Feature Stories - November 2003

Industry Focus: Construction Companies

by Kathleen Foley

Chief executives of Nevada commercial and residential building companies gathered at the Four Seasons Hotel on September 11 to discuss challenges and issues affecting the construction industry. The gathering was part of Nevada Business Journal’s monthly Industry Focus series. This month’s roundtable was sponsored by Lewis and Roca LLP. Lewis and Roca, a Southwest law firm with offices in Las Vegas, assists clients and businesses with needs in corporate and securities, construction, commercial litigation, intellectual property, utility, real estate and employment law. Connie Brennan, publisher of Nevada Business Journal, served as moderator for the roundtable discussion, which included issues such as land prices, the water shortage and new building codes. Following is a condensed version of the discussion.

Brooks Williams: Jaynes Corporation has been in Las Vegas since 1988, primarily working in the private market, doing a lot of retail and some office and industrial work, with public works projects from time to time. One obstacle I see in our business is the price pressure coming from everywhere – land pricing, building and permitting fees, water fees and others.

Gary Mayo: Toll Brothers builds primarily luxury homes throughout Las Vegas. I’m concerned about rising land prices and the shortage of land, which is causing a large increase in home prices that is running people out of the market.

Larry Monkarsh: As a small company, LM Construction is also concerned about land prices, but our major concern right now is the new IBC 2000 (International Building Code) rules. Since July 7th, construction costs for tenant improvements have grown 15 percent to 20 percent based on the restrictions caused by IBC 2000.

Mike DeSilva: U.S. Home has been building in the Las Vegas community since 1976. I see the drought as a major problem, as well as future capacities, infrastructure support and rising land costs. I imagined a couple of years ago that when thousands of acres of BLM land went on the market, at some point prices would ease up, but it’s been just the opposite. There’s been more competition for land, and the prices have actually gone higher. At some point, something’s got to give.

Peter Harvey: Carson Taylor Harvey focuses on commercial construction, and we’re probably 50 percent public and 50 percent private work. One of the obstacles we face these days is competition in this market. We’re all competing for the same work. On public jobs, you get a lot of subcontractor bids, but you don’t always know the subcontractors. Do you take the low bid from a guy you don’t know, or do you pick somebody a little higher because you trust him, and then lose the job? A lot of subcontractors in this town are on shaky ground, and they don’t always make it to the end of the job.

Bob Wallace: Kitchell’s been licensed in Nevada since 1952, and over the years we’ve done hospitality, office buildings, retail, golf clubhouses, some public works projects. Most recently we’ve been concentrating on healthcare projects. Most of our clients are negotiated repeat clients, and I’m the eternal optimist. I think this is a great place to live and work. This is a business-friendly environment here in Nevada. We’ve got some good workers here who work really hard, and good subcontractors. We’re surrounded by opportunities, and I’m enthusiastic for the future.

Chris Haase: Burnett Haase Construction Company has been in business in Nevada since 1996, and we’re a smaller commercial general contractor. We focus on development and construction of commercial, office, industrial and retail projects. We self-perform concrete and specialize in concrete tilt-up. I tend to share Bob’s optimism about our market. Anyone looking back over the past four or five years and say it’s been a tremendous run. What threatens our industry is anything that would take away from Nevada’s status as a low-cost alternative to the expensive cost of living in California, and anything that might increase regulation and taxation. As the cost of living and cost of owning real estate here in Nevada approach that of California, that’s what’s going to slow us down.

Greg Korte: The Korte Company has been operating here for about 15 months. We do a mix of projects, and nationally, we do about $210 million in volume. We are bringing some people from the Midwest here for employment because the economy has really been tough out there. The great economy in Las Vegas has started to affect the workforce here, and they don’t have the drive and the hunger that the rest of the country has, where they’re in fear of losing their work. People here don’t have the work habits of those in the rest of the country. I also see as a challenge what put me out of business in my former company (KBA Construction), and that is the continuing liability of general contractors. Ultimately, we are responsible for anything and everything on the job, including the owner’s finances. Our problems are our problems, and everybody else’s problems are also our problems.

Gary Siroky: Target General of Nevada, which will soon become Core Construction, is a construction service company primarily in the commercial and industrial sector. Our services are cement work, design-build, construction management and general contracting. Our roots date back to 1937 and we came to Las Vegas in 1999. The obstacles we face are the byproduct of the opportunities we have because of the explosive growth. The growth thereby creates your agenda. No matter where you go, you’re going to run into the same issues, but because of the growth rate here, we’re having to face them head-on on a day-to-day basis, and they’re not going to stop.

Wade Pope: Roche Constructor’s primary market in Nevada is public works and the school market. Competition is a challenge for us. Finding quality subcontractors is also a problem on most of our projects. We do have a pretty stable base, but it’s not expanding. Another challenge we face daily is inspection interpretation – maybe not so much new codes, but interpretation of codes. It’s costing, not only the contractor, but the owners, a substantial amount of money.

Frank Martin: Martin-Harris Construction started business in 1977. Fifty percent of our market is private, and 50 percent is public, with revenues in the neighborhood of $180 million to $280 million a year, all of it here in Las Vegas. Wade hit it dead on the money. The biggest challenge is code interpretation by the inspectors. It doesn’t make any difference that you have a building permit and a set of stamped signed drawings, when the inspector gets out there on the job site, he sees it a totally different way than anybody else does. We recently had a situation where we’d been through hundreds of inspections on a job, and the inspector walked through at the final building inspection and said I had to move all the exit lights to a different height. There needs to be some kind of a standard set-up in which everybody interprets it the same way. The other thing that seems to be a major problem is IBC 2000 regulations. We had a building that was built under the UBC (Uniform Building Code) and the client wanted to put in a mezzanine floor. The building was engineered for a mezzanine under the UBC, but it doesn’t meet the seismic standards of the IBC. Right now they’re saying, "You have to bring the building up to IBC standards seismically."

Brennan: So are you optimistic about the future, Frank?

Martin: Yes. We currently have the largest backlog of work since the day we opened for business, so I’m pretty optimistic about the future, but as Greg pointed out, we’re insulated here from problems the rest of the country is experiencing. I was talking to a guy in New York yesterday, and their work is down 15 percent to 20 percent. I talked to several people in Northern California and Central California, and they said the same thing.

Dick Rizzo: Perini Building Company is a 110-year-old national contractor. I’ve been in Nevada since the early ’70s in Reno. In Nevada, we have been recognized as the largest builder of casinos, hotels and entertainment venues. We’re also doing some non-gaming stuff. Because our niche is gaming, we find that we’ve been forced to go elsewhere to maintain our growth. Because we are a public company, we’re judged on the basis of growth and 15 percent a year is what we’ve targeted. It’s very difficult in the building business, as you know, to do that without growing and expanding. We are currently doing the majority of our construction in California for Native American tribes, which actually is a threat to the gaming industry here, but we are there by virtue of our expertise. In the next 120 days in Nevada, we’ll break ground on over $1 billion worth of work, so I think it’s extremely encouraging from that side of it. Again, Northern Nevada is a problem for us. We’ve had an office there since the ’70s. We just finished some timeshare units up in Lake Tahoe and have become mountain builders, but that market is extremely slow, and has a very long gestation period. Our challenges are people and talent. Because we’re in an expansion mode on a national scale, we’re trying to increase our professional staff by about 15 percent to 20 percent. Finding good talent is our biggest challenge. We try to hire our talent out of the local market, but it has been a very difficult problem for us to get the kind of talent we need in our business. So we end up importing, which is not the best of circumstances.

Kevin Burke: Burke & Associates is a commercial general contractor. Next year we’ll be 20 years in this market. We do about 30 percent of our work in the public sector, and 70 percent in the private sector. The main challenge for us is recruiting, and we predominately import all of our top talent now from other parts of the country. It certainly helps that some of the other parts of the country are depressed, which makes it easier to lure that top talent here.

Brennan: Are you optimistic about the future, Kevin?

Burke: I’m definitely optimistic.

Brennan: Could someone explain exactly what IBC 2000 is and what it means?

Monkarsh: I can give you some examples. We have in-house drafting services for tenant improvements, and we let our draftsmen take the courses through the Clark County Building Department. We used to be able to pull permits over the counter in the old days – meaning prior to July 7 – and now it’s taking upwards of three to four weeks to get permits out, due to the fact that Clark County doesn’t have anybody certified at the counter to check these plans. All tenant improvements will be affected and it’s increasing the cost. One of the main issues is occupancy separation walls. Between an office and a warehouse, you now have to put in a one-hour fire wall. The plan checkers come back and say, "The code says two hours." Here we go back to interpretation again. It’s up to you to go research the code and show them where it says it’s only required to be a one-hour wall. So, if you don’t do your homework, it could increase your cost to your clients tremendously. The other issue we’re finding is on retaining walls and footings due to the seismic requirements. Everything is being beefed up with rebar and increased thicknesses of concrete.

Brennan: Who imposed this?

Monkarsh: All the municipalities are adopting the 2000 code, some are adopting the 2002.

Williams: The city of Las Vegas is trying to adopt 2003 codes by the end of this year.

Wallace: The biggest impact I see is the changes due to seismic requirements. That’s going to affect the foundation and structure of a building. We think it’s going to increase the cost of the structural portion of a project by 15 percent, and the structure is about 20 percent of the project total.

Martin: Our research says 15 percent to 18 percent, depending on the type of building.

Wallace: We think the seismic changes alone have increased the construction cost about 3 percent overall.

Rizzo: In the high-rise part of that code, depending on where you are in town and the soil conditions of that particular area, costs can increase as much as 15 percent. In areas of town where they’re fortunate enough to have appropriate soil conditions, it’s not as bad.

Martin: I think the bigger impact, which the development community hasn’t seen yet, is the impact on existing buildings from a seismic standpoint. When you go in to do major remodels, there’s a piece of the code that says, "When you affect 25 percent of a building with upgrades, you have to bring the whole building up to current code."

DeSilva: To give you a couple examples that have specifically impacted the homebuilding industry, the new changes have resulted in six months delay for us in plan check. For the seismic differences, we have to put more plywood walls around the buildings where gypsum board was previously used. We’ve been building some of the very same house plans since 1995, but today we go in with those plans, and they have to be engineered differently. So right off the bat, we have to pay a structural engineer $2,000 to $3,000 per plan to redesign each one. Then we take the redesigned plan, bring it down to the county and wait in line for six months. When we get it out, the items that have to be designed into it have cost us roughly between $2,000 and $3,000. We add all of this up and – not counting the delays and plan check – it results in a price increase to the customer of $5,000. Now, a six-month delay in a rising land market means the home might cost another $20,000 dollars for land. So right there, that’s an extra $25,000 we have to pass on to the customer. When we finish that home, and you compare it to the one we built in 1995, there’s very little added functional value to that customer.

Mayo: We’ve come up on the same delay, which is frustrating, because we all knew this code was coming. We had the plans redrawn and re-engineered and submitted in a timely manner, but the entities that adopted the code hadn’t prepared themselves for the onslaught of plans that were coming in.

Brennan: Is there any municipality that has not adopted the new code?

DeSilva: North Las Vegas.

Brennan: And it’s really the builders’ responsibility to prove the inspector wrong?

DeSilva: What we’ve been training our guys to do is quit arguing and just go spend the extra money and get it done.

Mayo: Otherwise, the interest costs will kill you.

DeSilva: It’s a Catch-22 situation. We want to build stronger, safer buildings, but as we tackle affordability issues, we talk about whether people can even afford the resulting product.

Brennan: Let’s talk about something that affects all of you fairly dramatically – the availability and the cost of land. The people I’m talking to don’t seem to think it’s going to get a whole lot better and in fact, it’s getting worse. What’s going to happen when we run out of land in the Las Vegas Valley?

 Williams: I don’t think we’ll run out of land, but I think the BLM process is flawed. They don’t release large enough parcels of land, so there are a lot of folks going after a set amount of property, which keeps the price up. They also set a minimum on that price based on the property in the area. I don’t think it really gives the market the opportunity to adjust, to go up or down. I don’t see how it can come down.

Mayo: You find smaller parcels that may already have infrastructure selling at a certain price per acre, and then the BLM appraises their land based on that amount. But the parcels the BLM sells are in such large quantities you have to provide your own infrastructure, and that’s not figured in.

 DeSilva: The BLM counters the appraisal argument by saying an auction is the purest form of appraisal – a willing buyer with a check at the podium bidding against other people. Those of us in the homebuilding industry say, "This is crazy." The only reason the prices have gone so high is that one needs it more than the other. It’s working to the advantage of taxpayers, but to the disadvantage of local home purchasers.

Brennan: How does the drought issue affect your business?

Korte: It’s kind of ironic. On one hand, everybody’s concerned about water and the drought. On the other, you’ve got the health district and the EPA saying, "You need to put water on the desert [to keep the dust down] because we have an air-quality crisis." The water district is saying we need to stop all the water features and really conserve. Meanwhile, we’re dumping millions of gallons through the construction process just keeping the sites wet to keep the dust down.

Brennan: Does the drought have the potential to stop growth?

Siroky: Ten or 12 years ago, building departments were issuing permits based on how much water was available. They haven’t done that at this point in time, but if they do, you’ll see the construction industry come to a screeching halt.

Martin: It’s not so much a matter of a water crisis, as it is a matter of water distribution. Because of antiquated water laws, we could buy water from Utah, but we would have to pipe it instead of letting it flow through the river and down into Lake Mead and get credit for it. Once the water goes into Lake Mead, we can’t claim it. All we can do is hope there’s more snow on the westward slopes of the Rockies next year.

Siroky: It’s ironic they had to wait until Lake Mead is down 100 feet to start water restrictions. It’s almost as though it’s too little too late, but something had to happen. It probably should have happened 10 or 15 years ago, because I think the mentality back then was, "Just keep building, and we’ll find the water." Now they’re realizing they have to find water because they’re going to run out.

 Brennan: Is more pressure coming from your clients to shorten building time?

Williams: Once the schedule has been set, and it’s more aggressive than the one that was built before, and it’s achieved, then it sets a new plateau. Then our customers are expecting everything to be built faster and faster. Once it’s been built this fast, it becomes the norm, and then the next project is built faster still. We’re building twice as fast today as we were 10 years ago.

Mayo: From a residential standpoint, we’ve kind of taken the opposite approach. We build in enough interest costs to actually try to slow the project down. We’re doing everything we can to slow sales down.

Brennan: You do everything you can to slow sales down? Why?

Mayo: The market in residential right now is so strong that if we continue to build to meet the demand, we’d all be out of business it in the next year and a half to two years, because the land availability can’t keep up. There are too many pressures on the market right now for us to deliver the amount of homes demanded. We can’t find enough quality subcontractors to meet the demand. So rather than beat our heads against the wall trying to keep up with it, we’re trying to slow it down, and if we lose a little business along the way, that’s what we need to do.

Monkarsh: I was forced to self-perform some trades because of the subcontractor base being so low. I’ve also found that the 40-hour work week in construction is no longer there. You cannot complete some of these projects in 40 hours a week. You need to work Saturdays and Sundays and nights. We have split shifts, much like the casinos do, where we bring two crews in during the same day. One guy starts at 5:00 in the morning and works his eight hours, and the next guy comes in at 2:00 in the afternoon and works his eight hours. That’s the future. That’s what’s been going on in Las Vegas for the nine or 10 years I’ve been here. I see my overtime increasing as the demand increases.

Wallace: Some of our clients are for-profit hospitals, and they’re demanding shorter and shorter construction durations. Time is money to them, but they’re expecting the same level of quality and workmanship as we would normally achieve, so it’s a challenge.

Brennan: How do you deliver, considering that your permitting time has lengthened and with the all the unknowns at City Hall? You don’t know how long the project might be stalled because of the permitting or inspections.

Harvey: Part of the problem is, as contractors, we’re the last one in. The developers and the architects took up time, the city took up time to get the permit, so now suddenly the project is three months behind. Our 12-month project has become a nine-month project.

Brennan: And you can’t go back to your client and say, "I need three more months."

Harvey: Typically the conversation is: "Well, you can get the job, but I need it in nine months now." If you want the job, you have to do it in that amount of time or someone else will get the contract.

Kathleen Foley
Kathleen Foley is a freelance writer based in Southern Nevada.