General contractors across the state say they are keeping an eye on the economy as they continue to build in 2008.
Most contractors contacted for this story report they had a solid 2007, but that the coming years will be more difficult as the effect of the state’s housing slump becomes more apparent.
One of the initial trends that California’s general contractors are seeing in late 2007 and early 2008 is more competition for public works projects.
“There are more and more people on the bidding lists for public work,” says Keith Gonsalves, vice president with San Carlos-based Gonsalves & Stronck Construction.
Gonsalves says that on some public projects valued at between $5 million to $15 million, he’s seeing more than 10 bidders on projects where there once were only a few.
“It is tougher for us to get work,” he adds.
Terry Street, president/CEO of El Dorado Hills-based Roebbelen Contracting, is also seeing a similar increase in bidders on similar-size projects.
“I think there is a little bit of people feeling panic and wanting to grab a backlog,” Street says.
Newport Beach-based Questar Construction has a backlog of projects, but that is because the company relies on healthcare projects that generally aren’t tied to the economy, says Jim Salomon, Questar’s president. He reports that the firm has an almost $50 million backlog of work in 2008, but “it does seem pretty scary out there.”
Contractors say the housing slump is causing more construction workers and subcontractors to move from the housing industry into more commercial projects and that isn’t necessarily a good thing.
For example, a subcontractor who might normally work on building supermarkets might decide to work on a prison project, Street says. But the productivity at a prison is not going to be as high at a retail job because of such things as increased security and checkpoints and moving materials into the detention facility, he adds.
“(Subcontractors) may not understand the true cost of some industries,” he says.
One of the challenges that contractors are also facing is that while the housing market is in decline, material costs haven’t declined, Gonsalves says.
“There should be a glut of lumber and other materials depreciating in price, but we are not seeing it,” he says. “We are still dealing with copper and steel issues.”
But the news isn’t entirely dire across the state.
Education and healthcare construction are expected to remain stable.
Because of the slowdown in housing, new school construction may slow, but modernization programs will continue to provide good business, says Street, whose firm is working on a number of school projects.
Gonsalves & Stronck, which relies on education projects for a majority of its work, will be working on school-bond-funded projects, as well, Gonsalves says.
Some larger companies, like Turner Construction, are banking on large prison projects in California for business.
The state has mandated that seven new prison hospitals be built throughout the state, says Rory DeJohn, senior vice president and general manager for Turner Southern California.
The prison hospital projects are expected to cost about $700 million to build and will require joint ventures because of the bonding needed, DeJohn says.
And some parts of the state, such as the Inland Empire and Sacramento area, will continue to see good growth, DeJohn adds.
“Many of the things that are in construction (in those areas) will be completed,” he says. “What is in question is the residential market.”
The 76-story Park Fifth residential project in Los Angeles, expected to be the tallest residential project west of Chicago, is to be built by Turner Construction, but it is being delayed.
Turner Construction has done about 18 months of preconstruction work on Park Fifth but the economy is affecting its development, DeJohn says.
“People aren’t sure if the lenders are going to back the developers,” DeJohn says.
Park Fifth and another big Los Angeles residential complex – Grand Avenue – will be built, but their development will likely be staggered, he says.
“They are too important not to be developed,” DeJohn says.
While many companies are treading cautiously in 2008, some will have a tougher time than others, Street says.
The construction industry has not had a bad stretch in about 15 years, and a lot of companies will have to make tough decisions, including layoffs, that they have never had to make before, Street says.
“A lot of people in their 40s, they haven’t seen these times,” he adds.
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