General Contractors - Nonresidential Buildings, Other than Industrial Buildings and Warehouses

SIC 1542

Industry report:

This category covers general contractors primarily engaged in the construction, alteration, remodeling, repair, and renovation of nonresidential buildings, other than industrial buildings and warehouses. Included are nonresidential buildings of commercial, institutional, religious, or recreational nature, such as office buildings, churches and synagogues, hospitals, museums and schools, restaurants and shopping centers, and stadiums. General contractors primarily engaged in the construction of industrial buildings and warehouses are classified in SIC 1541: General Contractors--Industrial Buildings and Warehouses.

As with the construction industry in general, nonresidential construction benefited from a surging U.S. economy in the late 1990s. The demand and spending for all types of construction in this sector was commensurate with general economic strength, measured by gross domestic product and interest rates. When the economy began to falter at the turn of the twenty-first century, the nonresidential construction began to feel the pinch. Although residential construction was bolstered by interest rates that dipped to lows not seen since the 1950s, nonresidential construction experienced no such cushion. Businesses of all kinds began to curb spending on new and existing construction projects.

Along with economic strength, the specific construction categories of this sector are further affected by a range of variables, such as demographic trends, legislation regarding public expenditures and business developments, and social trends. Private nonresidential construction in the United States has fluctuated according to the success of key sectors such as office buildings and institutions. Nonresidential construction spending dropped by 6 percent in 2003 as even the strongest sectors, such as health care construction, began to see previously rapid growth rates slow.

Nonresidential construction spending increased in the mid-2000s, reaching $547.4 billion in 2006 and $651.9 billion in 2007. The industry peaked in 2008 at $709.8 billion before declining in 2009 to $654.2 billion. The decline can be attributed to an economic recession. In addition, individual categories dropped even further; the overall category of nonresidential building was bolstered by a federal government infusion of stimulus spending on public works projects such as schools and roads.

The states that experienced the greatest levels of construction activity in this sector included California and Texas.

Background

Office Construction.
The 1980s saw tremendous growth in new office construction, but overproduction and the subsequent economic recession resulted in such a glut that vacancy rates became a nationwide problem. In 1983, the national metropolitan office vacancy rate stood at approximately 12 percent; by 1990, that rate had risen to 17 percent and peaked at 19 percent two years later. In 1998 the rate was at its lowest mark since the early 1980s, at 8.9 percent. However, by early 2003, the office vacancy rate had jumped back up to 16.5 percent.

Office construction spending experienced a long-awaited resurgence in the late 1990s, from $36.2 billion in 1997 to $47.5 billion in 1999. While this was excellent news for contractors, 1999 revenues were still 35 percent below their record 1985 level. As the economy as a whole cooled off from its late 1990s surge, the rate of office building construction growth slowed considerably to roughly $43 billion in 2002 and to $39 billion in 2003. Meanwhile, lending institutions, which had eased some of their restrictions on commercial real estate loans, began to tighten up lending requirements. Eyeing the slower growth rate for white collar employment, as well as the economic trend toward downsizing, builders, wary of a repeat of the late 1980s disaster, were expected to try and rein in runaway construction.

Office construction reached 215 million square feet in 2007, up 4 percent compared to 2006. Some construction projects included the $550 million 11 Times Square office tower in New York, a $550 million data center in San Antonio, Texas, the $420 million Bank of America office in Charlotte, North Carolina, the $425 million Wachovia office tower in Charlotte, North Carolina as well, and the $200 million Nassif office building renovation in Washington, District of Columbia. Between office rents on the rise, coupled with more stringent financing, office construction was projected to fall 11 percent to 192 million square feet in 2008.

Retail Construction.
In contrast to office construction, the retail construction market has remained strong since the 1980s. Spending on retail construction rose steadily during the late 1990s, from $42 billion in 1996 to $55.4 billion in 1999. About half the value in this category is related to the construction of shopping centers. Especially in recent years, such construction was geared toward big box stores--large non-mall discount stores specializing in focused product categories.

According to a December 2002 issue of Chain Store Age, the 25 largest U.S. retailers opened a total of 5,935 new stores in 2002, compared to 5,843 in 2001. In addition, square footage in these new stores reflected a 6.4 percent increase over the size of existing stores. Leading U.S. retailers also continued to spend construction dollars on remodeling existing stores. Supermarkets, in particular, were investing more capital into improving existing stores than on opening new units. Supermarket companies engaged in store remodeling grew from 22 percent to 38 percent between 1997 and 2001. In fact, supermarket store openings fell to a ten-year low in 2001. Offsetting the impact of this decline, however, was the fact that store closings had also reached a decade-low rate. The new supermarkets that did open in 2001 boasted square footage of 46,750, compared to 44,072 a year earlier.

Commercial construction reached 1,038 million square feet in 2007, up 2 percent compared to 2006 with retail and office construction driving the growth, while garage and service station construction began to wane. Retail construction climbed slightly to 311 million square feet. Chief construction projects included a $310 million addition to the Carousel Center Mall in Syracuse, New York, the $250 million Rego Park Mall II in Elmhurst, New York, and the $99 million Pier Park Plaza in Panama City, Florida, all of which broke ground during the first quarter of 2007 before demand began to wane, falling throughout 2007.

"One pressing concern relates to how much store construction will respond to the housing decline that's been underway for two years now," Robert Murray noted in Construction Equipment Distribution magazine in August 2008, adding that "Given the close historic relationship of housing starts to store construction, the current disconnect won't continue much longer, and the weaker economic picture of 2008 adds to the downside risk." Thus, the overall retail construction was projected to plunge 19 percent to 202 million square feet in 2008. The International Council of Shopping Centers predicted nearly 6,500 retail stores will close their doors in 2008.

Institutional Construction.
This sector includes a wide range of building types, including hospitals, schools, prisons, government buildings, and others. This type of construction has generally been more stable than all other sectors of nonresidential construction. As a result, it commands an increasing share-- more than 60 percent as of the early years of the first decade of the 2000s--of total industry spending. Compared to industrial construction spending, which declined by 3.2 percent in 2001, and to commercial construction spending, which dipped 1.6 percent that year, spending on institutional construction grew 10 percent in 2001.

Educational building construction was very healthy in the late 1990s, with optimistic forecasts into the following decade. Sales in 1998 reached $39.5 billion and were expected to increase to $44.0 billion by 2000. Furthermore, as more schools placed a priority on full Internet service and technological facilities, the construction of new buildings and remodeling of existing ones was expected to follow. However, drastic cuts in educational funding in the early years of the first decade of the 2000s curtailed construction considerably in this sector. Seventy percent of this construction was of primary and secondary schooling facilities, while colleges, universities, and other educational institutions accounted for the remainder. The vast majority of this construction (80 percent) was for public institutions, though that figure was likely to diminish as state and local budgets continued to be strained while calls for voucher programs and other shifts toward private schooling increased.

Educational building construction experienced healthy gains in both 2005 and 2006, reaching 230 million square feet before falling 5 percent to 220 million square feet in 2007. College and university construction increased 10 percent.

The construction of health care facilities was largely dependent on legislative activity, which was in an uncertain state of limbo in the late 1990s. As a result, spending was down slightly in this sector, though much less for private hospitals than for public care facilities. Seventy percent of spending in this sector went toward hospitals and clinics, though nursing homes and outpatient centers claimed an increasing proportion of the market. More optimistically, however, analysts expected health care facilities to be among the fastest-growing sectors in the entire construction industry in the early years of the first decade of the 2000s. An aging population is a prime factor for this projected growth, especially as nursing homes and similar facilities flourish. Another indicator for growth is the age of existing facilities. According to an August 2002 issue of Heath Care Strategic Management, "In many cities, hospital plants are decaying beneath the surface, with out-of-date chillers and boilers, asbestos in the walls, and outdated signage...now it's time for hospitals to play catch-up."

Construction of health care facilities reached new levels in 2006, to 110 million square feet, in particular, due to strong demand for hospital space, before declining 18 percent in 2007. In 2008, health care construction slowed in part from the heightened building in 2006, as well as the tightened financial markets.

Construction of health care facilities reached new levels in 2006, to 110 million square feet, in particular, due to strong demand for hospital space, before declining 18 percent in 2007. In 2008, health care construction slowed in part from the heightened building in 2006, as well as the tightened financial markets.

Current Conditions

According to industry statistics, there were an estimated 53,732 general contractors primarily engaged in the construction, alteration, remodeling, repair, and renovation of nonresidential buildings, other than industrial buildings and warehouses, with industry-wide employment at 618,005workers who bolstered $230,126 million in 2009. States with the largest concentration were centered in Texas, New York, California, Illinois, and Nebraska.

The economy negative affected most segments of the industry during the late 2000s as a banking crisis made credit much more difficult to obtain. In addition, with consumer spending down, many firms were cutting costs by delaying or canceling capital projects. Many state governments were operating with limited or near-bankrupt coffers. Thus segments such as office and retail construction declined whereas educational spending increased, buoyed by a multibillion dollar stimulus package from the federal government.

Office construction spending increased in 2007 and 2008 reaching $65.3 billion and $68.6 billion, respectively, up from $54.2 billion in 2006. However, during 2009 spending decreased to $52.7 billion. Two major federally funded new office projects helped lift office spending somewhat during the year: a $922 million headquarters for the U.S. Army in Alexandria, Virginia, and another $315 million military office building in Quantico, Virginia.

In 2009 retail construction hit a 25-year low. Construction of retail space fell to 1.7 million square feet, down 53 percent from the 3.7 million square feet recorded in the previous year, and the lowest since 1984. The 1.7 million square feet built in 2009 was roughly 80 percent off the 8.3 million square feet built in 2007, which retailers slapped down in an attempt to keep up with the rapidly expanding housing developments. When the housing bubble burst in the late 2000s, consumer spending dropped, and retailers put the brakes on their expansion plans. Value of commercial spending dropped from $86.2 billion in 2008 to $55.0 billion in 2009.

Institutional construction was helped by the $787 billion allocated by the federal government as part of the American Recovery and Investment Act of 2009. As a result, educational construction spending only declined from $104.9 billion in 2008 to $102.9 billion in 2009. Transportation spending actually increased from 2008 to 2009, from $35.5 billion to $38.5 billion. Health care construction spending, which reached a decade-high of $46.9 billion in 2008, dropped to $45.1 billion in 2009.

Industry Leaders

While the majority of companies engaged in nonresidential construction other than industrial buildings and warehouses employed fewer than 10 workers, a handful of firms commanded a substantial market share; however, most of those firms' operations included construction activity that extended beyond what fits into this industry.

HBE Corporation, headquartered in St. Louis, was established in 1960 and employed 9,100 workers in 2002. Its flagship operation is HBE Hospital Building and Equipment Company, which designs, plans, and builds health care facilities. HBE also performs construction activity for the financial services industry, building banks and credit unions. Sales totaled $625 million in 2002, compared to $1.3 billion in 1998. In 2008 founder, president, and CEO Fred Kummer spun off HBE, which became a private, employee-owned corporation.

Hellmuth, Obeta, and Kassabaum, otherwise known as HOK Group, Inc., engaged in a wide range of construction activities, including commercial, recreational, and institutional facilities, among them U.S. government buildings. The St. Louis-based private firm was founded in 1955 by architects George Hellmuth, Gyo Obata, and George Kassabum.

Other leading firms included Clark Construction Group of Bethesda, Maryland; Tutor Perini Corporation of Sylmar, California; and Turner Corporation of New York, New York.

In 2007, HBE Corporation, headquartered in St. Louis, Missouri posted revenues of $298.4 million, employing 4,500 workers. HOK Group also located in St. Louis, Missouri, reported an estimated $100.7 million with 1,839 employees. Clark Construction Group, LLC generated $2,147.5 million while employing 3,100 workers. Perini Corporation headquartered in Framingham, Massachusetts, known as one of the leading hotel and casino builders, was responsible for the MGM MIRAGE and Trump International Hotel and Tower in Las Vegas. Perini also constructed schools, health care facilities, and sports arenas generating $4,628.4 million and employing 4,150 workers. The Turner Corporation built schools, airports, stadiums, prisons, apartment buildings, and factories while bolstering $2,147.5 million in revenues with a workforce of 5,000 people. In addition, Gilbane Building Company of Providence, Rhode Island was a leading general builder of educational facilities serving commercial, institutional, and governmental markets. Gilbane was tied with The Turner Corporation posting revenues of $2,147.5 million employing 1,800 workers.

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