Building Nevada - February 2009

Commercial Building:

The Good, the Bad and the Ugly

by Frank Albano

With both public and private commercial projects on hold, those who had the foresight to stack the fire wood to the rafters, [backlogged work], will weather the economic downturn nicely throughout the traditional winter doldrums and emerge somewhat bright-eyed and bushy-tailed in the spring. In some instances, commercial builders found themselves high and dry when the storm clouds soaked credit markets; leaving them ultimately cash strapped. On the bright side, according to the builders the magazine spoke with, Nevada’s economy and commercial building will once more bathe in the glow of that famous western sunshine, but it will take a year or two.

What follows is an unvarnished, verbatim and unedited Q&A, with some of Nevada’s leading commercial builders, of both Northern and Southern Nevada. Their insights, judgments and opinions form the basis of what is intended as an unbiased and informative report. After all, who could be in a better position to know the bottom line but the very people whose businesses have been so severely affected by the downturn in commercial real estate?

Cary Richardson: The market has certainly changed, but there is work out there. What you are seeing are projects that are smaller in nature, and the projects are being funded by cash flow businesses, by family businesses or international businesses that don’t want to take their profits and convert them into European taxes. There is work out there, in the manufacturing sector, but it takes more energy to get what work there is.

Lou Primak: By reinventing themselves. Seriously though, by reinventing ourselves, expanding our core competency, as well as our geographic locations and expanding our service capabilities.

Steve Holloway: Those that had a backlog of work prior to the economic downturn in commercial building will do fairly well in the coming year. By contrast, those that did not build a backlog, will suffer. We are seeing a number of companies going out of business and a larger number cutting back in staff.

Brian Gordon: I think the commercial market is facing some challenges, even as demand for product diminish, we still have a significant amount of product on-line, especially in the commercial office building sector. But, what we’ve seen is an increase in retail market door closings in response to the current economic environment. I think a lot of retailers are just concentrating on cost cutting measures to weather the storm from an operational standpoint. On another note, many developers are taking an interest in distressed properties transactions. In an up or down market, there are opportunities which developers can take advantage of, but nevertheless, cost cutting and conserving resources are the key elements in this economic turndown.

Kevin King: Our framing division is extremely slow. We are trying to pick up work where we can, but at this point, it’s more of a survival mode than anything else. We are cutting costs where we can and riding it out.

Dick Rizzo: I think in general, contractors are not weathering the economy very well. In Southern and Northern Nevada, projects have been stopped and that has really hurt the commercial builders that depended on those projects to get through the economic downturn. Now they are left searching to fill the void. Fortunately, all of our projects are moving forward. We are basically backlogged through 2010. That is based on Perini’s existing contracts to build City Center and Cosmopolitan, both projects that are moving forward as originally contracted. Smaller commercial contractors, without backlogged work, need to sink their teeth into something, especially throughout 2009.

Richardson: I don’t know how many have gone out of business, but I know there was some bad news coming for several companies. I don’t know specifically nor have I taken a headcount, but there is a lot concern for several companies, in so much as, ‘What’s going to happen this winter?’ It is going to be very difficult winter for some.

Primak: I don’t know of any that have literally ‘shut their doors.’

Holloway: I don’t know how many companies have gone out of business.

Gordon: From a retail standpoint, a number of store closures are suffering as a result of limited sales activity, which impacts the demand for additional retail commercial building. We’ve seen a number of furniture stores close their doors in Las Vegas, and we’ve also seen a handful of grocery stores in mature areas of the Las Vegas Valley close. We have also seen consumer electronics stores such as Circuit City and Comp USA, struggling to make some sense out of the current environment. So, most cutbacks in the office commercial building market are to the real estate market, including, realtors, brokerage firms and certainly mortgage lenders who are closing their doors or whittling back on staff.

King: The general contractors we compete against are still around. One or two contractors on every job we’ve been on in the last two years have gone out of business on us. We’ve had to pick up the pieces and move forward. A lot of contractors work on payment terms and we know a lot of contractors are having problems with insurance, bonding agents and other resources such as the Nevada Contractor’s Board. The percentage of contractors in this situation [financial trouble] varies anywhere from fifty to seventy percent.

Rizzo: I have not heard of any commercial builders that have closed their doors.

Richardson: It is on a particular case-by-case basis, but we are doing a fifty-fifty split between private and public projects. There is already money in the ‘pipeline’ to complete some public works projects that were provided for during past bond issues; but, private work is the biggest thing playing out in our industry. The real problem is the inability to get funding. Banks are not lending smart money on commercial projects to make up for the ‘bad money’ lent on residential projects. It has created a void and an opportunity for bankers to fill that void and so we are going to see creative financing. There are good projects out there and loans to be made, but nobody is willing to finance them.

Primak: That is a mixed bag, because it depends on our geographic location. In Northern Nevada the majority of our work is public, in Southern Nevada about two thirds of our work is private and in Southern California it is private at this stage. But, we anticipate the majority of our work in 2009 should be shifting over to the public sector side.

Holloway: A majority of the projects being done now, I would estimate from seventy to eighty percent, are private projects. A legislative committee has already frozen most of the public works projects. Most of the Nevada Department of Transportation’s projects, except those already under construction, have been postponed or cancelled. In addition, when the Clark County School District [CCSD], decided not to go ahead with a new bond issue, new school construction has slowed to a trickle.

Gordon: In terms of the commercial market, work is fairly limited. We’ve seen a number of public-private partnerships being proposed, such as the Las Vegas City Hall. There have been proposals for offices for the Las Vegas Metropolitan Police Department, but we have not seen many of these transactions move forward with actual commercial building activity. So, I would offer, cessation of commercial building activity today is taking place mostly in the private sector.

King: Before the economic meltdown, eighty percent of our work was divided up in the public and private sectors. Fast forward to 2008, more accurately the last two to three months of 2008, and that percentage has dropped dramatically. We are down to only ten percent private work.

Rizzo: We just completed Trump Tower, a private project. MGM Mirage’s City Center project is a private client as well. While the Cosmopolitan project is being developed by a bank, a private commercial contractor is also involved. We are doing the new Terminal D, at McCarran International Airport, so we have two private projects and one public project.

Rolling The Dice

Win some lose some, optimism, pessimism, cost cutting, survival, layoffs, tight-fisted bankers and a recession lasting into 2010; that is the plight of many commercial builders, as projects both public and private are postponed or cancelled. The key is backlogged work and funding. While bankers hold on to money, cash-strapped commercial builders are forced to seek creative financing. Commercial building will return to Southern and Northern Nevada in a leaner and meaner form, but will the industry ever be the same? Crystal balls notwithstanding, there are no reliable predictions.

As the data indicates, 2007 showed a spike in commercial building permits issued, followed by a gradual downturn in the last quarter of 2008. The general consensus among contractors is the 1st Quarter of 2009 will be rough, followed by a soft upswing, but it all truly depends on financing. With projects relegated to the queue due to a lack of financing, the delivery of new product is next to impossible to predict with any certainty.

Frank Albano
Frank Albano is a freelance writer based in Southern Nevada.