Construction Down; Firms Branch Out For Work

CHICAGO-Market analysts say construction was significantly down at year-end 2008, and will remain mostly stagnant through the remainder of 2009. The construction pipeline has nearly frozen in both office and industrial sectors, with contractors citing a need to branch out to unconventional projects beyond new construction to keep working.

“The velocity of projects coming through is slower, which isn’t a surprise to anyone, but there’s still projects happening and leases that are getting done,” says Bill Birck, president of Chicago-based full-service general contractor Reed Construction.

“A lot of the new construction has slowed in light of the credit crunch and lack of liquidity out there, but what we’re seeing a lot of is projects happening that may not have as many construction dollars in them as they had in previous years,” Birck says. “Rather than tenants expanding and taking 10,000 to 30,000 square feet, they’re giving that space back to the building instead, but there’s still construction needed.”

Birck says his company has seen a recent influx of tenants and building owners coming to Reed after downsizing to make their smaller spaces more efficient.

“A lot of folks are downsizing so buildings are still investing in capital improvements in order to attract tenants and make their buildings more suitable to a smaller tenant,” he says. “There’s a lot of spec suite work going on in a number of buildings to corridors, bathrooms or fitness centers, and it’s more of a cosmetic overhaul. It’s more of a tenant’s market right now so buildings are having to do more to attract those tenants.”

According to Transwestern’s year-end market report, both industrial and office construction have already suffered losses, one more than the other. The amount of industrial space is down nearly two-thirds year over year, with 5 million square feet in progress at year-end 2008 as compared to 14.2 million square feet at year-end 2007, the report says.

Office has taken a less substantial hit, with 2.1 million square feet under construction in suburban Chicago, as compared to 2.5 million at year-end 2007, by Transwestern’s numbers. Construction in Chicago’s central business district, however, has maintained almost the same level.

In an ironic twist, however, preleasing is up for the most part in both industrial and office sectors. Industrial space under construction was 27% preleased by the end of 2008, in comparison to 15% a year before, according to Transwestern. Meanwhile, preleasing in the CBD office market was at 84% at the end of 2008, up from 58% a year ago. Suburban office preleasing slipped slightly, down 6% from a year previous to 36% at year-end 2008.

Birck says he expects the extremely limited level of construction to continue through at least most of the rest of the year, but that a diverse client base can sustain a company and prove to be its saving grace in a weak economy.

“You really appreciate it when the economic climate slows,” Birck says. “In terms of economic stability, our company has been around since 1893, and we’ve been around a lot of economic downturns in the past. We’ve learned if you take care of your client in good times, they’ll take care of you in bad times and we’re happy to enjoy those relationships.”

Reed has also been able to grow its client base with an expansion into Washington, DC, where it opened a new office in recent months.

“We found that to be an active market in terms of federal government, corporate and healthcare work,” Birck says. “We’ve been able to expand our client base into the federal government given our expertise in adaptive reuse projects, interior work, and healthcare and laboratory work. There seems to be quite a lot of that going on within the federal government.”