Playing the Waiting Game - Sector Check
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
Home         About Us         Media Kit         Subscribe         Previous Issues         Search Articles         Meet the Staff        AED Homepage

CED Menu

Arrow Home
Arrow About Us
Arrow Media Kit
Arrow Digital Subscription
Arrow Search Articles
Arrow Meet the Staff
Arrow Trade Press Info
Arrow AEDNews

Premium Sponsor:

SECTION: Sector Check

Questions or feedback?
Contact Kim Phelan at (800) 388-0650 ext. 340.

Playing the Waiting Game

By Richard R. Rogoski

Article Date: 02-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

The recession is putting the brakes on a number of large retail and hotel projects.

In an industry that strives to get jobs done on time and on budget, waiting does not come easy. Yet contractors and construction equipment distributors have been forced to tighten their belts and wait until activity picks up.

But given the depth of this recession, that wait could be well into 2010.
While nearly every sector has been hit hard by the economic downturn, retail and hotel starts now rank among the crumbling.

“Activity has slowed pretty much across the board,” said Kenneth Simonson, chief economist for the Associated General Contractors of America. “A lot of projects have been scratched or deferred. And I don’t see the bottom yet.”

Simonson predicts that activity in all sectors will limp along throughout 2009 but pick up in 2010.

“Right now there are a lot of hungry contractors,” he says.

There is, however, one bright spot in a relatively somber environment: The cost of doing business is down. “The good news is limited to the cost of construction,” Simonson said. “Material costs have come down and diesel fuels costs have come down.”

Among the materials that have seen major price drops are steel, aluminum, copper and asphalt. And because the recession has idled so many qualified general contractors and subs, many are low-balling estimates to pick up whatever work they can.

Fewer Stores
The dismal holiday shopping season that ended 2008 was another indication that consumers are retrenching – forcing some stores to close and others to put off expansion plans.

The International Council of Shopping Centers predicts that 148,000 storefronts would be shuttered at the closing of 2008, the most since 2001 when 151,000 closed. With the demand for new stores dwindling, developers and shopping center owners are shelving plans for new centers and are trying, instead, to keep their existing spaces leased.

“Retail has almost slowed to a halt,” said Mike Allen, president of MP Allen, a general contracting firm based in Four Oaks, Calif. “A lot of shopping centers are either going dark or owners are reducing their rents.”

Hopefully, pent-up demand and a willingness on the part of banks to again finance retail construction may begin a turn-around later this year, Allen says, adding that during the last few months of 2008 he actually submitted bids on some proposed shopping centers.

But it’s going to take a lot of new construction to make up for the declines seen in 2008. According to figures compiled by McGraw-Hill Construction for the International Council of Shopping Centers, between January and July 2008 all retail subclasses were down 37.4 percent from the same period in 2007. Only drug stores showed a modest gain in expansions or starts (18.5 percent). During that same period, department store anchors were down 32.1 percent; big box/value stores dropped by 49.6 percent; and regional centers were off by 47.4 percent. In addition, retail in mixed-use developments – combining both commercial and residential space –was down over 40 percent in 2008.

No region of the U.S. was spared. But the Midwest took the biggest hit with the pace of retail supply down 45 percent from 2007’s pace. The Northeast was off the least with a 23.2 percent drop. Because retail generally follows rooftops, the booming housing market and consumer confidence kept demand high. Developers did not foresee the bottom dropping out as it did.

In Orange County, N.C., county commissioners last year gave the green light to building a 1.1 million-square-foot retail, office and residential mega center outside the town of Mebane. Named Buckhorn Village, the center promises to bring in nearly $6 billion in annual sales tax revenue. But plans have stalled.

“We have no plans to break ground yet,” said John Fugo, vice president and director of construction for Chapel Hill, N.C.-based Montgomery Carolina Corp., a commercial construction company that has built retail centers in 45 states. “We’re waiting for a couple of months to get a better reading on the retail sector. Planning, right now, is pretty much impossible.”

Although he hasn’t had to lay off any workers, Fugo says the company has transferred key people from the Miami office to New Jersey. “Right now we’re working in New Jersey, Texas and North Carolina. This is the first time we have no active projects in Florida.”

Fewer Rooms…
With few signs indicating an economic upturn any time soon, hotel construction is expected to slow even more in 2009 as hotel vacancy rates continue to rise; the demand for new rooms falls; and lenders remain reluctant to finance new projects.

A revised forecast by PKF Hospitality Research anticipates profit declines for the industry of 7.9 percent in 2009 as spending for leisure and business travel continues to drop. When the new forecast was published in October 2008, Mark Woodsworth, president of PKF-HR stated: “The lack of financing has all but stopped the start of construction for new hotels for this year and next. Therefore, we will see fewer rooms open up in the later part of 2009 and into 2010.”

The outlook from Lodging Econometrics, a global authority on hotel real estate, is no more encouraging. This organization expects declines in current construction projects to impact new openings in 2010 and early 2011.

John Fox, senior vice president of PKF Consulting in New York, says there are a number of hotel rooms now under construction in and around New York City. “But those projects were started prior to the summer,” he noted.

He also said that a number of condominiums that were built on speculation in Miami are now being converted into hotels. Hotels that are currently under construction stand a good chance of being completed, Fox says.

“The industry had started a number of projects prior to the downturn. But those in the planning stages are dead in the water because they can’t get financing.”

Fox, however, remains optimistic and predicts, “Things should start to level off in the third and fourth quarters of 2009 and pick up in 2010.”

Allen says his company worked on about six hotels in California during 2008, including a Marriott, Holiday Inn Express and a Hampton Inn. But he notes that these are relatively small hotels. “Most are 90 to 150-room, $5 million to $10 million projects.”

Las Vegas, Nev., has always attracted high-rollers and tourists, but the weak economy is forcing many hotel and casino projects there to also to be put on hold. In November 2008 it was reported that construction of the $4.8 billion Echelon has been suspended indefinitely. Located on 87 acres where The Stardust once stood, the Echelon was planned as a complex of four hotels with 5,000 rooms, 30 restaurants and bars, 300,000 square feet of retail space and the fourth largest casino in Las Vegas. But even smaller projects are hitting economic head winds.

“All our timeshare projects are on hold,” said Jennie Bowman, marketing coordinator for The PENTA Building Group in Las Vegas.

Two major projects are under way, she says. Phase III of the Hilton Grand Vacation Club, which will have 1,100 units when completed, is on hold for six to 12 months. And the GrandView Las Vegas, which will eventually have 1,800 units in eight towers, is just getting started.

Distributors Feel Pinched
For Dallas Moyer, president of Apco Equipment in North Las Vegas, the drop-off in new construction has hurt.

“I’ve been doing this for 35 years and I’ve never seen anything as bad,” he said. “We’re doing 25 percent of what we were doing just two years ago. And we’ve had to reduce our staff by 50 percent.”
Moyer also adds that he lost 10 good customers and is having a harder time collecting money from others. He admits that he’s still renting some excavators and wheel loaders, but sales are lagging. Typically, wheel loader sales in Clark County average about 250 a year. In 2008 only 40 were sold, he says.

Bob Sloan, president of Contractors Equipment Rentals Inc., in Chicago, said equipment sales and rentals were down by about 10 percent from 2007. Mini-excavators were especially hard-hit due to the severe drop-off in housing starts. In the first 10 months of 2008 he was down by 400, he says.
So far, Sloan has only had to lay off one employee and is waiting until the spring to see if he can rehire him.

Another drag on his business has been rising finance rates on used equipment.
“A guy comes in and I quote him 8 ½ percent. Three or four months ago it was 6 percent,” he said.
Sloan said he’s still seeing a lot of concrete being poured in the Chicago area, but added, “Everybody is still pretty cautious.”

Mike Hamilton, vice president of O’Leary’s Contractors Equipment & Supply in Chicago, said the overall market is down and hotel construction has slowed. But he said equipment is still going out the door.
“Bobcats are busy but standby generators and mini-excavators are slow,” he said.
Hamilton says his business has been somewhat insulated because, not only does the company sell and rent equipment, but its client base is well-diversified.

Another distributor that appears to be bucking the trend is Hoffman Equipment in Piscataway, N.J.
“We consider ourselves fortunate,” said Mike Anderson, vice president of sales. With a reach extending into New York City, Long Island and Philadelphia, Hoffman Equipment recently signed up Case in New York City and Long Island and expanded operations into the Hudson Valley. As a result, the company hired more people.

Anderson says some segments are still strong while others, including hotel and retail, are weak. Road and bridge construction, for example, is strong in the Northeast, which has increased the demand for cranes like the Grove cranes Hoffman sells and leases.

Anderson also says the area’s demolition and scrap business helped bolster the company’s bottom line, especially since Hoffman is a dealer of Genesis grapples and shears. But that sector began tanking during the summer, he says.

Still, Anderson says he’s seeing a continuing need for wheel loaders and hydraulic excavators and expects that market to stay strong this year. Although distributors and contractors are waiting to see if business across all sectors picks up later this year, it’s not all doom and gloom.
“The work’s out there,” said Hamilton at O’Leary. “You just have to find it.”

[ TOP ]

Article Categories:  Business Outlooks  »  Economic Outlooks  »  Current Events  »  Industry News  »  Management