Construction and Development Roundtable: Improving Our Build

We can’t claim that construction activity is booming at prerecession levels in Greater Madison, but we can point to a noticeable uptick, as the city has streamlined its approval process and new construction and urban infill projects are approved at a moderately faster pace. As a result, Madison is getting a makeover and important growth in its tax base.

Whether it’s new apartments and other housing to accommodate growth at companies like Epic Systems, new corporate headquarters for key employers like Spectrum Brands, new hotels downtown near the city’s convention centers, or the residential housing surge, Madison developers are building again. In this industry roundtable on construction and development, our panel explores whether this pace has enough momentum to sustain itself.

Our Expert Panel

Jeremy Shecterle, project executive, J.P. Cullen & Sons, Inc.
Beth Prochaska, executive vice president, Potter Lawson, Inc.
Laura Cataldo, director of workforce and industry outreach, Associated General Contractors of Wisconsin
Tim Cleary, account executive and practice group leader, M3 Insurance Solution’s construction and real estate group
Joe Alexander, president, The Alexander Co.
Vern Jesse, real estate and business attorney and shareholder, Murphy Desmond

GLYNN PATRICK: Are you all very bullish on near-term future growth of commercial construction, at least in Madison? 

ALEXANDER: We’re bullish for the short term. There’s been a bottleneck of projects people wanted to do, and now they’re able to get the financing and build them, but I would expect this will last for two or three years, where everything on the shelf comes off the shelf but then we go back to sort of a normal pace. Credit will tighten, not to a recessionary level but to a traditional level.

GLYNN PATRICK: Are you able to get projects financed under pre-2008 terms?

ALEXANDER: They’re not as favorable as they were in 2008, but they’re still remarkably good, given the rate set by the Fed. The bond market is still in pretty good shape, so we’re not as crazy as we were in 2008, but not as conservative, perhaps, as the lending market was in 2000.

PROCHASKA: Do you mean the interest rates are still low but there’s still pretty tight lending criteria? We’re hearing that.

ALEXANDER: Yeah, you get put through the ringer. The due diligence level is a lot greater, obviously, than it was prior to the recession.

CATALDO: Madison has definitely been a highlight of construction activity within the state of Wisconsin, notably because of all the work that’s happening down on the campus or with state projects. But we have definitely seen, in Madison and throughout the state, contractors saying that the percentage of their private work compared to the public work is increasing, which is really critical as state building budgets have tightened up. Contractors had, in the last couple years, relied on public work to keep them going and now have the private market opening up.

JESSE: I’m definitely involved in more transactions, but I see a better, or more positive, mix of work. Fewer transactions have a bank involved or a distressed property or an owner under financial pressure. 

GLYNN PATRICK: Have the terms changed?

JESSE: Yes. People are doing things that do not involve some of those negative factors that were so prevalent one or two or three years ago.

SHECTERLE: What we tended to see in the last year or so is an uptick in the number of projects that are available to compete for. On average, that group of individual projects seems smaller than in the past. As far as recent projections, the growth of construction in the next three or four years is potentially only 2%, maybe 3%, which is relatively small for our industry.

CLEARY: I get somewhat of an estimated preview in my line of work [insurance] when I’m working on a renewal or a bond program for a contractor. We’re always asking, ‘What do you project that your sales, your revenues, your payrolls to look like in the next year?’ So it’s almost this cautiously optimistic outlook that we’re seeing right now. Somebody asked me the question the other day, and I said, ‘If I’m going through 10 renewals right now with 10 contractors, I’d say seven of them are projecting single to maybe low double-digit growth in payrolls or revenues or subcontracted costs. The other three are projecting single digit or flat, but nobody seems to be going backwards, which is a positive sign and not something we’ve seen for a long time.’

The other part about that is when their insurance cycle ends, there’s an audit that occurs. When the audit occurs, the insurance company comes in and says, ‘Well, you told us you have a million dollars in payroll, and you had more than that, so here’s an extra bill, or you have less than that, so here’s money back.’ If you didn’t know that existed, that’s a lot of fun. The insurance companies were plagued by constantly giving these big returns back to their customers, who weren’t hitting their projections for years. 

GLYNN PATRICK: Beth, in the architectural realm, are you hearing about more projects?

PROCHASKA: Yes, but it’s different. With all the public work we’ve done, and a lot of firms have done, being put on hold, we’re seeing a different kind of project. We’re seeing smaller projects where people want things. They don’t call until the last minute, and then it’s hurry up, and they want it right now. We’re seeing compressed schedules on top of increased competition, which is really having an impact on our industry. Technology and BIM (building information modeling), and how we communicate with contractors and consultants, also has a big impact.

GLYNN PATRICK: Do you think the uncertainty about health care has something to do with it? 

PROCHASKA: That’s huge, and everybody was paying more attention to health care. Then, as the story changes every day, people tune it out, but it’s in the back of their minds. When we talk with clients, they say, ‘We really need something, but we’re going to wait and see what happens in September and December because nobody knows what the impact is going to be.’ They just don’t know how much it’s going to cost, but it’s going to cost all of us more, and people are cautious about increasing their debt load. They’re very conservative when it comes to expansion, even though there’s pent-up demand.

Hardly Immaterial

GLYNN PATRICK: In past roundtables, panelists said the cost of materials was rising. More recently, they have been at historic lows, but we understand that’s about to change. How do you estimate projects with uncertainty about materials?

ALEXANDER: We priced some things in January. We ended up re-pricing them in May, and everything was up 10%. As we go forward, we’re leaving 5% to 10% leeway on how we pro forma things.

GLYNN PATRICK: Was that a standard practice? 

ALEXANDER: No, you keep a contingency for your process during construction. You usually don’t keep a bidding contingency, at least on our end. The contractor frequently does, but we were surprised with that spike.

CATALDO: A couple years ago, there were some big swings in material prices. Copper had some big swings, steel, and now the trend nationally with construction materials has been more moderate. So the price increases have been 1% to 3% and are forecasted to remain the same. The exception is diesel, especially in the Upper Midwest. The cost of diesel will be a big issue for road builders, but also for material suppliers because they have the diesel trucks bringing materials into the area.

GLYNN PATRICK: J.P. Cullen, you must have some experience in this.

SHECTERLE: Well, it’s contracting and providing bids, and depending on the time frame — from when you provide the bid and make an agreement to when the work actually happens — that’s a risk you take, and that risk has always been there. Recently, there are some material increases, and things have flattened off a little bit, but they are still increasing, so it’s just a diligence level of having the most accurate information the day you need to provide a budget to somebody.

If you’re providing a budget or an agreement with somebody but know the work is not going to happen for 18 months, you have to factor that in. The Engineering News-Record keeps very good historical data on the rate of increase of just construction, so we can use that now. You just use your experience and the geography you’re in and how that market is working to put the most accurate number together.

(Continued)

GLYNN PATRICK: Let’s look at 18 months from now in a different framework. We’ve seen that long-term interest rates have risen sharply since May. Do you have any worries pertaining to the future cost of financing, and would that curtail the optimism?

ALEXANDER: Everybody has been talking about cautious optimism and expectations for good times, but there is a window on it for two or three years, and then things will probably revert to a historic norm. That’s probably true with rates, too. A rate today at 4.5% is still very much unprecedented. You’d have to expect that it will be back at 6% after the economy fully rebounds.

GLYNN PATRICK: Vern, because you would be the most impartial in terms of when to build, what would your advice be?

JESSE: It’s a difficult question to answer, and it’s very situational. It depends on how you weathered the last few years and where you sit today. Another panelist made reference to companies that build up reserves. They’re in a much better position to make moves today. Others that aren’t so well positioned aren’t going to make any moves. I’m generally bullish looking forward.

To speak to the interest rate question, what Joe stated about historical lows is something to keep in mind. They’ve come up recently, but they’ve got a ways to go to get to where they’re historically high or even to the norm.

PROCHASKA: I agree with that. We probably all read various financial outlooks and read the trade publications. It’s interesting that for the first time in a long time, they’re not using the past to predict the future, because we truly are in uncharted territory. We’ve been in recessions before. We didn’t come through a recession and have national health care reform looming. I do think it’s a good time right now. Construction costs are low. Interest rates are low. But at the same time, we hear our clients saying, ‘Yeah, but.’

Something is going to have to happen to pay for all this health care, so it’s just a matter of time before taxes go up and interest rates go up. So it might be a good time to build now, but what happens in three years when I’m trying to pay for this and we take another big nosedive? This is what we’re hearing from our clients.

JESSE: That’s evident in what several people have said about projects, but their size on average is smaller. People are dipping their toe back in rather than going in full forward. That’s a good thing, by the way.

PROCHASKA: Yes, and we’re hearing the same thing over and over. We want it adaptable, we want it flexible, and we want it expandable.

Streamlining approvals

GLYNN PATRICK: The city of Madison has patted itself on the back for addressing obstructionist criticism about its approval process. Does it deserve praise for creating a fairer, more streamlined process?

JESSE: Among developers, real estate investors, and those who advocate for them, be they engineers, planners, designers, or attorneys, there is a perception that things are more difficult in Madison, and it’s not easy to overcome that perception. There’s a degree of reality to it. That’s not to say, however, that in the outlying villages and cities and the townships and on the county level that you don’t also have those approval hurdles. At times, that’s exaggerated, but that perception is still there.

ALEXANDER: They’re going in the right direction because the mayor showed some leadership. It’s very much personality-based. It’s not necessarily a big change in the way they go about approvals. 

SHECTERLE: It’s just inherently not an easy process to change. It’s been that way for so long. It’s not a light switch. It’s really an evolution, so it’s going to take time. Whatever strides it made, at least attempts are being made to move in the right direction.

GLYNN PATRICK: The pinnacle of the tug of war between developers’ wants, neighborhood wants, and government oversight probably was the struggle to approve the Edgewater Hotel expansion. Are we better off because we went through that?

CLEARY: It’s an interesting question. For so long, it’s been so easy, and it’s been so popular to just say Madison was difficult, or Madison can be difficult. But for the people that are from here, live here, do business here, maybe they’ve become fatigued about talking about how hard it is to do business here. Maybe the fatigue has started to turn a little bit. Maybe the Edgewater is a chapter in that book, but at the same time, while it’s challenging, people are still going to want to build, people are still going to want to develop, people are still going to have a lot of pride that this is one of the best places to live. People are going to look at the record of the type of economy we have here and understand that it’s a positive place to be, and so maybe it does come with its pockmarks. I’d like to see if the next generation of leaders starts understanding that there are some positives that are going on as well, and that there is a way to do business here.

I do see people that are from out of town or out of state that want to come here and do things, and they’re much more jaded about the process here, and they don’t have to dig too far to find other people who will empathize with that. So there’s validity in it, but at the same time, I wonder if part of that challenge hasn’t helped create a really dynamic development environment in a really dynamic community. Maybe that’s a silver-lining statement, but I hear that a lot from my customers. 

CATALDO: While nobody in the construction or development industry likes to see how long the Edgewater project dragged on, one of the positive impacts is that it really brought to the surface all of the different issues that go into a large development and construction project, the jobs that are at stake, and the tax revenue for the city. Whenever you hear about controversial projects in the paper, not in my backyard is always brought up, and it is hard. It is hard for individual citizens to look at what might happen in their neighborhoods or their communities, but the Edgewater did help educate people on all of the other factors that really are impacted. The Edgewater has the potential to generate a lot of revenue for the city, which helps taxpayers and employs people, and there’s a ripple effect.

PROCHASKA: We have a really good reputation of getting projects through the city approval process, so we have figured out how to make it work. We’ve had projects like Walk 100, which was very controversial and took a long time, and we spent a lot of money getting that through. You hear about those, the Edgewater and some of those very visible projects, that were very controversial, and people don’t notice all the cranes and construction projects as you drive up and down University Avenue that just went through pretty handily. Go down East Washington Avenue; there’s a lot going on. There’s been improvement and there’s room for more. It’s a process, but there has been positive improvement with the city.

Laboring to find workers

GLYNN PATRICK: We’re going to move to employment because that is a barrier. What happened to all of those people who were laid off, and what is your challenge today? 

SHECTERLE: Part of the challenge is that when the economy changed and the jobless rate went up, a couple things happened. One, people who were very close to retirement retired. Two, after a period of time, people who were unemployed left construction and found work somewhere else. So the unemployment rate went down, but that’s because people left the pool. Now that we’re on this uptick and we need to get people again, those people aren’t there because they didn’t sit and wait for four years for a job to come back. They went and found work somewhere else.

We’re seeing a shortage in almost every trade right now. In Madison, in the electricians union, there’s 900 people that belong to that union. All of them are employed. Carpenters, iron workers, and masons in Madison are almost not available. You have to go to Milwaukee or other regions to try to pull workers into this area. As everybody’s work increases, then we all need manpower, and it’s just not there. The challenge with construction is that it’s a job that really can’t be outsourced, the workers need to be here, and so we need to really refocus on how we refill that talent pool and make the construction trade an attractive career for people again.

JESSE: That’s not going to happen overnight. I have a little bit of an out-of-the-box theory about this, particularly with respect to the trades. I don’t think you see, when you observe young people today, 10-, 15-, 20-year-olds, the interest to work with your hands anymore. Most of those kids don’t have fathers who work with their hands that they see or observe. We hire people to repair things at our home instead of doing it ourselves, and that interest is never nurtured. 

(Continued)

SHECTERLE: You can make good money. It pays well, and you can get paid while you learn, while you’re taught the trade, either on the job or through an apprenticeship program. So it’s not like going to college and graduating with debt, not that that is bad. I went to college, too, but it’s an alternative career path and it’s not published enough that, ‘Hey, I could look into that.’

JESSE: There are schools, there are programs, there are employers all willing to train and develop that worker pool, but there is a fundamental lack of interest in it at the base.

CLEARY: During the recession, one of the most visual indicators that would appear on the news was always the housing crash. It was always about what was happening in housing, that the housing market had completely deflated, that construction was really falling off. That formed the opinions of a pretty wide set of valuable employees in some of the young people who think, ‘Ooh, I may not want to get into that.’

I practice quite a bit in construction, and even my co-workers would say, ‘Ooh, that’s got to be tough right now, that’s got to be hard.’ I felt there were a lot of things in our economy that were pointing in the right direction, but construction and development continued to get a lot of attention as to how rocky it was. It’s probably incumbent upon our collective industries to make sure people understand that it’s a great way to make a living. It’s a great way to advance the next generation.

PROCHASKA: It is, and design and construction is cool. It is so neat to hear someone’s vision and then drive by and watch it come out of the ground and then walk through it when it’s done. That is really cool. There are not many jobs where you can do that.

SHECTERLE: You take kids around backhoes and cranes and loaders and all that stuff, and they’re like, ‘Holy cow,’ and every time I get to drive through town, I get to point to my daughters, ‘Hey, Daddy worked on that,’ or sometimes I say, ‘Daddy built that building.’ You have a sense of pride.

CATALDO: That’s the challenge for the construction industry, really. How do you keep the enthusiasm of the young children that go from Tonka trucks to watching the job sites and all the cranes, and then get into the educational system and construction is portrayed as a last-choice, dead-end, low-tech, low-skill job? That’s not at all what this industry is about. Construction has changed in so many ways that many of the trades are technology-driven. 

It means changing the image that our industry has but also changing the outcomes that our schools are working on. The good news is that the governor’s budget did include money for academic career plans, which really encourage the educational system to focus on career and college prep so that students aren’t going to school just to go to college but really to explore what they want to do and what they need to do for a career. It’s going to require more industry involvement, getting involved with students, letting them see the great jobs, whether they are in the field or whether these are jobs that require them to go to Madison College or to the university.

GLYNN PATRICK: There were one-time federal funds for a funding commitment for apprenticeship training, and now the state has said that it’s going to set aside a $1.8 million funding commitment for apprenticeship programs. But even with that $1.8 million for apprenticeships, are you still going to have almost the equivalent of an Army recruiting office to recruit young people to the trades? How are you going to take advantage of it? 

SHECTERLE: Everybody in the industry needs to have a hand in that. That’s the contractors and the designers and everybody. The earlier we can plant those seeds, the better. 

My wife is an educator at a middle school, and they have career week every year. A few times, the tech-ed teachers asked me to come in and do a presentation about what it’s like to be in construction. I always focus on the trades. I don’t talk about me as a project manager. I can show them photos of the guys rigging and erecting steel or pouring concrete, and then I can explain to them what those guys make for an hourly wage and what that translates into as a career, and then pictures of cranes and construction — big things like that get them excited when they’re a kid. So if you plant that seed a little earlier, that’s one thing. The tech-ed departments in middle schools and high schools hopefully will grow over time and start to focus on, as career planning is done in high school, directing kids with that interest into something like that as opposed to college for the sake of going to college.

CATALDO: The big change within education right now is helping students identify the career paths or the industries where they have an early interest. Not pigeonholing them but then giving them the opportunity through industry exposure, through applied learning so that if you have a child that has an interest in designer construction, their math class is not just about memorizing formulas, it’s about the application of mathematic principles such as calculating the pitch of the roof, calculating how much cement you need for a pour, and understanding the load weights for cranes.

SHECTERLE: There are a lot of ‘very old’ perceptions that haven’t gone away, and it’s a hurdle we have to get over. The perception of construction is it’s dirty and stinky, and it’s not very fun, and that’s not true. You see the camaraderie of some of the crews and how the guys get along and interact — men and women.

ALEXANDER: From our perspective, we see a two- to three-year period where crews are going to be busier than they have been. We’re not expanding dramatically. Everybody is just working twice as hard as they did for the four years when we had less work to do. We’re trying to be elastic in our staff.

PROCHASKA: Right now, I need a five-year grad who’s really good who has good communication skills, but they’re hard to find. You’d think that they wouldn’t be with all the layoffs, but like Jeremy said, people have left the industry. They’ve either gotten gainfully employed or they left and went into other fields.

GLYNN PATRICK: If they’re 24 years old and they’ve got student loans and they need a job, where would they start?  

CATALDO: If they are going into the trades, that’s really an apprenticeship, and Wisconsin has one of the strongest apprenticeship systems. Apprenticeship is a three- to five-year commitment, so while they’re being paid, they are learning. So if it’s a college graduate that has not found employment, and they’re thinking about construction trades, it’s really critical that they have that connection with a contractor that’s going to indenture them through their apprenticeship. Many contractors hire individuals as pre-apprentices and have them work within the company so that they can prove their worth and prove they have a good work ethic. Communication skills are critical. Whether they’re a carpenter, a superintendent, or a project manager, they’re relying on their communication skills to manage that project. Employers are looking for those strong employability skills.

JESSE: When they’re at that lower level, can they get exposed to multiple trades so that they can select a particular one in which they have an interest?

SHECTERLE: There are guys that are laborers for several years and then will take on a carpentry apprenticeship and switch trades. That happens.

GLYNN PATRICK: Isn’t there an opportunity here for someone to create a clearinghouse that anyone with an interest in that field could go to and could be assigned to the vendors who have an interest in that? I didn’t hear anyone say, ‘Go to MABA, go here, go there.’

PROCHASKA: Well, if you want to go through an apprenticeship program, you have to be sponsored by a contractor first.So if you want to get into construction, go talk to Cullen or Kraemer or Findorff or whoever it is. Get them to — convince them to — take a chance.

GLYNN PATRICK: I’m seeing a niche opportunity here for a cottage business that says, ‘I’ll go to Cullen, I’ll go to Kraemer, and then I’ll send them the people that need to be sent there because there needs to be one place that’s gathering all this intelligence.’ If you’re going to rely on a 19-year-old to figure this out, they’re not going to do it, and you’re missing a perfectly good candidate.

CATALDO: The challenge is that if it’s providing them the opportunity to just explore the industry, that’s different than employment. In the apprenticeship system in Wisconsin, there is a union apprenticeship system, and then there’s an open-shop apprenticeship system through the technical colleges. You really can’t go through the process of just appointing people to a contractor. There’s an application, and there’s a testing process. 

For any of the trades, you have to take a test to see if you qualify. You usually take those through one of the trade offices, so the carpenters will have an office that will provide the tests for the carpenter’s exam. As an association, one thing that we just rolled out for our members is a formal job shadow program that matches groups of students with an employer in their community. 

GLYNN PATRICK: I’m looking at a macro level that says we have several million students who graduated, and they’re saying that they’re never going to have a chance to pay back student loans, and they don’t know where they’re going to be hired, and it’s a slow absorption rate. And here are all these people who are college educated, who speak well, and you’re saying we have this wonderful opportunity for people.

(Continued)

PROCHASKA: Another thing I’ve seen is a trend of kids coming out of school and saying, ‘I can’t get a job in my field,’ so they move in with Mom and Dad. And I say, ‘Go to McDonald’s, go to the mall, get a job,’ and they say, ‘No, that’s not in my field.’

SHECTERLE: Or they don’t think they’re qualified for it. Well, it’s not what I went to school for. They have this false perception.

GLYNN PATRICK: I want to go around the table now and have panelists tell our readers anything that you want them to take away from this roundtable discussion. 

SHECTERLE: It’s a good time for construction right now. Things are on the uptick. But construction costs are still pretty low, and things are still pretty competitive, so if you’re financially stable and you have plans to grow or develop your company and need construction assistance with this, or design assistance with that, it’s not going to be any more economical to do it in the future based on what we think is going to happen with interest rates and what we know is going to happen with material costs and labor costs.

GLYNN PATRICK: It sounds like you want to lock in those rates for your materials. 

PROCHASKA: Not only that, but a cool space can really have a huge impact, not only on morale and recruiting and retention, but productivity. If I’m working on a project and I’m stuck, I’ll go downstairs in our lower level, where our interior staff is, and walk around. There’s always cool material we use that comes through the office that you look at, and you touch it, and you go, ‘That is neat. I can’t wait to see that in so-and-so’s space.’ It’s just neat stuff that re-energizes you. It gets you all jacked up with creativity.

ALEXANDER: It’s the time to buy. If you’re looking for a decent lease rate, they’re still low. If you’re looking to purchase a building or a home, those things are still relatively low. If you want to finance something or build something, it’s still at affordable rates and prices, and that’s going to change quickly. It’s changing already. So people ought to take advantage, over the next few months, of the fact that the world is basically stabilized and take advantage of that while stable means affordable.

JESSE: Take the time to educate yourself to make an informed decision, so that means get competent people around you and actually listen to them instead of ask and not listen. Developers and real estate people, construction people, are often risk takers, and they should be admired for that on balance. But they don’t take risk for the sake of taking risk.

CATALDO: We have an aging workforce. We have a growing industry that’s going to continue to grow a little bit each year. As those people retire, we’re going to need the best and brightest at every level, whether it’s as a carpenter or plumber, as a project manager, or as a design professional. We need those people, and they’re great careers that are very fulfilling.

CLEARY: We’re staged for the growth if it comes. We’re staged for the growth if it doesn’t. We support it, and we encourage it, and we’re vested in it.

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