At the beginning of last year, Southeast Real Estate Business reported that 2001 looked to be a successful time for the construction industry in the Southeast. The volume of activity in the region was promising, and most industry experts forecasted a profitable 2001 and 2002.

Although results vary from market to market, many companies did not fare as well as they predicted. As with most trades, recent events and the slowing economy took their tolls on the construction industry. This month we spoke with several contractors that are actively building in the Southeast to find out how they managed last year and what their hopes are for 2002.

Evaluating the Market

"I think that there has been a pretty dramatic slowdown in actual contract signing over the last 7 months," comments Jeff Greenwalt, principal of Indianapolis-based Greenfield Builders, Inc. "However, the activity level today is as strong as we've seen it in a long time, and we have reason to believe some of that activity will turn into contracts -- hopefully in the first or early second quarter of this year. But there is no question there's been a tremendous slowdown, at least in the distribution sector of construction."

Clark Realty Builders, a national, multifamily general contractor headquartered in Bethesda, Maryland, has seen a similar slowdown. Over the past couple of months, the company has started fewer jobs than its historical average. "There seem to be less jobs that have broken ground in the past couple of months," says Glenn Ferguson, president. "There still seems to be as much activity as far as people looking at jobs and sites, but there's definitely been a slowdown in new starts." Ferguson adds that the slowdown has been mostly in the Class A, outer suburban product.

Len Martling, Florida division president of Des Moines, Iowa-based The Weitz Company, notes that the market in Southeast Florida has maintained its strength. "The multifamily high-rise residential market seems strong," Martling notes. "The hospitality industry was obviously impacted by the events of September 11, although we've seen somewhat of a rebound there. In terms of the opportunities that we have before us, the building industry still seems strong in Southeast Florida. There are a number of opportunities -- a lot of school work, both at the college and high school/elementary school levels."

"We have definitely seen a drop off in construction opportunities, primarily in the office market, with regard to tenant work," says Jeff Lawrence, vice president of Chantilly, Virginia-based BRITT Construction. BRITT provides full service general contracting for all types of commercial properties. "And we are fortunate that last year we had a fairly large backlog of work and it looks like this year we've got a fairly nice backlog of work as well."

The economy is no doubt one of the reasons for the decreasing number of construction opportunities, and Lawrence cites the fallout of the dot-com companies as having a large impact on the area. "Quite a few of the dot-comers were founded here, including AOL, PSI and Winstar, as well as many of the dot-com startups. Many of those companies that were really growing in 2000 are now bankrupt. For a time, they were gobbling space up, and there was a lot of new building construction going on. And now, because the economy is in a recession, there's a flood of space on the market. In turn, people aren't moving as much, and certainly rental rates have gone down as well," Lawrence notes.

On the other hand, the BRITT Services division, which provides the resources to perform small construction jobs, emergency repair work and maintenance, has seen an increase in work over the last 2 years. "I think that's just a product of people staying where they are or sprucing up the existing places that they are in," says Lawrence.

Spec: A Risky Business

By definition, a speculative development involves the risk of loss. And although taking a risk also allows for the opportunity for gain, in this uncertain economy, many are not willing to take the chance.

Today there is definitely a trend away from speculative distribution facilities, according to Greenwalt. "This was a very large market for us last year, in working with several developers and REITs. Now those companies and entities have, for the most part, slowed or completely stopped their spec development -- with a few exceptions.

There are a few out there that are still considering spec projects or have them on the drawing board," he says. Activity has shifted to the build-to-suit market. And interestingly enough, that activity is very strong right now. "There are not a lot of people signing contracts right now, but the activity level today is still fairly strong," adds Greenwalt.

Multifamily Trends

Clark Realty Builders is seeing a trend toward more in-fill sites. "We're seeing more sites closer to town, in Washington, and less out in the suburbs," Ferguson explains. "I think it's a function of more people wanting to live closer in because of the traffic, and also because a lot of the good suburban sites are gone. With these in-fill sites, we're seeing more structured and underground parking instead of just on-site surface parking because these sites need more density."

Atlanta-based Realty Construction Corporation, the contracting arm of the Lane Companies, is also seeing increased in-town development. "I think the in-town markets are drawing people back to the city," says President David Deriso. "I think the commute has gotten pretty old with a lot of people, so instead of living in suburban parts of major cities, the in-town locations are a lot more attractive."

And fortunately for Realty Construction Corporation, the company is diversified in the product type that it builds and geographically. Realty Construction Corporation specializes in building apartments, condominiums, extended stay hotels and senior living facilities. It constructs both in-town mid-rise type product as well as suburban product. The company also works in a number of major markets throughout the Southeast. "I think some markets are not hit as hard as others," Deriso notes. Many of the markets Realty Construction Corporation works in remain strong. "We're building some communities in the Tampa/ Lakeland area that are doing quite well. We're also building a project in DeKalb County, Georgia, that's located well outside the perimeter of Atlanta, and it's renting well." Realty Construction Corporation has also built several extended stay hotels over the last 3 or 5 years and, according to Deriso, they are all staying fairly well occupied.

Realistic Expectations

Despite the unusual and uncertain times, most contractors are cautiously optimistic about 2002. Many have a number of prospects that could lead to new developments. "We're very bullish about next year," says Greenwalt. "The work that's being bid on right now is good work, and we believe a fair amount of it is going to close. Although I can't say for certain, we're very optimistic that next year is going to be a reasonably decent year."

On the office side, vacancy rates are rising, which is not good news for office builders. Many companies have suffered from the economic slowdown and have been forced to downsize or, in some cases, go out of business. In these instances, the construction industry is forced to wait until a lot of the vacant space is filled before starting new projects.

"There's always a lag from the time the economy turns around before construction catches up with it," says Edmund Glover, chairman and CEO of Batson-Cook Company, headquartered in West Point, Georgia. Raymond Moody Jr., president and COO, agrees, citing Atlanta as one of the areas with a significant amount of office space available. "When the economy picks back up, it will probably take another 12 to 18 months to use up that vacant space," he notes.

Lawrence agrees that while things could be better, he remains cautiously optimistic. "However we, like everyone else, are trying to get lean and mean to figure out what the market is going to do. Typically, we'd be hiring people in anticipation of work coming on, and lately we've slowed down a little bit," he says.

"I think right now we are all just being a lot more cautious in what we do -- really managing the process better. We've had to adapt a strong zero tolerance policy for mistakes. We just have to do it right the first time," Deriso says. He adds that one of the most significant impacts on the industry is the rental market. The rising number of layoffs in other industries affects what is built. "Fortunately for us, as the general contractor, we have a lot of projects under construction now that will go through the majority of 2002. And we have several starts in the pipeline that should begin by spring or early summer of 2002, which will bring new product on the market sometime in 2003."

And although Batson-Cook predicts a slight slowdown in 2002 work as compared to 2001, Glover notes that the company's "average job takes about 18 months to build, so even if our orders slow down, it will be a while before our volume actually drops."


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