General Contractors Industrial Buildings and Warehouses

SIC 1541

Industry report:

This category covers general contractors primarily engaged in the construction, alteration, remodeling, repair, and renovation of industrial buildings and warehouses, including aluminum plants, automobile assembly plants, food processing plants, pharmaceutical manufacturing plants, and commercial warehouses. General contractors working on nonresidential buildings other than industrial buildings and warehouses are classified in SIC 1542: General Contractors--Nonresidential Buildings, Other Than Industrial Buildings and Warehouses.

Industry Snapshot

Like all construction activity, nonresidential construction is critically dependent on overall U.S. and regional economic health. Construction of industrial building and warehouses specifically is closely tied to trends and conditions in the U.S. manufacturing sector. In addition, individual projects are bound to the economic health of the industries are sponsoring those projects.

Consequently, when the U.S. economic bubble of the late 1990s burst, spending on industrial buildings and warehouses began to diminish. Employment in the manufacturing sector fell throughout 2001 and 2002, as did industrial production. As a result, spending on new manufacturing plants and warehouses slowed dramatically and was expected to continue to slow through 2002, according to Building Design and Construction in May 2002.

Commercial construction spending for the retail and warehouse sectors fluctuated during the mid-2000s, declining from 10.1 percent in 2004 to 7.6 percent in 2005, rebounding to 10.8 percent in 2006, and then dipping to 9.7 percent in 2007. Construction spending in the manufacturing sector fluctuated also, growing from 10.6 percent in 2004 to 30.6 percent in 2005 before falling to 21.9 percent in 2006 and plummeting to 8.8 percent in 2007.

In the late 2000s, the housing bubble--which peaked at over 2 million new housing starts in 2005--burst, and new housing starts dropped to 554,000 in 2009. A global recession was particularly acute in the United States, where numerous banks failed due to the failure of the subprime mortgage market. As consumer spending declined, the U.S. economy slowed, which was reflected in the manufacturing sector. In these economically difficult conditions, any firms looked to cut costs and thus canceled or postponed building projects. As a result, the general contractors of industrial buildings and warehouses saw a decline in demand during the late 2000s. Recovery was slow and erratic during 2010.

Organization and Structure

In this sector of the construction industry general contractors generally bid for a project and assumed responsibility for the project's planning and overall development. However, the general contractor often delegates performance of many specific tasks to specialty subcontractors.

Once a contractor is chosen to complete a project, he or she often remains in close communication with the project owner to oversee many construction details while simultaneously coordinating the work of various subcontractors and teams of employees. Given the inherent complexity of this arrangement, successful management is acknowledged to be one of the industry's greatest challenges. Projects often fail due to miscalculation of budgets and missed deadlines, which may be attributed to the lack of efficient communication between contractors and owners.

Background and Development

Contractors benefited from the booming U.S. economy in the late 1990s, especially the "bullish" stock market, which encouraged investment in new buildings and modernization proposals as manufacturing industries attempted to increase efficiency through technological innovation. Contractors were called in for building and remodeling projects to accommodate the new production methods and equipment.

Manufacturers that expanded or relocated in the mid- and late 1990s and were involved in semiconductor manufacturing, pharmaceuticals, food and related products, and paper and related products, were among the fastest growing in the industry. Companies within the pharmaceutical industry as well as semiconductor manufacturers especially were constantly building research, development, and production facilities since their products faced ever-shortening product life cycles. In order to be competitive, many manufacturers also needed to upgrade to facilities that were fully equipped to provide advanced telecommunications and computer systems. Moreover, additional remodeling and construction opportunities were expected to be created worldwide as a result of the importance increasingly attached to reducing hazards to the environment.

For instance, the construction, expansion, or renovation of a record 867 plants was required by the food industry in 1998, an increase of 14.7 percent from 1997. Analysts attributed the bulk of this growth to increasing automation in production. Companies like Coca-Cola, ConAgra, and Frito-Lay had a number of projects underway in 1999, with Kraft leading the sector with 24 projects. The food industry generally was moving to larger facilities that allowed automation to be economically applied.

The increasingly rigorous loan requirements set up by banks in the wake of the savings and loan crisis also impacted the industry in the 1990s. To counter banks taking a risk position in these projects, developers and construction firms were often asked to take an equity position or become a part owner in projects they designed or built. Meanwhile, the growing strength and popularity of real estate investment trusts (REITs) helped maintain healthy funding for construction in the sector despite concerns of oversupply or possible increases in interest rates.

The nonresidential repair and renovation market generally was considered to have a more secure future than new construction. The commercial building boom of the 1980s produced record vacancy rates for warehouses, which was expected to weaken the market for new warehouse construction for some time. Manufacturers began to reflect the excess supply by expanding their capacities, resulting in fewer but larger facilities.

However, contractors in this sector remained somewhat wary of the increased international presence of the U.S. manufacturing industries. With relaxed trade and investment restrictions, a strong dollar in relation to foreign currencies, and the lure of inexpensive labor and low materials costs overseas, large firms with capacity to move production facilities began increasingly to move to foreign markets. However, such practices were expected to lead to a rise in warehouse construction, as goods produced abroad would be shipped to the United States where they would be prepared for domestic distribution.

After experiencing substantial growth in the mid-1990s, the industrial building industry experienced a dramatic slowdown beginning in 1999. Spending on industrial buildings in the United States dropped 13.8 percent in 1999 to $32.6 billion, and continued to decline at a slowed pace, falling 1.7 percent in 2000 and another 3.2 percent in 2001, reaching $31.1 billion. According to Building Design and Construction in May 2000, the decline in spending was related to the general slowdown reported across U.S. industries. "Medium- and long-term demand for new industrial space is closely correlated with industrial output, export growth, and capacity utilization rates--all factors that have weakened dramatically during the past 18 months."

Despite continued economic weakness going into 2004, the residential construction sector continued to perform well, bolstered by historically low interest rates. However, the nonresidential construction sector, which included industrial buildings and warehouses, continued to falter. Even the institutional sector, which had flourished in 2000 and 2001 due primarily to the strength of the healthcare industry, had started reporting a slowdown in construction spending by 2002. Nevertheless, analysts noted that the decline in nonresidential construction had begun to level off in 2003, prompting some to predict a turnaround by the end of 2004.

Predictions of a turnaround in nonresidential construction were realized during 2005 with all commercial construction sectors recording growth, "helping to offset slowing residential building construction outlays in 2006 and 2007," according to Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University in the Birmingham Business Journal in May 2007. Fuller, who wrote a research report funded by the National Association of Office and Industrial Properties (NAIOP) Research Foundation with data compiled from McGraw-Hill Construction and the U.S. Census Bureau, went on to say that the "counterbalance kept the national economy from experiencing a sharper downturn in the face of rising energy costs. . . ." The anticipated rise in warehouse construction from increased import and export activity was further realized in 2006 as total warehouse spending reached $32 billion during the first ten months of 2006, compared to $28 billion for the same period in 2005.

Industry statistics indicated an estimated 12,890 general contractors within the segment with industry-wide employment at 232,084 workers generating approximately $74 million in 2007. Based on value, in descending order Texas contributed about $8.78 million, California added slightly more than $5.6 million, and Missouri was responsible for just under $5.2 million of total construction.

Completed construction of industrial buildings and warehouses accounted for close to $28.3 million, which was more than 43 percent of the industrial total in 2007, as warehouse construction climbed 14 percent to 248 million square feet. Demand for warehouse space increased in Phoenix, Arizona, southern California, and Dallas/Fort Worth, Texas. General contractors active in new construction of industrial buildings, not elsewhere classified, held nearly 27 percent in market share with a value of $35.9 million. Contractors specializing in renovation, remodeling, and repairs of industrial buildings held 12.6 percent of market share with almost $2.4 million in revenues.

The NAIOP conducted a survey of its top 200 members titled Vital Signs, which found that although the availability and cost of construction materials was the main concern in 2006, financing was at the forefront in 2007. Among the respondents, a 40 percent felt the national economy was moving forward, and nearly three-quarters of those surveyed responded that they were beginning to experience a "credit crunch" compared to the prior four years. The decrease in available credit had dampened the volume of commercial real estate transaction activity considerably. Investment in commercial real estate during the first four months of 2008 reached $48.2 billion, down 69.5 percent compared to $157.8 billion during the same period in 2007 before the credit markets tightened.

Warehouse vacancy rates reached 10.5 percent in the first quarter of 2008, compared to 9.5 percent during the third quarter of 2006. "As supply finally catches up with demand in such markets as Phoenix, southern California and Dallas/Fort Worth, developers will begin to rein in warehouse projects," Richard Ellis noted in Construction Equipment Distribution in August 2008. Ellis added that ;ldquo;As a result, warehouse construction will join the weakening trend for stores, as contracting falls 19 percent this year to 202 million square feet."

Current Conditions

The construction industry as a whole continued to trend downward through 2009. Overall, construction spending dropped by 26 percent to $412 billion. Construction of warehouses declined even more dramatically, falling by 62 percent as firms looked to cut costs during the difficult economic times by cancelling or postponing capital projects. For example, leading construction firm Betchel Corporation saw the total value of work book drop to $20.3 billion in 2009, down from $35.0 billion in 2008.

As the economy slowly recovered during 2010, the industry was expected to also recover. In particular, the warehouse industry was expected to play an increasing role in the U.S. economy as more and more of the goods consumed in the country were based on the import and export system. According to a report by the NAIOP, "the value of U.S. imports and exports has more than doubled since 1989 in real terms, and is now more than $3 trillion. This does not include the even larger domestic market for goods traded between metropolitan regions." Another shift in how goods are stored and shipped in the United States was a trend away from maintaining large inventories and toward "just in time" delivery. Although such a shift may negate the need for some of the largest warehouses, it creates the need for multiple distribution and supply networks.

Industry Leaders

The top contractors in this category in the late 2000s were also typically engaged in other construction sectors. Bechtel Corporation of San Francisco, a private company founded in 1898 and still run by its founding family, employed 47,000 people and generated worldwide sales of $11.6 billion in 2003, down 13.4 percent from 2002. By 2009, Bechtel was the leader in the industry, with revenues from ongoing work of $30.8 billion and 49,000 employees.

Fluor Corporation of Irvine, California, posted sales of $8.8 billion in 2003, down 11.6 percent from 2002, and employed 29,011 people. In 2007, Fluor had 41,260 employees and revenues of $16.7 billion, up from $14 million in 2006. Fluor continued to grow its assets and in 2009 posted revenues of $21.99 billion. The firm employed just over 36,000 in 2009. The oil and gas sector accounts for over 50 percent of Fluor's revenues.

KBR (Kellogg Brown & Root), based in Houston, Texas, was best known during the 2000s for helping the U.S. government rebuild Iraq. About 35 percent of its contracts were in Iraq. The firm posted sales of $12.1 billion in 2009 and had 51,000 employees. KBR had been the construction arm of Halliburton but spun off to become a separately traded firm in 2007.

There were large numbers of generally small firms tackling a wide variety of projects within a frequently confined geographical area. Although the giants in the industry operated internationally, all contractors engaged in constructing industrial buildings and warehouses typically relied overwhelmingly on contracts in the state in which they were headquartered for the bulk of their profits.

Workforce

According to industry statistics, this sector of the construction industry employed 209,781 in 2009. Over 80 percent of firms in this industry categorization employed less than 25 workers. However, firms with 25 employees or more accounted for more than two-thirds of industry revenues. California, Illinois, Missouri, and Nebraska were some of the top states in terms of employment in 2009.

Employment in construction was seasonal, leading to distinct swings in the number of workers employed over the course of a year. Moreover, the skilled members of the workforce engaged in a wide variety of different crafts or specialties, resulting in inadequate representation for the various needs and interests of the workers. Such considerations were particularly important because labor and management interacted more than in many other industries. For example, unions negotiated with contractors on issues like training procedures and hiring practices in addition to wages and working conditions. Construction jobs were in low demand in the late 2000s but demand was expected to return as the economy recovered and firms started up capital projects once again.

Also adding to the lack of uniformity in the workforce were the tendencies for skilled workers to identify with their specialties rather than with a particular employer. In addition, employees tended to change employers often, moving frequently from site to site, working beside teams hired by other employers, and engaging to an unusual extent in self-supervision.

Supervising contractors typically had started working in an entry-level position for their particular craft or specialty. Academic training traditionally has played a minor role in career preparation for contractors, although the inherent complexity of managing construction projects--especially the larger ones--seemed likely to make higher levels of education increasingly desirable.

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