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Chicago Market Booming

(midwest.construction.com, October 2006 issue)

By Craig Barner

From North Side to South Side, the percussion of hammers, drill rigs and other rigging can be heard all over Chicago.

Call it the hammering harmony, construction concerto or building bebop.

"This year will be a record year," said Ken Isaacs, president of Homewood-based Graycor Co., a general contractor. "Our crystal ball suggests next year may well be comparable, if not better, than this year."

Opinions vary, and not everyone is so confident. Some signs indicate that the rousing building performance could be replaced by less musical sounds.

A Construction Crescendo

In the meantime, there is little doubt that in 2006, Chicago's construction fortunes are reaching a crescendo.

Data show that starts through the second quarter were up 10 percent, to $11.2 billion, according to McGraw-Hill Construction, publisher of Midwest Construction.

"Everybody is busy," said Thomas Villanova, president of the Chicago & Cook County Building Trades Council, an umbrella organization of 24 union affiliates. "We got jobs with longevity to them."

Indeed, some megaprojects are having a substantial impact, including the $6.6 billion expansion of O'Hare International Airport for which more than $700 million in contracts have been let; the $1.1 billion expansion of the McCormick Place Convention Center; and the $850 million, 92-story Trump International Hotel & Tower.

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Infrastructure starts, which are normally the smallest piece of the overall construction pie, were particularly noteworthy with a 79 percent increase, to $2.0 billion. Funds are already flowing from the $286 billion federal transportation bill signed into law last year.

Streets and highways were up 70 percent to $805 million in part because contracts are being activated on the $5.3 billion, 10-year Congestion Relief Program on the Illinois Tollway and the $600 renovation of the Dan Ryan Expressway. Bridges increased 97 percent, to $338 million in part because of projects like the $22 million reconstruction of the North Avenue Bridge over the Chicago River.

The buoyant construction market in Chicago is reflecting the overall vibrant state of the Illinois economy, as mirrored in the University of Illinois Flash Economic Index.

The index is a weighted average of state growth rates in consumer spending, corporate earnings and personal income, and a score of 100 is the dividing line between economic decline and growth. In July, the reading was 106.1, up a tick from June's 106.0.

The index has been in the 105 to 107 range since April 2005, said J. Fred Giertz, the Illinois professor of economics who compiles the data.

Unexpectedly, the manufacturing-heavy Illinois unemployment rate fell slightly below the national rate for the first time since March 1999.

"The July result suggests that the state economy is still moving forward at a good rate even though the pace of the national economy still seems to be slowing," Giertz added.

The Loop's high-rise residential market is a seemingly endless supply of projects, as one condominium after another is announced to satisfy the demand for downtown living.

Gail Lissner, vice president of Chicago-based Appraisal Research Counselors, said that 5,721 condominium and rental units, many clustered around Millennium Park and the South Loop, are expected to be delivered downtown this year, a 40 percent increase from 2005. Many observers keep wondering when the bubble will burst.

"Many people were forecasting that and saying two years ago that we are overbuilding (high-rise residential buildings)," said Richard Smith, principal of Chicago-based design firm Loebl Schlossman & Hackl. "But they continue to be built on a supply-and-demand model."

The Complaint Choral

Still, some off-key notes are being sounded about the prospects for construction in Chicago.

The most worrisome is becoming a familiar gripe among contractors: rising construction material costs. Driving the increase are domestic demand, rebuilding in the U.S. Gulf Coast and international demand, particularly China.

The Producer Price Index for construction materials and components is outpacing the overall PPI for finished goods, 7.7 percent vs. 4.9 percent, according to the Associated General Contractors of America in Alexandria, Va.

Some materials have experienced particularly sharp increases since the same time last year, including copper and brass mill shapes (81.5 percent), asphalt (71.4 percent) and diesel fuel (33 percent), AGC data show.

"We've all just accepted it (cost increases)," said Paul Hellermann, president and chief operating officer of Chicago-based contractor Bulley & Andrews LLC. "You just have to be prepared to award quickly and lock in numbers to hold in the prices you're quoted."

Other measures also give reason for pause.

The Washington, D.C.-based American Institute of Architects announced that its Architecture Billings Index, a work-on-the boards survey of architecture billings, dropped for the second consecutive month in June, the most recent month available, to 49.2. A score below 50 indicates a drop in billings.

The Midwest region posted the worst of four regions nationwide (46.8), also in June.

"It should serve notice to the construction industry that there could be a slowdown in activity if this pattern continues over the next few months," said Kermit Baker, AIA chief economist.

Another worrisome figure suggests that consumer confidence is flagging.

Building permits for homes were down 15 percent from the year-ago period.

Perhaps sensing a fading economy, the Federal Reserve declined to raise the prime interest rate in August. It had previously increased it 17 straight times since June 2004.

"But we're not falling off a cliff here," added Richard Tilghman, senior vice president of Chicago-based general contractor Pepper Construction Co. "It's a decline but not a steep decline."

Huge Backlogs Reported

Windy City contractors have built such a backlog of work that they should be steady for the near term.

Pepper, for instance, has had a 50 percent increase in backlogs, though this represents work in its Chicago, Indianapolis and Houston markets combined.

The firm is so confident that it is opening an office in Columbus, Ohio.

"Our backlog is so strong that we know 2007 will be fine," Tilghman added.

"We're already selling for 2008."

Double-digit increases are widely reported among contractors and architects throughout the Chicago area.
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In addition, high-performing executives and project managers seemingly can pick a job.

"We are actively looking and willing to hire anybody who is very good to excellent, both locally and throughout the U.S., both to work in offices and in field positions," said Graycor's Isaacs. "My sense is most successful construction companies are looking for excellent people."