Bright Spots in an Otherwise Hazy Outlook
If statistics are any indication, specialty contractors are grappling with mixed signals that make for an uncertain year ahead. On the plus side, U.S. construction starts are expected to rise slightly this year as demand in certain sectors such as health care, higher education and renovation is forecast to continue its upward climb in the tristate region.
Those sectors, as well as transportation and energy, kept tristate firms busy last year—as reflected in the results of the largest 50 firms that responded to ENR New York's specialty contractors survey (see p. 23). For the group, 2011 revenue at the top 50 firms rose 12.7% from the prior year.
Tristate subcontractors say they are more positive about the year ahead but not overly optimistic as the industry's pluses are not strong enough to offset the lingering minuses.
"It's a mixed bag," says Kevin Monaco, executive director of the New Jersey Subcontractors Association, Manasquan, N.J. "People are generally more optimistic, but it's a very segmented optimism," contingent on the particular construction sector that the subcontractor serves.
High on the list of negatives are the stubbornly high jobless rate, the smaller pool of project opportunities and the drying up of bank lending to industry.
Such factors have contributed to subcontractor defaults, with Demco Inc., West Seneca, N.Y., the latest victim. Demco, which handled the $20-million Yankee Stadium demolition in 2010, recently filed for bankruptcy. The firm did not return calls for comment by press time.
"Banks are being much more strict, particularly with the contracting and subcontracting community," says Kevin Waldron, vice president and construction director at Chubb Surety, Warren, N.J.
Banks have cut their lines of credit in half for some firms, even those with solid balance sheets, Monaco says. "Some banks, from what I'm told, are exiting the construction market completely."
Firms that have not taken steps to adjust to the slow marketplace are also under intense profit margin pressure as costs rise or revenue drops, Waldron says.
"What we are seeing is that operating losses are becoming more prevalent, particularly for subcontractors," Waldron says. He estimates that some contractors and subcontractors that once had a healthy six months or more of cash flow on hand, are now down to only two or three months.
For many subcontractors, "cash flow is either minimal or negative, making it difficult for them even if they do acquire work, which takes capital to put in place and much longer billing cycles," Waldron says.
But Waldron and other industry experts also say there are bright spots on the horizon for those that have built some flexibility into their overhead by, for example, using temporary workers and/or leasing instead of buying job-specific equipment. "Taking advantage of that early on allows you flexibility as the higher-margin work tapers off," Waldron says. "It's the pre-planning that really helps."
Monaco says the near future remains uncertain for the industry overall. "Things are better than they were, but they're still not where they need to be or where they were a number of years ago," he says.
The last two years have, nonetheless, provided opportunities for firms with the right expertise, Monaco says. In New Jersey, in particular, this includes expertise in data centers, health care, solar energy installation and transportation—all sectors that have experienced high construction demand in the state in recent years, he says.
Infrastructure and public works projects in the tristate region, especially in New York, have also helped subcontractors hold steady, as evidenced by the dominance of these sectors in this year's ranking.
Infrastructure is one of the most "definitive sectors out there right now," says Gary Segal, chairman and CEO of GreenStar Services Corp., a subsidiary of Tutor Perini and No. 1 in this year's ranking.
Specializations for GreenStar, which won ENR New York's Top Specialty Contractor honors last year (ENR 9/12/11 p. 54), include infrastructure and environmental work on such projects as the Owls Head and Jamaica Bay water treatment plants in Brooklyn and Queens.
Five Star Electric Corp., one of GreenStar's operating subsidiaries, recently completed work on the Resorts World casino in Queens and the $300-million Rushmore residential tower in Manhattan. The firm is currently working on 1 World Trade Center, which is scheduled for completion in early 2014.
The whole WTC site continues to be a major industry employer, and several firms in this year's ranking list it as the source of their largest projects. The site alone employs more than 3,500 workers from more than 60 union trades, according to the Port Authority of New York & New Jersey. More than 1,000 of those are dedicated to 1 WTC construction.
Segal expects that both the Metropolitan Transportation Authority and the NYC School Construction Authority will provide a lot of work for industry during the next few years. They already "have the money and projects in the works," he says.