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Concrete progress for retail contractors

April 30, 2015

The good news for contractors that do retail projects: Demand for such services in the U.S. is up — especially for redevelopment and renovation projects. The not-so-good news: This same demand hints at labor shortages and may portend some uncertainty about materials costs. Even so, though, contractors that know their way around a retail property and are attuned to the current redevelopment needs of the industry probably stand to enjoy a pretty good 2015.

McGraw-Hill is projecting that construction of retail space will total about 140 million square feet nationwide this year, up 19 percent over the 2014 footage. To be sure, that remains a lot lower than -footage -totals during the retail development boom of a decade ago — when annual completions fell somewhere between 250 million and 300 million square feet — but it is up considerably from the trough of 100 million square feet that activity dropped to during the recession years.

A number of major chains are in an expansion mode. In 2013, the latest year for which figures are available, Walmart outpaced everyone else with upwards of $2 billion in projects started (ground-up and redevelopment), according to McGraw-Hill. Others active that year include CVS, Dollar General, Family Dollar and Kroger — all of which spent in excess of $200 million on construction, with Costco, McDonald’s, Target and Walgreens not far behind.

“All of our company’s work is in the retail sector, and all of it has improved greatly,” said Jack Grothe, president of Los Angeles–based JG Construction. The firm does both new construction and remodeling, having worked with Auto Zone, Family Dollar, Rite Aid and others. “During the recession, new development essentially went to zero, [and] then came the downsizing of retail tenant space,” Grothe said. The current resurgence in retail construction jobs involves a lot of redevelopment, he notes. “Now developers are dividing up big boxes and contracting for whole center face-lifts and lots of new pad buildings,” he said. “Retailers are remodeling existing stores, though some are even building new stores again.”

Indeed, the relative sluggishness of new development has meant that the remodeling of existing retail facilities accounts for more of the business William A. Randolph Inc. is doing, says Eric Handley, vice president of the Chicago-based company. Randolph does big-box work for the likes of Home Depot, Kohl’s and Walmart, and also for grocery stores and drugstores. 

Chattanooga, Tenn.–based EMJ Corp. does new construction and major renovations for retail, according to Raymond Catlin, a company executive vice president. In March the company started the expansion and makeover of Sunrise Mall, in Brownsville, Texas. 

The outlook for new development is particularly mixed, Catlin says. “Major retailers say that their real estate and construction departments are shrinking because of a shortage of top talent and strong competition for those resources from national service providers,” he said. “Also, for REITs, cap rates are making ground-up developments more risky.”

With an increase in the volume of projects, retail contractors face a problem that has been some years in the brewing: labor. True enough, current circumstances may not qualify as a dire shortage, but things are tight. “The biggest challenge in the industry is labor, because the last recession was so deep and long [that] a lot of people left the industry completely,” said Grothe. “They now have new jobs and aren’t coming back, so that means with the increase of work, there aren’t enough people to go around. It seems that in the last six months everyone is in the same boat — architects, owners, contractors and subcontractors all seem to need people, and everyone I talk to says the response to their recruiting has dried up.”

During the recession, many of the construction workers who lost their jobs found employment in such industries as gas exploration or health care. Some retired, and the recession also put a crimp in the pipeline of workers being trained to replace them. Handley says hiring is now his biggest challenge. And Catlin puts it this way: “Demand is outstripping supply, especially with regards to labor. That means costs are up, and there is no foreseeable end in sight, because young people don’t want to work in construction. There are no new bodies to take on the new work or to replace the older workers as they retire.”

A survey the Associated General Contractors of America published in January bears out much of this. According to the survey, some 80 percent of U.S. contractors plan to begin hiring this year, up significantly from last year, when only 57 percent were planning to hire. On the plus side, contractors seem to be more optimistic about the prospects for new work in retail, industrial and hotel projects than in other other nonresidential sectors, the survey says — and that is great, except for the aforementioned dearth of skilled labor. The Census Bureau estimates that the number of skilled laborers in the construction industry contracted by some 2.3 million during 2007–2009. Since then, only about 500,000 of these workers have returned to the job.

“Despite the overall optimism, some challenges remain for the industry,” said Ken Simonson, the association’s chief economist. “In particular, as construction firms continue to expand, they’ll continue to have a difficult time finding enough skilled construction workers.” And these problems are found on both the blue- and white-collar ends of the business. Of those survey respondents trying to hire, 87 percent report having difficulty. In particular, 76 percent are having trouble finding qualified craft workers, while 62 percent say the same about the professional positions: project managers, supervisors, estimators and the like.

Of course, as Simonson points out, as the supply of construction workers tightens, compensation rises too, adding to the cost of business for contractors. Fifty-one percent of firms report having increased base pay rates to retain construction professionals, and 46 percent have done the same to hold onto skilled craft workers. A quarter of these firms report having sweetened their benefits packages to retain construction professionals, and about a fifth have done this to keep their craft workers.

Materials costs present a more mixed picture. According to Engineering News-Record magazine, construction costs in March were up by 2.9 percent over the year-ago month of March. This was somewhat ahead of inflation, with some of the increase driven by labor costs — which were up by 2.8 percent year on year. (Skilled labor was up by 3 percent.)

Steel prices are starting to drop, Engineering News-Record says. According to its data, a 20-city average price for three types of structural steel declined by 0.5 percent in March; those are now just 1.2 percent higher than a year ago, at roughly the rate of inflation. Rebar is now only 1.6 percent above 2014. On the other hand, Engineering News-Record’s 20-city average price for pine, fir and commonly used wood products is up between 4 percent and 5.7 percent year on year. 

Thus, for contractors, all this new business is great for business — if only the cost of doing business were not giving them the business.