February 6, 2006
Fuzzy math | Contractors debate the state's accounting of a booming construction industry in 2005
By Taylor Smith
Big dollar figures always catch people's attention, and a set of numbers released by the State Fire Marshal's Office in mid December was no exception. Sparking widespread interest among Maine's construction industry and state economic development officials, State Fire Marshal John Dean released a document showing that Maine saw more than $815 million in commercial construction activity in 2005, from new public schools in Auburn, Waterboro and elsewhere to a $22 million condominium proposal in downtown Portland. That total eclipsed the roughly $579 million in commercial construction Dean tracked the previous year ˆ a year-over-year gain of nearly 41%.
Among economic development officials like Jack Cashman, commissioner of the Maine Department of Economic and Community Development, the numbers represented good news for the state's economy. Taken alongside strong employment and wage numbers, says Cashman, the gain in the commercial construction points to a strengthening economy. "That's just one indicator of many that shows a positive report on economic activity in Maine," he says. "It just adds credence to other reports that we see. It's not taken in a vacuum; it's taken as part of an overall picture that looks pretty good."
Even taking that total all by itself, an industry that sees 41% growth in one year must be doing something right. But some in the commercial construction industry warn that the numbers from Dean's office aren't accurate, and shouldn't be used as an economic barometer. Kathleen Newman, president of the Maine chapter of the Associated Builders and Contractors, a national industry trade group based in Arlington, Va., says the $815 million number is misleading because the State Fire Marshal's Office tracks just approved commercial construction permits ˆ not projects underway or even started during the year. "We asked our contractors whether their volume was doubling in 2005, and they said, 'Well, no,'" says Newman.
Dean, however, says the list released by his office is a good snapshot of Maine's commercial construction market. And those projects, says Dean, are all clearing the last regulatory hurdle before construction, as the State Fire Marshal's Office is charged with making sure, for example, that the projects conform to the Americans with Disabilities Act or include up-to-code sprinkler plans. "No question, there's a lot more being built in 2005 than in 2004," says Dean.
That state and industry officials would disagree about these numbers isn't altogether surprising. Such statistics are notoriously difficult to pin down, especially considering that the timing of construction projects are constantly in flux even after the first hole is dug. Permitting snags or problematic financing can easily add months or even years to the timeline of a multimillion-dollar construction project. Take, for example, Portland developer Jeffrey Cohen's $25 million Waterview condominium project. According to The Forecaster, a weekly paper in Falmouth, the project, which was approved by the Portland City Council early last year, was delayed until March after Cohen's financial backer, Pasadena, Calif.-based IndyMac Bank, reportedly reneged on its financing agreement. (Mainebiz was unable to reach Cohen before this issue went to print.)
Because of those project fluctuations, Tom Wright, co-owner of Wright-Ryan Construction in Portland, says that the strong market illustrated by the report from the State Fire Marshal's Office could be completely coincidental. "Most of the jobs that are out there have been years in development," he says. "You're never quite sure when they're going to land. It could be something that's been on the boards for three or four years. Maybe financing comes into place or a tenant comes along. There are a lot of things that drive the commercial construction market."
That's why, to many in the construction industry, the numbers from the Fire Marshal's Office serve as a general guidepost but not a detailed picture of the year's construction activity. A wide-angle view, they say, can't easily illustrate regional differences in construction activity, or the varying health of different sectors of the market. On-the-ground reports from construction firms themselves, however, show how broad the variations were in 2005.
Alternative views
Instead of relying on numbers from Dean's office, Newman of ABC refers to data compiled by McGraw-Hill Construction, a research company that tracks the U.S. construction market. Kim Kennedy, manager for national forecasting at McGraw-Hill's Lexington, Mass. offices, reports that Maine's commercial construction market hit $592 million last year, a seven-percent gain from 2004. (The company tabulates the value of the overall market by counting a project's full cost as soon as it breaks ground.)
By that reckoning, Maine's commercial industry closely mirrored national figures, which also showed a seven percent gain across the country. "It looks like they fared about the same overall, which is interesting. That doesn't usually happen," says Kennedy. "The New England area has kind of lagged behind the U.S. It's a mixed bag. I think New Hampshire has grown really well, but Maine's economy has been pretty fragile. And with a fragile economy, the commercial construction market isn't usually booming."
Kennedy explains Maine's relatively strong performance by pointing to a few areas in the commercial construction market. According to McGraw-Hill Construction data, the value of hotel projects in Maine rose from just $300,000 in 2004 to more than $32 million last year. (Kennedy says that could mean that there were just one or two hotel renovations in 2004 while 2005 saw a number of full-scale development projects. The town of Wells, for example, saw construction begin late last year on a $5.6 million Hampton Inn, which is expected to open on Route One this summer.)
Meanwhile, roughly $95 million was spent on public buildings like town halls or detention facilities last year. That compares to $23 million spent on such projects in 2004. But McGraw-Hill reports that construction projects for religious buildings, warehouses and education facilities were down in 2005 compared to the previous year.
Regional disparities can make it even more difficult to draw a bead on the state's commercial construction market. Don Nason, an owner of Bangor-based contracting firm Perry & Morrill, says most of his commercial work during the past few years has been for clients such as the University of Maine, where the company in 2004 built the 20,000-square-foot Student Technology Center.
Still, Nason says the numbers he's seen from the state don't seem to add up, and questions whether the total budgets submitted to the State Fire Marshal's Office are artificially inflated through the inclusion of finish details like furniture and carpeting. What's more, Nason doesn't seem convinced that the entire state's commercial construction market is going through the boom. "We didn't do a ton of work in 2005. Our volume was lower than it's been in recent years," he says. "I don't know where the state gets all its figures from, but I haven't seen any more work. The southern end of the state has probably seen quite a lot, though."
External forces
Tom Wright says that his company saw a slight uptick in work last year. Key to that growth was a handful of affordable housing projects the firm worked on in the Portland area, according to Wright. The company last year won a bid to manage construction on the $7.3 million Brickhill Townhouses project in South Portland, which includes 66 recently completed new housing units and the ongoing renovation of five existing cottages into 43 mixed-rate housing units at the former Maine Youth Center.
But Wright says the company's work last year wasn't confined to southern Maine: Wright-Ryan was hired to construct a $4.5 million, 20,000-square-foot expansion to the Knox County Courthouse in Rockland. What's more, the company is continuing work on a $25 million expansion of Cony High School in Augusta.
Despite the steady work he's seen during the past few years, Wright is loath to expect the same pace going forward. For starters, there are likely to be fewer municipal projects like school renovations or courthouse expansions if the state's finances continue to be, as Wright puts it, "not great."
McGraw-Hill's Kennedy agrees, and says that those working in the commercial construction market will suffer if the state backs off from funding these types of projects. The company's research notes that spending on education construction ˆ schools and the like ˆ fell 13% last year. "Because state budgets are weakened, it will take until the economy turns around to see any big investment in education construction," she says.
As the commercial construction market is just one factor in the health of the overall economy, so too is the state's economy just one factor in the overall health of the commercial construction market. And no matter what the state's fiscal condition, Tom Wright says the construction industry is likely to face some rough water during the next few years. Prices are rising in nearly every corner of the construction market, from increases for materials and labor to higher energy costs that affect trucking and heavy equipment operation.
As these prices cut deeper into contractors' already thin profit margins, it will be more difficult for construction companies to draw up workable project bids, Wright fears. "Fuel costs are up, labor costs are up, material costs are up, interest rates are up," he says. "You put that together and those aren't positive signs in the commercial construction market."
Among economic development officials like Jack Cashman, commissioner of the Maine Department of Economic and Community Development, the numbers represented good news for the state's economy. Taken alongside strong employment and wage numbers, says Cashman, the gain in the commercial construction points to a strengthening economy. "That's just one indicator of many that shows a positive report on economic activity in Maine," he says. "It just adds credence to other reports that we see. It's not taken in a vacuum; it's taken as part of an overall picture that looks pretty good."
Even taking that total all by itself, an industry that sees 41% growth in one year must be doing something right. But some in the commercial construction industry warn that the numbers from Dean's office aren't accurate, and shouldn't be used as an economic barometer. Kathleen Newman, president of the Maine chapter of the Associated Builders and Contractors, a national industry trade group based in Arlington, Va., says the $815 million number is misleading because the State Fire Marshal's Office tracks just approved commercial construction permits ˆ not projects underway or even started during the year. "We asked our contractors whether their volume was doubling in 2005, and they said, 'Well, no,'" says Newman.
Dean, however, says the list released by his office is a good snapshot of Maine's commercial construction market. And those projects, says Dean, are all clearing the last regulatory hurdle before construction, as the State Fire Marshal's Office is charged with making sure, for example, that the projects conform to the Americans with Disabilities Act or include up-to-code sprinkler plans. "No question, there's a lot more being built in 2005 than in 2004," says Dean.
That state and industry officials would disagree about these numbers isn't altogether surprising. Such statistics are notoriously difficult to pin down, especially considering that the timing of construction projects are constantly in flux even after the first hole is dug. Permitting snags or problematic financing can easily add months or even years to the timeline of a multimillion-dollar construction project. Take, for example, Portland developer Jeffrey Cohen's $25 million Waterview condominium project. According to The Forecaster, a weekly paper in Falmouth, the project, which was approved by the Portland City Council early last year, was delayed until March after Cohen's financial backer, Pasadena, Calif.-based IndyMac Bank, reportedly reneged on its financing agreement. (Mainebiz was unable to reach Cohen before this issue went to print.)
Because of those project fluctuations, Tom Wright, co-owner of Wright-Ryan Construction in Portland, says that the strong market illustrated by the report from the State Fire Marshal's Office could be completely coincidental. "Most of the jobs that are out there have been years in development," he says. "You're never quite sure when they're going to land. It could be something that's been on the boards for three or four years. Maybe financing comes into place or a tenant comes along. There are a lot of things that drive the commercial construction market."
That's why, to many in the construction industry, the numbers from the Fire Marshal's Office serve as a general guidepost but not a detailed picture of the year's construction activity. A wide-angle view, they say, can't easily illustrate regional differences in construction activity, or the varying health of different sectors of the market. On-the-ground reports from construction firms themselves, however, show how broad the variations were in 2005.
Alternative views
Instead of relying on numbers from Dean's office, Newman of ABC refers to data compiled by McGraw-Hill Construction, a research company that tracks the U.S. construction market. Kim Kennedy, manager for national forecasting at McGraw-Hill's Lexington, Mass. offices, reports that Maine's commercial construction market hit $592 million last year, a seven-percent gain from 2004. (The company tabulates the value of the overall market by counting a project's full cost as soon as it breaks ground.)
By that reckoning, Maine's commercial industry closely mirrored national figures, which also showed a seven percent gain across the country. "It looks like they fared about the same overall, which is interesting. That doesn't usually happen," says Kennedy. "The New England area has kind of lagged behind the U.S. It's a mixed bag. I think New Hampshire has grown really well, but Maine's economy has been pretty fragile. And with a fragile economy, the commercial construction market isn't usually booming."
Kennedy explains Maine's relatively strong performance by pointing to a few areas in the commercial construction market. According to McGraw-Hill Construction data, the value of hotel projects in Maine rose from just $300,000 in 2004 to more than $32 million last year. (Kennedy says that could mean that there were just one or two hotel renovations in 2004 while 2005 saw a number of full-scale development projects. The town of Wells, for example, saw construction begin late last year on a $5.6 million Hampton Inn, which is expected to open on Route One this summer.)
Meanwhile, roughly $95 million was spent on public buildings like town halls or detention facilities last year. That compares to $23 million spent on such projects in 2004. But McGraw-Hill reports that construction projects for religious buildings, warehouses and education facilities were down in 2005 compared to the previous year.
Regional disparities can make it even more difficult to draw a bead on the state's commercial construction market. Don Nason, an owner of Bangor-based contracting firm Perry & Morrill, says most of his commercial work during the past few years has been for clients such as the University of Maine, where the company in 2004 built the 20,000-square-foot Student Technology Center.
Still, Nason says the numbers he's seen from the state don't seem to add up, and questions whether the total budgets submitted to the State Fire Marshal's Office are artificially inflated through the inclusion of finish details like furniture and carpeting. What's more, Nason doesn't seem convinced that the entire state's commercial construction market is going through the boom. "We didn't do a ton of work in 2005. Our volume was lower than it's been in recent years," he says. "I don't know where the state gets all its figures from, but I haven't seen any more work. The southern end of the state has probably seen quite a lot, though."
External forces
Tom Wright says that his company saw a slight uptick in work last year. Key to that growth was a handful of affordable housing projects the firm worked on in the Portland area, according to Wright. The company last year won a bid to manage construction on the $7.3 million Brickhill Townhouses project in South Portland, which includes 66 recently completed new housing units and the ongoing renovation of five existing cottages into 43 mixed-rate housing units at the former Maine Youth Center.
But Wright says the company's work last year wasn't confined to southern Maine: Wright-Ryan was hired to construct a $4.5 million, 20,000-square-foot expansion to the Knox County Courthouse in Rockland. What's more, the company is continuing work on a $25 million expansion of Cony High School in Augusta.
Despite the steady work he's seen during the past few years, Wright is loath to expect the same pace going forward. For starters, there are likely to be fewer municipal projects like school renovations or courthouse expansions if the state's finances continue to be, as Wright puts it, "not great."
McGraw-Hill's Kennedy agrees, and says that those working in the commercial construction market will suffer if the state backs off from funding these types of projects. The company's research notes that spending on education construction ˆ schools and the like ˆ fell 13% last year. "Because state budgets are weakened, it will take until the economy turns around to see any big investment in education construction," she says.
As the commercial construction market is just one factor in the health of the overall economy, so too is the state's economy just one factor in the overall health of the commercial construction market. And no matter what the state's fiscal condition, Tom Wright says the construction industry is likely to face some rough water during the next few years. Prices are rising in nearly every corner of the construction market, from increases for materials and labor to higher energy costs that affect trucking and heavy equipment operation.
As these prices cut deeper into contractors' already thin profit margins, it will be more difficult for construction companies to draw up workable project bids, Wright fears. "Fuel costs are up, labor costs are up, material costs are up, interest rates are up," he says. "You put that together and those aren't positive signs in the commercial construction market."
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