Commercial Construction: What's ahead?
Renovation of downtown office spaces, large agribusiness projects, multifamily housing part of double-digit growth outlook for local contractors
Friday, April 04, 2014 7:00 AM
The old saying “If you want a job done, give it to a busy person” could apply to three commercial contractors active in the Greater Des Moines market. Beal | Derkenne Construction LLC, Ryan Companies US Inc. and Graham Construction Co. are hip-deep in projects to expand and renovate spaces for some of the metro area’s largest employers.
All of these contractors say they expect commercial construction activity to be brisk this year, perhaps the most they’ve had since 2007.
The biggest surprise – at least to those of us who don’t own steel-toed boots – may be that the bone-chilling winter weather really didn’t significantly slow progress on big projects, say the contractors. However, the tight supply of workers in the skilled trades that some contractors are continuing to experience could slow them down as their volume of work ramps up.
According to the 2014 Dodge Construction Outlook generated by McGraw-Hill Construction issued last October, U.S. commercial building is expected to increase by 17 percent this year. In dollar volume, that still would be 28 percent lower than the 2007 peak.
The industry’s reservoir of optimism, as measured by Wells Fargo & Co.’s Optimism Quotient, reached an all-time peak of 124 for 2014, up from 106 last year. Scores above 100 indicate high optimism, while 75 or below signals that more executives believe that construction activity will decrease rather than increase. The index dipped to a low of 42 in 2009.
Renovation and new construction projects in and around downtown Des Moines account for many of the big projects underway this year. Of those downtown projects, the three contractors we interviewed are involved with Principal Financial Group Inc.’s renovation of its corporate headquarters facilities, the new downtown YMCA and several housing projects.
Beal | Derkenne: Breaking into the market
A relative newcomer to Greater Des Moines’ commercial construction market, Beal | Derkenne was launched in 2010 by Andy Beal and Mike Derkenne, two Australian transplants who reconnected after they each emigrated to Iowa in the early 2000s. The Des Moines-based firm is currently working on the Malo restaurant as the last piece of its renovation of the former downtown fire station for the Des Moines Social Club.
“At the end of the day, it really comes down to opportunity,” Beal said. “There was a lot of opportunity here in Iowa and the Midwest.”
Its first Central Iowa project was a renovation of the Bright Grandview Golf Course clubhouse. Other projects that followed include 2105 Ingersoll, a 9,000-square-foot retail center, as well as Gateway Retail, a 10,000-square-foot center, both in Des Moines. It also built a three-story mixed-used student housing and fitness facility near Iowa State University.
One of Beal | Derkenne’s big-break projects was located a little farther southwest, in Tempe, Ariz. Last year the contractor completed a 19-floor, 269-unit high-rise student housing complex adjacent to Arizona State University. The building, which qualified for certification under the U.S. Green Building Council’s Leadership in Energy and Environmental Design program, was named the 2013 Best Residential Project by Engineering News-Record magazine and Multifamily Project of the Year - over 250,000 square feet by the state’s real estate association.
Beal | Derkenne is also in the home stretch of constructing Madison Flats, a three-level, 27-unit apartment complex development on Indianola Avenue on Des Moines’ south side.
“It’s equally important for us to establish a presence here in the Des Moines market,” Beal said. “It’s been exciting to put up a flag here and build our presence.”
Looking ahead, the construction firm expects to break ground this spring on a new office-retail building in the East Village as well as begin a historic office building remodeling project there. On the eastern side of the state, the firm hopes to begin work on a new apartment project in Iowa City.
Beal said that breaking into the competitive Iowa commercial construction market, while challenging, has been somewhat easier because he and Derkenne have built relationships with some subcontractors while they were both working for a contractor locally.
“At the end of the day, our results speak for us, and that’s how we build our momentum,” he said. “We do what we say we’re going to do, and then we execute.”
Ryan Companies: 2014 ‘Even a little better’
Brad Schoenfelder, vice president of development for Ryan Companies US Inc. and leader of the firm’s Greater Des Moines office in Clive, said he believes 2014 will shape up to be a nice growth year for his company and the industry as a whole.
“It’s probably going to be even a little bit better than it has been in the past couple of years, which indicates sustained growth for the industry,” he said. Minneapolis-based Ryan has regained the ground it lost during the Great Recession, and its Midwest region, which includes its three Iowa offices, has $175 million in new construction projects in progress and $1 billion in work companywide.
In Central Iowa, the company began construction on its second phase of DuPont Pioneer’s expansion of offices and laboratories at its Johnston campus last spring and is scheduled to complete the project by November. Ryan will own the building and lease it back to DuPont Pioneer. Ryan is also providing general contracting services for Principal Financial Group Inc.’s downtown renovation project, the first phase of which began a year ago and will extend into 2017.
That initial phase, estimated to cost $238.5 million, consists of infrastructure repairs and maintenance, building upgrades and modernization for three of Principal’s downtown buildings as well as a new skywalk bridge across Eighth Street.
In the agribusiness sector, Ryan has begun construction of a new 50,000-square-foot office building for Deere & Co. at the John Deere Des Moines Works in Ankeny, a project valued at about $10 million.
“Ryan was selected as the design-builder, and like all of our projects, we’re really exploring the use of ‘agile’ work spaces and incorporating that into how clients work and use their space,” Schoenfelder said. “I think that’s something the industry will be working on through the next several years.”
Agile work environments recognize that work is an activity, not a place, Schoenfelder said. “So instead of providing (employees with) a workstation, you’re providing them collaborative spaces to work within the entire building, not just in one location,” he said.
Over the past several months, Ryan also has completed projects in the health care sector for The Iowa Clinic, Iowa Ortho and Mercy Medical Center for expansion of their facilities in Greater Des Moines.
In the senior living sector, Ryan. has partnered with Des Moines-based retirement services company LCS in a joint venture in which it will build several senior housing projects over the next several years in the Midwest. In May, construction will begin on the first of those projects, a $25 million, 140-bed senior living center in Mekona, Ill.
Graham Construction: On the upswing
After experiencing a record volume year in 2012, Des Moines-based Graham Construction Co. weathered a down year last year but now expects revenues to be back up in record territory this year, said Steve Hauschilt, the company’s president.
“I don’t know if it will be a breakout year, but it will be a very good year for us,” he said. “What happened in 2008 and 2009 is always in the back of your mind.”
Last year, a majority of Graham’s work took place outside Greater Des Moines, with the exception of an expansion project for DuPont Pioneer. In contrast, the metro area is a hotbed of activity for the company this year.
Downtown, the company has begun work on the new $31 million downtown YMCA. Graham is also the primary contractor for the $30 million renovation of 801 Grand, a multiphase project to refresh 13 floors of the building’s interior for Principal.
In the East Village, Graham is busy on 350 E. Locust, a mixed-use project that will feature leased retail space on the ground floor along with three floors of condominium units and a penthouse. The $7.3 million project, to be completed in October, is being financed by a group of local investors.
From Hauschilt’s perspective, the eastern Iowa construction market recently has had more projects that are publicly funded, whereas Central Iowa appears to have a larger proportion of privately funded projects in which companies such as Principal and DuPont Pioneer are plowing money back into their facilities.
Although Graham has always been focused on construction for the health care industry, growth in that sector has slowed since the 2010 passage of the federal health care overhaul.
“We still do a higher percentage of health care projects than anyone else in the state, but that’s tapered off,” he said.
However, low-interest U.S. Department of Agriculture loans have spurred a lot of new health care construction in rural Iowa, with hospital expansions as well as new clinics and surgical facilities, he said.
Add it all up, and Graham could end the year with a 20 percent increase in total revenue, after being down 12 percent in 2013, Hauschilt said.
Q & A with the builders
Q: How much of a problem is it to findskilled labor?
Schoenfelder: To date, it’s not been a challenge for us. I do see that the labor market will continue to tighten. But as the industry continues to show signs of stability and growth, you’re going to see new people come into the market, and you’re also going to see some people who left the industry come back. For us, it’s always about how to attract and sustain the best people. We’ve always had good relationships with our unions. We’re also working to bring in women and minorities through workforce inclusion initiatives.
Hauschilt: Really, the No. 1 challenge I see going forward is just the labor shortage. We had some of our highest-level craft workers leave during the recession, and we don’t know if we’re ever going to get them back. It’s got to be a comprehensive approach; we’re doing a lot to try to educate people about the craft-worker trades through the community colleges. But moving into 2014-2015, we’re really going to see the impact. We’re already starting to see prices rise. If you have (rising) interest rates, commodity prices and labor costs, those can all impact the pace at which commercial construction continues.
Q: Has the severe winter weather had an impact on commercial construction?
Schoenfelder: It’s not been an issue for us. We work year-round; it’s just part of our industry and we prepare and plan for the weather with each project. So it hasn’t had any effect, even though it’s been a little colder than normal.
Beal: Weather is always a factor; it definitely has been more extreme this year. But at the end of the day, a deadline’s a deadline, and we push our team to make sure we’re all going in the same direction.
Q: Where do you see opportunities in the commercial market?
Beal: Clearly, the multifamily market is still extremely strong, and we see a lot of improvement in office space coming up.
Q: Have government funding cutbacks resulted in fewer public projects?
Schoenfelder: Nationally, yes. I think there will be continual pressure on government spending. However, the state continues to have a budget surplus, and the governor is continuing to look for ways to invest back into the infrastructure. So Iowa activity will be consistent, maybe even with some slight growth.