyers."
In the interest of speedy construction, Butler uses 42-inch TextureWall panels, which are designed for the appearance-conscious commercial market. The product combines stucco with high energy-efficiency ratings, he notes. And, because the entire product is produced in a factory, weather does not hinder construction.
Butler also markets the Delta Joist building system, which uses concrete walls with an MR-24 roof. "It has been a real hit with our commercial building customers who want to combine the benefits of masonry, pre-cast or tilt-up concrete walls with the speed and economy of pre-engineered structural and roof systems," says Wills.
The systems were used recently at a new Borders Books & Music in Metairie, La. Built by Alfred Miller Contracting Co., a Butler Builder in Lake Charles, La., the building uses a 90 x 180 x 38 Delta-Joist structural system, which is designed to work with its MR-24 roof system. The 30,000 sq. ft. building was designed by David Brossett and is owned by Park Investments Ltd.
Similarly, Clayco Construction is using Cast In Place architectural concrete wall systems as an alternative to traditional pre-cast concrete wall systems. The "ready-to-go" materials typically are easy to install, meaning that less experienced workers may be able to install the components with no loss in product performance.
That fact has become more important with lack of labor availability, both in skilled trades and in management personnel. Many firms indicate that there are not enough individuals in the industry to produce the work that needs to be built. There are more individuals leaving the industry through retirement or career changes to high-tech jobs than there are coming into the industry through apprentice schools and engineering/universities.
With low unemployment rates around the nation, construction labor has become both scarce and more expensive, says Wills. New technology and the pre-engineered systems can help alleviate some of the problems arising from the shortage.
The challenges ahead Even in an extraordinarily good marketplace overflowing with demand and quality products, there are a number of other challenges that commercial construction contractors face that have little to do with the actual construction. For example, all available land sites seem to have problems that may include environmental issues such as wetlands and floodplains, poor soil conditions and inappropriate zoning.
"These problems can make permitting a nightmare, if for no other reason than they can wind up involving a number of governmental agencies with jurisdiction over them," says FCL's Boro.
Raday also has experienced more than a few site-related problems. "One trend we have seen is the lengthening of the approval process in many municipalities, which consumes a lot of time and makes our business more difficult, especially as more mature communities run out of commercial sites," he explains.
Lack of in-town space typically drives development to the suburbs, where demand for office buildings remains strong, according to Raday. In fact, more than 30% of McShane's current business is in low-rise and mid-rise suburban office buildings.
Despite problems with materials, labor and zoning, the commercial real estate market has remained strong in all facets, from retail to industrial. The hospitality market has slowed in the Midwest, according to Raday, but retail and multifamily are steady.
Successful developers work to balance quality offerings with customizable features that can attract hot tenants such as dot.coms and large companies. Supplying capacity for high-tech wiring is important to technology firms as well as any company that operates on advanced systems.
A strong economy will continue to fuel a strong commercial construction market, but developers can plan on change at any time. "From our perspective, the commercial construction industry hasn't yet witnessed any significant impact from recent interest rate hikes and stock market volatility," says McShane's Raday. "But we would not be surprised to see some negative effects by the end of the year."