Building business by building for businesses: Part one of a two part series
By Scott Robertson
This month saw the release of the national construction cost reports. Cost levels in the U.S. remained stable, a trend that has been in place for some time. “What I see nationally, I can usually see here too,” said Jim Street, founder of JA Street and Associates in Blountville. “Inflation nationally has been at about 2 percent and material prices have been flat. The increases have been mostly in labor.”
A few years back, when materials costs were seemingly constantly rising, the China market was blamed. Now that prices are level, China is once again in large part responsible. As Eastman Chemical Co., CEO Mark Costa recently said, “China overproduces everything it touches.”
Structural steel is down 35 percent from its high, “though you still have fabrication and erection of material, so the customer isn’t paying 35 percent less. Asphalt and paving are down about 3 percent. Diesel fuel is down 40 percent.” So what does 40 percent off diesel fuel do for the price of a grading job, for instance? “It’s down around 5 percent,” Street said.
It’s not just the China market that’s driving material prices down, to be fair. The world market is off. “Lumber prices are down around 9 percent,” Street said. “But lumber has always been a yo-yo.”
Builders are seeing the volume of projects rising again in the region. While it’s nowhere near the pre-recession level, when the Tri-Cities branch of the Associated General Contractors reported $218 million in projects, the market is at least back up off the mat. “The lowest dollar figure reported came in 2012, when we had $104 million,” said Brad Jenkins, executive director of the Tri-Cities branch of the AGC. “In 2013, we went back up to $122 million. In 2014 it was $118, and with one GC left to report from 2015, we’re above $122 million.”
There’s also been a shift in how dollars are allocated, Jenkins said. “In 2008 and 2009 the plan room was full. There was always a new school or new physician office buildings or hospital renovations – lots of $20 million projects. Now you don’t see that. There are a lot fewer hard-bid projects.”
More projects now have been negotiated, Jenkins said. “Bur-wil; Goins, Rash, Cain; and Street all have in-house design firms, so they’ve gotten a lot of business from design build where it stays in-house. So that’s where the trend has gone. What comes into the plan room now for bid is a lot smaller stuff.
So the rise in volume is happening, but it’s a very slow rise, with materials costs remaining at or near constant and labor rises moving with inflation at a fairly low rate. At the same time, more builders are negotiating directly with clients.”
If this sounds like a good time to build a new building, at least from a cost standpoint, that’s a pretty defensible idea, especially if you have specific needs, like Pure Foods, a client for whom JA Street and Associates recently built an 85,000-square-foot manufacturing facility in Kingsport. If one’s needs aren’t so specific, though, many American markets have available pre-existing buildings in inventory. And that’s alright with builders like Street, because they make money off refit and renovation jobs.
“We do a lot of work for both Wellmont and Mountain States,” Street said, “and it’s all renovation work. We do a lot of renovation and upgrade work for automobile dealerships. We had two new ones in 2015, but the rest were upgrades.”
Even with Street’s largest client, Food City, he said, “We’ll do three or four major remodels a year and maybe build two new ones.”
So while new construction projects are generally bigger ticket jobs, more remodel work is available. “I would say in terms of dollars, we’re doing about a 60/40 split right now, with the 60 being reconstruction,” Street said, “and in terms of jobs, it’s probably 70/30.”
Next month: Crystal balling with builders: How post-recession lessons have shaped the market moving forward.