Contractors have seen the best and the worst in a battered industry

JQUACKENBUSH

August 16, 2010

The 2010 Spotlight on Leaders in Contracting in the North Bay on pages 6 to 13 illuminates how top general and specialty contractors have remained on top as a number of sectors of the construction industry have contracted significantly in the past four years.

Read profiles of the largest commercial general, general engineering, plumbing, electrical, HVAC and solar contractors in the North Bay.

“For some it’s the best of times, and for some the worst of times,” said Keith Woods, chief executive officer of the North Coast Builders Exchange. “Some are going gangbusters in solar and energy-retrofit projects, and others are cutting things to the bone.”

Much of the North Bay construction activity has been supported by federal economic-stimulus dollars, buoying local contractors large and small that have done such work in the past or won bids against fierce competition from companies outside the area.

But because of the big decrease in private construction, such as light-industrial and housing projects, competition for public-sector work has increased, pushing down bids to 25 percent to 35 percent below original engineering estimates, according to Mike Ghilotti, president of San Rafael-based general engineering contractor Ghilotti Bros.

“We’re doing 2010 work with all its challenges -- restrictions, regulations, and bureaucracy -- for 2003 prices!” he said. He pointed to changing federal and state stormwater-management rules for construction projects that would make site work difficult between September and April in coming years.

“And the latest good news? Caltrans just announced that due to the state budget crisis, they may be suspending work on their contracts starting as soon as Aug. 20,” Mr. Ghilotti said.

However, the Ghilotti Bros. hasn’t seen a boost to employment from stimulus-funded projects.

“The sustained increase in construction workforce has been largely unrealized because demand for ‘shovel-ready’ projects translated into primarily street and highway overlays [for which] about 60 percent of the dollars spent go to purchasing and delivering the asphalt materials,” Mr. Ghilotti said.

The company projected it would need to cut general and administration expenses by 10 percent this year to avoid layoffs and trimming of hours for year-round staff. So far, the company is on track to meet that goal, he said.

There are a number of large health care projects set to start in the North Bay in coming months. One could be the $282 million Sutter Health new Santa Rosa campus, if the county of Sonoma late this month affirms its initial approval. Another set to start this fall is Petaluma Health Center’s overhaul on an existing building for a new medical center.

“There is a fairly endless horizon of health care projects with the changing demographics that make health care more important,” said Alan Butler, a principal at TLCD Architecture of Santa Rosa.

But the firm has had to trim its staff by 40 percent in the past two years as school projects were tabled for lack of local funds and commercial projects slowed. The firm recently hired college graduate Scott Jensen, the firm’s first architect hire in two years.

“We have a fair amount in the pipeline, and if all goes well we will staff up a bit,” Mr. Butler said.

Given the number of foreclosed or distressed home loans in the North Bay, homebuilding will be limited until the homes are occupied, but work on renovating and upgrading the homes for rent or sale could provide work for contractors, according to Mr. Woods.

Some of the financially challenged projects are being acquired by companies planning to continue building but at a lower cost base, such as Lennar Homes’ recent acquisition in Santa Rosa.

Likewise, commercial construction has slowed considerably because of high vacancy rates in commercial real estate in a number of North Bay locales and a challenging environment for sales of certain high-end wines.

Commercial projects in the offing include the planned transformation of the AT&T building in downtown Santa Rosa, construction of a Luther Burbank Savings branch office next to it and tenant improvements for BioMarin Pharmaceutical in Novato.

Relatively low interest rates on financing bode well for construction projects, but uncertainty in valuation will continue to hamper funding of even substantially occupied properties, according to economist Rob Eyler, Ph.D., head of the Center for Regional Economics at Sonoma State University.

Lenders want to know what cash-flow for the business or property will be like up two years or more in the future, and the larger economy has not substantially turned around, he said.

“If there is an economist who claims to know what will happen with construction or commercial real estate, the information out there is not good in a general sense,” Dr. Eyler said.

Also looming over lenders is potential for defaults in the next few years on commercial properties with inadequate cash flow, he said. Banking regulators have been requiring lenders to improve their capital ratios because of concerns over bad debt.

Uncertainty in the direction of the economy has caused a number of project owners to stall projects, but some contractors note early signs of improvement.

Commercial general contractor and developer McDevitt & McDevitt Construction of Petaluma has been receiving a lot of calls so far this year about jobs. Company revenues were cut in half last year.

“There is work out there, and people with money are getting motivated about being ready for business to come back in the next two years,” said President Willie McDevitt.

But with so little construction activity, the competition among contractors has become fierce with two or three times as many bidding on jobs, he said.

“It’s like buying tomatoes in the summertime,” Mr. McDevitt said. “There's too many of them.”

Caution among project owners about deploying capital is extending the time from first conversation to construction, and ongoing political concerns about growth are making that process even longer, he said.

The building industry has been calling on local governments to streamline the project-review process.

“Right now for contractors, delay is deadly,” said Mr. Woods of the builder’s exchange.

Ed Nessinger, president of Santa Rosa-based commercial landscape contractor Nessco Construction, wants to see existing streamlined construction permitting programs streamlined further to rebuild job losses in the local building industry.

“You should be able to walk in and walk out the same day with a permit,” he said.

Recently, some jurisdictions such as the county of Sonoma and Santa Rosa have responded with economic-development plans that include such measures.

For Jim Murphy & Associates, a Santa Rosa-based commercial general contractor specializing in wine, private school and custom-home projects, the reluctance of some project owners to proceed with construction amid the economic uncertainties of the past two years, led to painful cuts in crew and compensation to keep the company running.

“In 2009, we laid off several project superintendents and all but a few of our skilled carpenters and laborers,” said Jim Murphy, president.

Like McDevitt & McDevitt, Jim Murphy & Associates has experienced a different business environment so far this year.

“By spring 2010, we had acquired the projects that allowed us to re-hire many of them,” he said. “We also suspended bonus and profit-sharing programs and hope to re-instate them in 2011.”

Northern Electric of Santa Rosa has been surviving on public work such has bond-funded school projects for the past 12 months as the switch largely was flipped off for conventional design-build work. Instead of new wineries, work in that industry has been mainly maintenance and remodeling. But recently, the company’s outlook on local construction has brightened, though client nervousness remains, according to lead project manager Jim Chiappari.

“Six months ago, I would have said it was horrible, but now it’s OK,” he said. “We’re doing design-build in manufacturing and medical, and a lot of companies are moving office spaces from old junky buildings to new buildings where they got good deals on rent.”

For example, the company is outfitting Thermo Fisher’s new consolidated production facility in Petaluma. The medical instrument manufacturer’s equipment now is operating at 96 percent capacity, compared to 40 percent to 60 percent months before. Northern Electric is angling for a similar project for the company in Fremont.

Multifaceted contractor W. Bradley Electric of Novato has chipped out even more facets in the past two years to dazzle new types of prospective clients, according to President Leslie Murphy.

“WBE has worked hard to increase our sales and marketing efforts while reducing our spending,” Ms. Murphy said. “A big challenge was retaining employees, and we did so by reducing work weeks.”

At the same time the company has invested in training for advanced work in biotech and medical facilities as well as solar and green projects. In 2008 the company opened an office in Redwood City to expand its high-tech services in Silicon Valley.

The contractor also partnered with Novato-based iPower Corp. to expand into more solar energy projects with building-integrated photovoltaic panels, which blend into the roofline, and traditional solar systems.

Novato-based solar systems installer SolarCraft is seeing more requests for proposals than ever before, according to owner and President Bill Stewart.

“Many are in the public sector as most schools, municipal buildings and libraries that are undergoing construction or renovation are at least considering renewable energy as part of the overall project,” he said.

The 50-person staff of education sector–focused Quattrocchi Kwok Architects of Santa Rosa is working extra hours to keep up with design work on school projects recently funded through bond measures in June or among the several on the November ballot, according to principal architect Mark Quattrocchi.

Photovoltaic energy systems, new windows and better insulation are among the features getting more attention in these projects. More than 9 megawatt-hours of solar-panel power are being designed into Quattrocchi Kwok’s projects.

“We’re doing planning a lot of saving-energy measures into the projects for long-term sustained savings in the school general fund,” he said.

School facilities bond money would help districts come up with the 40 percent local match required to tap about $1 billion in state bond funds for school facilities modernization. Approval of these local bonds would allow more school projects to start next summer, something Mr. Quattrocchi is eager to see, given that design work on the firm’s books currently tapers off early next year.

Quattrocchi Kwok was the architect on the recently completed $125 million American Canyon High School project.

In the private sector, a number residential and commercial property owners have approached solar contractors about renewable-energy features are interested in renewable energy or green project features.

Key to that interest have been Property-Assessed Clean Energy financing programs such as the Sonoma County Energy Independence Program, which was started in March 2009, and federal economic-stimulus programs such as the extension of the 30 percent tax credit and Department of Energy grants, according to Mr. Stewart.

Some flow of energy-efficiency projects also is trickling down to other trades such as plumbing and landscaping.

“The construction sectors we work in are all very sluggish,” said Tom LeDuc, president of LeDuc & Dexter Plumbing of Santa Rosa. “Production housing is slow; winery construction is slow; commercial work is extremely competitive; custom-home construction is somewhat strong; green construction and energy retrofit [work] is somewhat strong.”

While dramatically trimming expenses as traditional projects evaporated, LeDuc & Dexter has been pursuing more green-related construction and retrofit projects, said Mr. LeDuc, who has obtained various water-conservation and energy-efficiency certifications.

A number of projects with high-efficiency water heaters, ground-source heat pumps and solar-thermal systems are on the drawing board, fueled by a number of government financing and rebate programs, he said.