San Antonio - Ahead of the Curve - Local Market
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San Antonio - Ahead of the Curve

By Joanne Costin

Article Date: 01-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.

The construction market in San Antonio has fared better than most, thanks to government spending and a diverse economy.

When you meet San Antoniodealers at the AED Summit, they won't be celebrating. But the truth of the matter is that equipment dealers in many other areas of the country would rather be in their shoes.

Yes, equipment sales are down in the nation's seventh largest city, and down dramatically over the past year – new machine sales are off 66 percent over the past year, according to one dealer. However, compared to other major metro markets, San Antonio's has actually fared well. San Antonio lost 1,100 construction jobs from October 2008 to 2009, a 2 percent loss of jobs that placed it 16th in the most recent (October) Associated General Contractors of America (AGC) analysis of metropolitan area employment data using Bureau of Labor Statistics. Only five states showed positive job growth.

"Any dealer that is in Texas is fortunate, because Texas is better off than a lot of states," said Bennett Closer, AED's 2009 chairman and president of Closner Equipment Co., based in Schertz, Texas. "That is not to say it is not a significant challenge."

The downturn hit San Antonio later than it hit a lot of other markets. And with strong government spending and a diverse economy, the hope among dealers is that it will recover sooner as well.

As in other markets across the country, the downturn in San Antonio has been deeper and longer than any other downturns they can remember.

"With this particular downturn we experienced a decrease across the board: Parts, service and machine sales," said Shane Brownlow, general manager of RDO Equipment Co. in San Antonio and Laredo, Texas. "In '05, '06 '07 and half of '08 there was so much iron being purchased that people got flooded with it. Contractors had excess iron sitting on the yard, because they had the jobs to use them. Now they don't have to spend money getting their stuff fixed. It sits."

Closner concurs. "They weren't buying new equipment and they weren't using the equipment they had," said Closner. "They were parking it because they didn't have any work. We were off the mark on that. We thought there would be a huge increase in parts and service. That is not what happened."

The rental market also took a hit. According to Brownlow, backhoes that typically rented for $1,500 a month can now be rented for $700 or $800 a month. And he believes there won't be an uptick in sales until the rental pricing returns to market value.

Waiting for the Stimulus

Dealers in San Antonio say they really haven't seen the impact of the American Recovery and Reinvestment Act yet. According to Closner, "Contractors are finding the sledding a lot tougher now than it was a year ago – much less work, much more competitive, much lower margins."

The highway market has slowed as contractors have worked through a backlog of projects. There are a few signs of optimism, though. A number of stimulus funded projects are set to be awarded in January 2010, among them a $140 million interchange connection ramp project on U.S. 281. The San Antonio Business Journal reported that the area's total allotment is close to $400 million, when grants from federal agencies, like the U.S. General Services Administration and the Department of Transportation's Federal Transit Administration, are included.

"For the first time, we are starting to hear that contractors are being a little more optimistic, a little more positive about what is going to happen this year, "said Bob Luton, South Texas regional manager for Romco Equipment.

This past November, the highway construction industry in San Antonio received another boost when the Texas Transportation Commission approved roughly $2 billion in projects aimed at increasing safety, rehabilitating pavement and expanding highway corridors to reduce congestion. The projects will be funded by Proposition 12 bond proceeds, which were authorized by the Texas legislature earlier this year.

Two billion of the proceeds will be spent on non-toll projects, with $1 billion expended by September 2011. An estimated $1 billion will be spent to expand I-35 from a four- to a six-lane highway in much of Central Texas.

San Antonio's Wurzbach Parkway will receive $130 million to complete the 4.8 mile reconstruction and expand the facility from a four- to six-lane divided highway.

"Personally, I am not going to put all my chips in the stimulus package basket," said Brownlow. Although, he's encouraged by the $266 million worth of jobs he has seen bid in recent weeks.

San AntonioInternational Airportwill also continue its $634 million capital improvement program. A two-tier terminal roadway is scheduled to be completed in 2010. Construction of a new terminal is scheduled to be completed in November 2010. It will replace Terminal 2, which will be demolished in 2011. Construction of a $1 million, 1,000-foot runway extension has also begun.

Military Spending
San Antonioemploys more than 89,000 people in the defense industry and is home to one of the largest military concentrations in the U.S. The U.S. Department of Defense is reorganizing its infrastructure under the Base Realignment and Closure (BRAC) directive and will undergo significant military construction projects (MILCON) in San Antonio. It translates into a $3 billion surge in construction activity at four military installations. Work is scheduled to take place at Fort Sam Houston, Camp Bullis, Lackland and Randolph Air Force Bases through September 2011.

This initiative includes 180 construction projects, 78 major facilities and more than 12 million feet of new and renovated space. Major projects include the San Antonio Military Medical Center and the Medical Education and Training Campus, constructing an aircraft taxiway at Randolph AFB, an urban assault course at Camp Bullis, a bridge at Fort Sam and building renovations at Lackland AFB.

The new and renovated facilities will bring more than 12,000 additional military personnel and federal employees into the San Antonio area. The Military Transformation Task Force, which was created by the city, county and Greater San Antonio Chamber of Commerce, estimates that by the time construction ends, projects at Fort Sam alone will have accounted for $6.7 billion in economic impact on the San Antonio area and more than $10 million in sales tax revenues.

Commercial Building

While the employment numbers are generally favorable, what they don't show is the impact that increased competition is having on the market. Doug McMurray, executive vice president of the San Antonio chapter of the Associated General Contractors cites the bid list for a $4 million public library project as evidence of what is happening in the market. Twenty-seven firms are on the list, including many companies that usually go after larger, more sophisticated work. Large firms and nonlocal firms are entering the market in increasing numbers. "Increased competition is the overarching narrative of 2009 and the thing that has some industry leaders on edge about 2010,"said McMurray.

According to McMurray, several ENR top firms have already set up offices in San Antonio, including the Clark Construction Group and Turner Construction Co. Zachry Construction, No. 23 on ENR's Top 400 list, with an estimated $2.8 billion in annual revenues, is headquartered in San Antonio.

Health Care

Health care is a market that continues to be strong in San Antonio. An $899.4 million capital improvement program for the University Health Care system will be a boost to contractors in 2010 and beyond. Owned by the taxpayers of Bexar County, University Health System is a nationally recognized academic medical center that includes a network of 18 outpatient clinical locations across the community. San Antonio-based Barlett Cocke is serving as construction manager on the project.

Residential Construction

"The housing was the first market to go down and will probably be the last one to come back," said Luton. Of all the construction markets, residential housing appears to be the one that has been hit the hardest, yet they are still ahead of the nation. Single and multifamily construction permits are down 41 percent through October, on par with the rest of the nation. Existing home prices were down 2.34 percent through October, compared to 7.1 percent for the nation.

"We have seen a significant amount of customers already close up shop," said Brownlow, who says he has repossessed more tractors this year than the previous five years combined. Dealers will be watching this market closely as a leading indicator for their business. "Once housing values begin to go back up that will be the beginning of the end," he said.

A Positive Long-Term Outlook

Economists and the media have a very positive view of San Antonio. In October 2009, Business Week placed San Antonio atop its list of the 40 strongest metro economies. San Antonio is perceived as a low-cost place to do business. Housing is affordable and wages reflect that. The cost of living is 10 percent below the U.S. average.

Diversity is its strength. Top employment sectors include finance, government, biomedical and biotechnology, foodservice, manufacturing and tourism. Toyota recently built a plant in San Antonio and in January of 2009 Caterpillar broke ground on a plant in Seguin, just east of San Antonio. "The fact that we have five or six or seven contributors [to the economy] helps us average out our highs and lows more than areas that are tied to just a single piece of the economy," said Closner.

The city boasts an educated, qualified workforce of more than 900,000 people. It is ideally situated close to major Texas population centers and midway between the east and west coasts. Its strategic placement along the Mexico/NAFTA corridor provides direct access to international trade and business opportunities.

The city of San Antonio also operates within a general purpose Foreign Trade Zone (FTZ) under the supervision of the U.S. Customs Service. FTZs are secured areas that officially fall outside U.S. Customs territory. FTZs help U.S.-based businesses cut costs, improve cash flow, and increase return on investment by deferring, reducing, or altogether eliminating duties and excise taxes if the final product is exported from the zone.

Concerns for the Future

Despite some of the positives, dealers in San Antonio still have concerns. Weakened finances among developers, contractors and dealers are definitely cause for worry. The industry relies heavily on financing for both projects and equipment. "One concern we have at AED, not just in San Antonio, is that the lending community may not lend to the extent they need to," said Closner. "If lending doesn't occur to developers, contractors and dealers, it is going to be hard to get out of this recession."

Like elsewhere in the nation, dealers in San Antonio are coping with withering demand by cutting costs wherever they can.

Lone Star Machinery, a multiline utility/ground engaging dealership, has a 60-40 business ratio of site prep contractors to contractors involved in water, sewer and gas installation. But new subdivision starts have halted, says president Roger Palmquist, and while he hasn't seen any of his customers close down yet, he's had to take unsavory measures in his own business.

"We have had to lay off people, which we didn't want to do," said Palmquist. "Others in our line of work have had to do the same. It's just a matter of riding the storm out. We came in here in 1976 and this is the worst slow down we have seen. In the mid ‘80s, there was a recession, but we weren't completely shut off."

Needless to say, San Antonio dealers are ready for the upturn they know is coming, but they just don't know when.

"A lot of the dealers that are here have been here a long time," said Closner. "I think we are all going to make it. We are all going to be around. The question is, how fast we are going to recover, and that really is a function of how fast our customers recover. We're tied to them at the hip."

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