Builders wait for baby boom: Housing starts lag, as public construction stays strong

Barna, Ed

The Vermont construction industry's recovery from the recession of 1990-1991 has been slow and troubled, despite some signs of forward movement.

Bidding remains cutthroat and profit margins are tight, even at companies with good sales figures. Numerous reports suggest some companies are working at a loss just to stay in business, a situation that has resulted, at times, in subcontractor failures and problems for everyone involved with the interrupted projects.

Large companies are traveling farther to find work, putting further pressure on smaller firms. Those that have done reasonably well often have done so by working out of state, bypassing the relatively slow local economies.

There is a strong consensus that it is no accident Vermont is lagging behind other areas of the country in its recovery. While reforming the Act 250 permit process would be a nice way for legislators to say they are sorry, many construction company officials say sorry isn't enough: There needs to be a wholesale transformation in the state's attitude toward business to counter the negative image Vermont has acquired in much of the national business community.

Optimism is restrained by apprehension, with both the Legislature and Congress contemplating measures that business owners say could be devastating. While property tax reform and health care in Vermont have grabbed the lion's share of attention, possible changes in Occupational Safety and Health Administration rules could add to site supervision costs and require payment of benefits to (or result in the termination of) many subcontractors.

Bank credit no longer seems to be a significant problem, especially with interest rates low. But timber costs, which jumped in 1993 and took another hike in 1994, are adding substantially to prices, thus cutting into demand.

With lumber in shorter supply, attention is turning to new materials, such as metal framing or veneered wooden composites. The technological turbulence has amplified a sense that the rules of the game are changing, and that the future will not bring a simple, pendulum-like swing back to the more positive side of the business cycle.

MAYBE THIS YEAR

One way to track overall construction activity is through the Environmental Board's summary of estimated construction costs for Act 250 applications.

Fiscal year 1991 (July-June) saw 2 applications totaling $222,313,885. In Fiscal 1992, this dropped to 217 applications, but the sum increased to $246,497,171. Fiscal 1993 saw both figures plummet: 162 applications totaling $166,199,300.

Nor do the Department of Employment and Training figures for 1993 suggest a turnaround. From a month average employment in "contract construction" of 11,900 in 1991 and 11,350 in 1992, the number dropped to 11,300 in 1993.

January 1993 saw 9,400 employed, a figure that increased to 9,600 in January 1994. The January figure is only preliminary and is subject to revision.

But the pace does seem to be picking up in 1994, according to Larry Cain, president of Works In Progress, a four-year-old Burlington firm that publishes weekly construction report that covers Vermont, eastern New York, Hampshire and southern Maine. The projects listed in the publication help companies identify biddable opportunities.

For January and February, "We're seeing an 8.5 percent increase in bidding projects over the same period last year," Cain said. "We've also noticed an improvement in the quality (higher suggested bid prices) of the projects."

Also, there is more new construction, as opposed to renovation, Cain said. As for this winter's epidemic of snow-related roof leaks, he said it helped keep roofers busy this winter, but is unlikely to have any significant impact on the construction industry this year.

On the commercial and industrial side, "things have been pretty flat for the past four years or so," said Russ Ayer, executive vice president of the Associated General Contractors of Vermont, which includes 55 general contractors among its 130 or so members. But the prediction he heard at a recent convention in Florida was that Vermont could see 3 percent to 4 percent growth in 1994.

Building supply sellers, another major part of the organization, are "staying in business but not doing as well as they might," Ayer said. "I don't see a lot of them falling off at this point. The weaker players have already been culled, so to speak. A lot of the folks have consolidated their operations."

But, "Things are starting to break now," Ayer said. "We see a trend in jobs being let."

Fortunes vary in different regions. Ayer said, "The northern tier is much better than the southern," with Chittenden County down into Addison County doing best, Rutland County holding even, and the Northeast Kingdom and the two southernmost counties being the weakest.

G Ray Ault, a Rutland area commercial real estate agent who sits on the board of directors for the National Association of Realtors, said the Burlington area has been showing a vacancy rate of 2-10 percent for offices and 8-15 percent for retail. Around Rutland, by way of contrast, the 8-15 percent rate is found for offices, with retail vacancies at 15-20 percent.

"There's an awful lot of people waiting before making decisions, to see which way the wind blows," Ault said. For instance, he said he knows of at least two big office projects for Chittenden County where the would-be developers are seeking 80 percent pre-leasing before construction--a pattern consistent with what's been happening around New England.

Things seem a bit more upbeat on the residential side At the Vermont Association of Realtors, executive director Gar Anderson said, "The housing market is pretty good right now."

While a substantial inventory of properties remains--6,413 at the end of the fourth quarter of 1992, versus 6.604 at the same time in 1993--sales have grown over the past four years, Anderson said. Between 1992 and 1993, they rose about 29 percent in the first quarter, 3 percent in the second quarter, 14 percent in the third quarter, and 20 percent in the fourth quarter (1,511 versus 1,256 in the last case).

"If you have that type of sales increase, you're going to see the building pick up," Anderson said. The availability of credit has been "absolutely fantastic," and, "There are plenty of government programs out there for people who are in the low-income bracket."

At the Home Builders Association of Northern Vermont, with 133 members, executive officer Barbara Korona said, "It depends who you talk to. Some of the fellows are doing fairly well, others are not doing well at all."

Mark Miller, the vice president of the Home Builders Association of Central Vermont, said, "The residential end of things is not flying like it had been." From the perspective of his company Reprographics, which works with blueprints and large-scale drawings, "Things are slow right now."

Arthur Woolf, former state economist and now head of Northern Economic Consulting in Essex Junction, said housing sales looked to have been up perhaps 4 or 5 percent in 1993, though prices were flat. Housing permits tracked by the US Commerce Department were about the same for 1992 and 1993, he said.

"There's a large amount of unsold inventory out there, especially the vacation sector," Woolf said. Demographics are working against the housing market, because the bulge of baby boomers has mostly been housed, he said.

For housing, Woolf said, "I just think that's the way it's going to be the way it is for a while"--that is, a slow recovery.

HOLDING ON, HANGING IN

Construction company officials described a world where everyone is trying to do more with less, working harder but not necessarily getting better pay or profits.

"People don't realize," said John Magruder, president of Lamb's Construction in Brattleboro, which has 15 employees. "Happy days are not here again--yet."

"Things have been fine for us," Magruder said. "but we're a real diversified company." Not much of the work has been in Vermont, "just a few scattered jobs."

Magruder said that one hidden factor in the construction situation is the way bonding companies (Aetna, Peerless, National Grange, AM West and others, mostly with headquarters offices out-of-state) have taken on new companies to get their cash flow going. This in turn has led to unrealistic lowball bidding by some of the shakier companies, he said--a claim that several other construction company owners seconded.

In the short term, bidding below actual costs can result in subcontractors pulling out of an ongoing project, leading to a marathon of change orders, Magruder said. In the long term, the general contractors will fail, he said, but, "if that's how people want to do business, it's a free-market system."

"Most of our work is negotiated," Magruder said. "It's almost impossible to bid low enough to get in."

"It's really all relative," Magruder said. "Your volume could be tremendous, but your bottom line could be non-existent."

Fortunes vary. Jim Pizzagalli, president of Pizzagalli Construction in South Burlington, said his company did about $58 million worth of work in Vermont--a lot of school construction, a wastewater treatment plant in Barre, industrial work at OMYA in Pittsford and Hancor in Springfield, and more--which was "substantially over" the figures for 1991 and 1992.

The company is "reasonably optimistic" about 1993, Pizzagalli said, with a bank building in Montpelier, a medical facility in St Albans and a school in Newport in the pipeline. Employment has been fairly steady, with about 100 people at the headquarters, another 25 or so in the equipment yard, and varying numbers at work sites.

Work in 12 other states accounts for just under 30 percent of the company's revenues, Pizzagalli said. Meanwhile, subcontractors are "a concern of ours. Many subcontractors are not as geographically diverse as general contractors," he said.

"A number of subcontractors have failed, and that of course leads to problems for everyone," Pizzagalli said. But greater activity in 1994 should help the subs, too, he said.

"Hopefully we've seen the last of the difficult times, at least for some period of time," Pizzagalli said. "Certainly the bank earnings have been strong, and that is indicative of how business is doing."

"I think contractors always have the same complaint: not enough work, margins too tight," Pizzagalli said. "I don't know that construction is that different from other industries. Everyone has to work harder to deliver a good product at a competitive margin."

At EF Wall Associates in Barre, which has held steady at about 125 employees, vice president Joseph Bordas called last year "reasonable." There were two bank buildings, a credit union building, and a telephone facility, all in central Vermont, he said, though profit margins were "very competitive."

This year looks all right, too, Bordas said, with a supermarket, an elementary school addition, a transfer station and a corporate building planned.

At Daniels Construction in Ascutney, which has about 20 employees, president Neil Daniels said they were holding on, "just barely. We only have a couple of people laid off from last summer."

As for a turnaround, "I have some degree of optimism that there is, but the real evidence is not there. I simply sense that it is improving."

As to whether it's better to do business across the Connecticut River in New Hampshire, Daniels said, "It depends which way the coin falls. It's not easy to say one is better than the other. New Hampshire does have their administrative rules, their permit requirements."

In Rutland, Giancola Construction has 20 to 25 employees working, not only on outside construction but also in renovating the downtown Howe-Richardson scale factory complex's 18 acres and 25 buildings for mixed industrial, commercial and office use. A small conference center was among the latest project masterminded by owner Joseph Giancola.

That project is "doing great," he said, but, "We don't see a lot of work coming here (to Rutland) yet." Design-build work and help with the permit process have contributed to keeping Giancola Construction alive, along with such projects as an animal clinic and miscellaneous jobs for the local General Electric plant.

The John A Russell Corporation in Rutland had a good year, according to president John A Russell, "The best year we've had in the last four, actually. We did work in New York and Massachusetts, and that did help make the difference. Margins in Vermont are not good."

Regulations and taxes continue to make Vermont's business climate "a joke" to people who live elsewhere, Russell said. "Our company is planning to grow in the next year and the years to come--and it will not be in Vermont."

At Bread Loaf Construction in Middlebury, executive vice president John Leehman said, "Last year was not a good year for us margin-wise." There was the same amount of work, but, "The margins were definitely off," leading to problems with subcontractors going out of business.

"We do have what appears to be a pretty good backlog," Leehman said. Upcoming work includes a new $7.5 million Mack Molding plant in Arlington, a $2.5 million hockey rink in Manchester, and $12 million in dormitory renovations at Middlebury College.

Employment is down to 110 or so, from a peak of about 160 in the late 1980s, Leehman said. The central office has been downsized 25 percent, to 32 or so people, "and will continue to stay downsized if we have the same volume of work. We look at this as a long-term strategy."

At Engelberth Construction in Williston, president Otto Engelberth said, "I think we've done quite well. We had last year a kind of a blip upward," to $69 million in sales.

But that was largely due to a few fast-tracked projects in New York State, notably the Plattsburgh Wal-Mart. In 1994, "We'll be back in the $40-50 million range," Engelberth predicted.

Most of their work is commercial and industrial, the mix varying each year, Engelberth said. Usually about 30 percent takes place out-of-state.

With more than 300 employees, Engelberth Construction can find a way of surviving hard times. But some of the little guys can find good niches and decent livings, and wouldn't want to grow too big to do quality work.

One such is Traditional Lines Construction in Weybridge, run by Matthew Bruch and owned by Bruch and Greg Borah. Their specialties are timber-framing and restoration of 18th and 19th century houses.

"Just about anything that has to do with an old house," Bruch said. "Just about the only thing I don't do is vinyl siding, because I feel it's a crime."

The crew of five is highly qualified and highly productive, Bruch said. "As owner of the company, I have to be the first one in the hole and the last guy to leave the roof on rough days," he said, but his clients appreciate that kind of supervision and quality control.

Word-of-mouth advertising and long-term relationships have helped keep Traditional Lines solvent, Bruch said. When they talk with a property owner, they will try to set up a restoration plan that meets both the person's budget and the home's needs, and also gives them work year after year.

Not only high-end clients, but also people "from farmers on up" use the company's services, Bruch said. "We have been very lucky. There's a lot of builders here in Addison County who have had a hard time."

In Rutland County, Bruce Carrington Exterior Home Products has kept busy, according to owner Bruce Carrington of Proctor. His experience has been somewhat the opposite of Traditional Lines: "We've got a lot of work installing vinyl siding," as well as new, energy-efficient windows.

SET IN CONCRETE

A check with some of Vermont's concrete-related businesses found similar conditions and a similar range of experiences at the subcontractor level.

Ireland Concrete Construction in Burlington is one of the state's larger companies, with close to 100 employees. Co-owner and vice president Steve Ireland said things were slow for them in 1990-91, but have been picking up, and "last year we had an extremely good year."

"Burlington is definitely the place to be, but we had to travel a little," Ireland said. A mall in Plattsburgh helped boost the yearly sales, as did a continuing relationship with larger contractors like Pizzagalli and Engelberth.

"I think this will be a pretty good year," Ireland said, though that depends on the bidding. "We have been bidding on quite a few jobs this year," he said.

At the other extreme, one small company owner in southern Vermont, who asked not to be named, said he was getting out after more than 20 years in the concrete business. "The main thing is, the guys are working for nothing, the guys that are around," he said.

It costs $95 a cubic yard to produce concrete, realistically, and when he sees companies bidding at $90 he knows "three years later they'll be down the tubes. The jobs aren't there either," he said.

Morse Block in Bennington, which since 1927 has grown to add outlets in Poultney, Rutland and Pittsfield, MA, has now stopped manufacturing concrete blocks, according to owner and general manager Larry Cole. Buying blocks from the Glens Falls, NY, area is cheaper and the costs are more predictable, he said.

"It's been kind of trying, put it that way," Cole said. "There has not been a tremendous amount of work anywhere, for the productive capability that existed. It was a difficult decision, but you can't always go along with tradition."

"We tried it for 50 years and it just wasn't profitable, so we're trying to do it another way," Cole said. Rather than try to work with contractors, they are targeting homeowners, supplying retaining walls, driveway and walkway materials, crushed stone mulch, natural and quarried stone for landscaping, blocks for patio decks. "It's a growing market we want to be part of," he said "and these people pay their bills on time."

JP Carrara and Sons used to have 150 employees at their Middlebury plant. Now they have about 40 there, and another 30 to 35 at their Rutland branch, according to director of sales and marketing Dick Terk. "We've been very slow for the past couple of years," he said.

Lowball bidding by companies struggling for cash flow remains a problem. "There have been some companies that have gone out of business that we bid against, who left the jobs high and dry, but it's still happening," Terk said.

Worse yet, there are jobs where you have to bid to get in, but, "That's only the starting point. You bid them all over again once you get the job," Terk said.

How do they survive? "We're doing a job in Providence, RI, right now. We're finishing a job in Syracuse, NY. We're doing work in the Boston area," Terk said.

Redimix Concrete, Inc, has 60 to 70 people, seasonally, at branches in Lyndonville, St Johnsbury, Guildhall, and Woodsville, NH. General manager Bruce Warner said last year picked up a bit, particularly with the prison in Newport, and this year, "it looks to be better" with some bridge repairs in the works.

But, "It's all iffy," Warner said. "I don't know what it is, but all over the state I guess we're just holding our own."

"THE RULES ARE CHANGING"

Not only the market conditions but also the very materials of construction seem to be changing. A sharp escalation in lumber prices, which had already risen to unprecedented levels last year, has pushed some builders to look at new techniques.

At the Northeastern Retail Lumber Association, director of government affairs Elizabeth Matthews said there has been an across-the-board price increase of about 40 percent in the past year. Governmental cutbacks on timber harvests have been the cause, not foreign purchases of US supplies, she said.

Korona, at the Homebuilders Association of Central Vermont, said the price rise has added $4,500 to $5,000 to the average cost of a new house, according to National Association of Homebuilders figures. "As an organization, we're very, very concerned," she said.

Several contractors said they had become more willing to look at substitutes for wooden framing, such as metal framing for interior work. One newcomer in the field, Ron Marra of Quechee, said he is hoping to make new materials and techniques a cornerstone for his start-up company.

A general contractor in Florida for the past three years, Marra said he decided to come back to Vermont for family reasons. "I feel as though I bring, maybe, a fresh outlook," he said, particularly in energy conservation and metal framing.

Marra uses precast foam foundation forms for pouring concrete, leaving them in place to insulate foundations to an R-22 value. That also means he can pour concrete when it's 40 below, versus having to stop foundation work when temperatures fall below freezing.

"There are a few companies working with metal studs (framing timbers) in the Burlington area." Marra said. Now he is talking with suppliers and customers, trying to educate both about the virtues of metal framing.

"I always felt Vermont had a lot of opportunity," Marra said. "I can't complain. I'm busy." But until he builds his reputation further, he will have to do subcontracting work for larger companies as well as his own projects, he said.

NOT FOR PROFIT

Some companies become non-profit organizations against their will, but there are other organizations that don't seek to make a profit. In Vermont, these have been quietly playing a role in assuring a supply of affordable housing, something that was a serious public policy issue when times boomed in the late 1980s.

This is a world of grants, tax-free bonds, low-income tax credits, and public-private partnerships to leverage bank capital. Often the organizations involved hope to revitalize whole neighborhoods, creating a synergistic effect that sparks regular commercial lending to somewhat more financially capable property owners.

A few examples will give some idea of how such projects come to fruition, supplying opportunities for a variety of construction workers in the process.

Housing Vermont, a not-for-profit begun in May 1988, has been involved in constructing or rehabilitating 1,375 units of housing in the past five years, according to president Don Dixon. "We become a general partner in a limited partnership," he said, with a local organization also a general partner and private investors looking for tax credits become the limited partners.

Funding comes from a number of grant sources, with the Vermont Housing and Conservation Trust Fund the major player, and a good deal of help from a new federal Housing and Urban Development block grant program. Towns often obtain revitalization-related Community Development Block Grants, he said.

The supply of money "goes up and down, but I certainly think it will continue," Dixon said. In general, with the not-for-profits, "There have been some years when that was the only thing going."

In Burlington, there is the ReLIEF program--Regional Low Income Emergency Facilities. The plan is to use $1.5 million in tax-exempt bonds from the City of Burlington's Community Development Corporation and $1.5 million in donations and grants to develop facilities in three renovated buildings (the Whalen Building on South Winooski Avenue, the Moose Lodge on North Winooski Avenue, and a Howard Bank property on North Winooski Avenue) for a variety of organizations: Legal Aid, the local Emergency Food Shelf, the Burlington Community Land Trust, Chittenden County Court Diversion, and the Committee on Temporary Shelter.

Tom Dillon, the city's housing development coordinator, said, "Burlington's size, compared to other cities in the country, really works to its advantage. There's a level of cooperation that I can't imagine taking place in a very large city."

Nancy Wasserman, the executive director of the Vermont Community Loan Fund, observed that when the VCLF started five years ago, businesses were hiring employees at a pace that made affordable housing for workers hard to find. "Now we have housing, but not the jobs, and people can't afford the housing," she said.

Still, Act 250 helped avoid overbuilding and bank failures on the scale that southern New Hampshire experienced, Wasserman said. "If all of a sudden we give away the state because of hard times, then we're really going to regret it 20 years from now," she said.

CAUSTIC BUSINESS CLIMATE

But in the private sector, opinion was unanimous that Vermont's permit process, regulations, taxes and overall business climate are the real factors behind the slow construction sector, and that the Legislature has yet to realize how serious the problems are.

Some of the issues are fairly specific, like workmen's compensation. Marra said that coming from Florida, where the situation is even worse, it was almost a relief, though the payments are still a burden.

But most contractors felt as Russell did. After improving the company's experience rating, the claims rate, for several years in a row, still they were faced with a 17 percent increase in premiums last year, he said.

Contractors lambasted Act 250, with the loss of a major C & S Grocers project repeatedly cited as an example that drew nationwide attention from people who might have been thinking of locating facilities in Vermont. Bordas said that in addition to expediting the review process, the appeals had to be reined in and there should be provision for non-refutable expert testimony.

Current legislative initiatives in the areas of property tax reform and health care reform had created general consternation. Loading more taxes on corporations and the affluent was seen as a way to send expansions and venture capital flying out of state.

"The political dialogue that's going on in Montpelier can really scare you," Engelberth said. Pointing to the way Burlington area businessman Ray Pecor, among others, is now officially a resident of Florida, he said, "It's interesting nobody asks why he no longer claims residence in the state of Vermont."

Regarding health care, Magruder said, "We offer it as a fringe benefit to attract qualified personnel." Companies like his, which depend on superior employees to survive, will no longer have that competitive ability if everyone is forced to provide health insurance, he said.

Korona said one of the most devastating possibilities is that the Legislature will pass a health care amendment requiring general contractors to pick up the charges for subcontractors. The proposal would make it almost impossible to consider a sub a temporary employee, she said.

Contractors are likely to stick with larger specialty companies that already provide benefits, or may take the work in house, Korona said. Or if everyone is required to furnish health insurance, the many subcontractors with one or two employees will let someone go.

On the federal level, Korona said OSHA is contemplating a supervisory requirement that in effect would mean hiring someone to sit all day and watch what the construction workers are doing. That alone could add $4,000 to $5,000 to the price of a house, she said.

"OSHA, unfortunately, is beginning to throw (off) the impression that the IRS give all of us, that you're guilty until proven innocent," Korona said. "That's unfortunate."

Beyond any of the specific complaints, there is the attitudinal question. Russell described it as a drawbridge mentality, a tendency of newcomers to keep Vermont quaint, in ways that will make the real Vermonters the real losers.

Three sources used the same unprintable word to describe the state's unsuccessful business climate. Patrick Camp, of Camp Precast Concrete Products in Milton, asked what could be done to improve conditions, said, "You haven't got time."

But Camp did contribute one anecdote, concerning the International Paper Company, which was looking to site a new mill. When they went to one city in Tennessee, they were met at the airport by the town fathers and the high school band, and were given the keys to the city, he said.

"The word in the industry is, New England is a joke and Vermont is laughable, as far as business climate," Camp said.

Outside Vermont, "There is a general aura that Vermont is not pro-business at all," said Ayer, of the Associated General Contractors. "I think it's gone beyond the process--the attitude is very important."

"There has to be an adequate weighing of the benefits and impacts for the state," Ayer said. Engelberth, who narrowly lost a bid to become a state Senator in the last election, said, "Unless we start changing the rules society decides to run by, this state will become a West Virginia before too long."

Ed Barna is a freelance writer from Brandon.

SUMMMING UP

The economic climate for Vermont's contractors and subcontractors has improved only slightly, and owners all over the state say they are frustrated by lowball bidding that only results in bankruptcy, by the restrictiveness of Act 250 and by an anti-business climate that has marked the state outside its borders as a poor place to do business.

* The successful contractors have survived on building projects outside Vermont. Inside the state a handful of commercial and institutional building projects have only marginally supported the struggling construction industry.

* Low ball bidding has hurt subcontractors the most. Contractors say the cutthroat financial margins get handed down directly to the subcontractors, who have been declaring bankruptcy, or quitting the business, in large numbers over the past three years. Making the situation worse, bonding companies have covered companies already in shaky financial condition, who then bid under actual costs, as away to increase their cash flow, according to one builder.

* With ever-increasing prices of lumber and building materials, some contractors and subcontractors are looking at nontraditional building materials as a way to keep costs down.

* Bank credit, which had been nearly nonexistent, has started to return to both the housing market and the commercial real estate market. Increased housing sales invariably mean increases in the construction market. Commercial real estate agents say developers of large projects are waiting to see how the economy progresses before going forward. And office building developers are waiting to get 80 percent or more of the space leased before beginning construction.

* Contractors say they are both frustrated by, and apprehensive about, how both state and federal governments affect their bottom line. Rising worker's compensation costs, stricter OSHA regulations and permitting delays all have a negative impact on building projects. Looming in the future are government-mandated employee health care costs. And no one knows just how high those costs will be.

* Illustrative of the construction industry's sluggishness, Act 250 permit applications are down. Fiscal year 1991 (July-June) saw 229 applications totaling $222,313,885. In Fiscal 1992, this dropped to 217 applications, but the sum increased to $246,497,171. Fiscal 1993 saw both figures plummet: 162 applications totaling $166,199,300. Construction employment also is down, even from depressed 1991 and 1992 figures. Though there was some hope from January numbers, construction employment was up over January 1993.

Copyright Lake Iroquois Publishing, Inc. d/b/a Vermont Business Magazine Apr 1994
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