A Looming Boom

By Dennis Boone

From home inspectors to electricians to residential builders and the region’s largest contractors, a powerful sense of optimism at long last runs through the construction sector. Are we back?

It hasn’t grabbed the big headlines one might imagine, given where the real-estate markets have been over the past half-decade. But something big is going on in the Kansas City area, and Russell Capps is living it.
The owner of a home-inspection service called A Buyer’s Choice, Capps is looking ahead to early 2014, when he hopes to add staff to deal with a sharp uptick in inspections—precursors to sales.

“I was turning down five to seven inspections a week,” Capps said of his decision to expand. “I just had no more capacity, and was already at 12- and 14-hour days.” Shifts like that can be a grind, but in his line of work, “It’s a good problem to have,” he concedes. And he’s got plenty of company. At a recent American Society of Home Inspectors regional conference, he said, “some of the guys there said they’ve been doing this for 10 to 20 years, and this is their best year in years.”

Pat Ryan, who for a decade ran a one-man shop as a residential electrician, has brought on three employees following an increase in business. While he relies primarily on projects in existing homes, some of the increased in requests to add more capacity to those older systems is linked to people preparing to sell their homes and, likely, to trade up. “When the existing homes are being moved,” he said, “that helps our company.”

And it helps Pat Ryan. A career air-traffic controller for 30 years, he’s expanding his sideline company with a plan on turning it over to the real pros. “I was doing the work of three people,” Ryan said. His new staff is laying the groundwork for expansion in 2014, when they’ll hire the hands-on electricians who he says “will do the work, take the load off and let us accomplish what we want to as a company.”

Like others tied to the realty sector, they are in boats—albeit small ones—being lifted by a rising tide. And the tide is not limited to residential real estate. The statistics bear out that area general contractors, along with architects, designers, sub-contractors and professionals in the trades, have made it through more months of belt-tightening than they’d ever imagined. But for those who’ve survived, it’s time to start ratcheting things back up.

Taken as a whole, the statistics are “an absolute indication that hiring is imminent,” says Don Greenwell, president of the Builders Association. “Our apprentice programs have all reopened in the basic trades—ironworkers who have a lot of work in the industrial sector have gone from two years of no first-year apprentices to over 120 first-year apprentices right now.”

Commercial Construction

Before the bottom fell out of the general contracting world in 2008, the 25 biggest contractors in the Kansas City region billed $2.1 billion in work for the year. They saw that collective figure plunge by more than one-third—and laid off employees at nearly the same rates—by the depths of the downturn in 2010. But that spending rose by more than $200 million in the region in 2012, and is on track to beat that number not just this year, but through 2017, industry professionals say.

As that new work arrives, it will be tackled by a dramatically different work force. “As volume dropped by 40 percent in commercial building, the most productive people were kept on the payroll,” Greenwell said. “They tended to be the most experienced; the younger and less-experienced are the ones who lost their jobs.” A national work force of 8 million fell to about 6 million, but even while an uptick in work helped drive the loss percentages back into single digits, he said, the revival was not alone responsible. “It’s not because a lot came back to work; it’s because they don’t consider themselves to be in the construction industry anymore.”

Still, Greenwell is able to tick off a list of large projects that are helping sustain employment: A combined $1.6 billion in upgrades to the Ford and Chevrolet plants here, the LaCygne power plant, the Mars candy factory in Topeka, and the central plant for the National Bio- and Agro-Defense Facility in Manhattan. With all of that, he says, “the unemployment picture is much better in Kansas City” than it otherwise might have been.

Longer-term, he said, a protracted recovery is shaping up to run twice as long as the recession, “and the recession was three years for us.” So better times may be ahead as far out as 2020.

For market-dominating J.E. Dunn Construction, it’s been slow and steady, but it has been growth, said vice president Margaret Bowker. “After years of little activity, the corporate office market is very active with the construction of the Cerner Continuous Campus, the Plaza Vista Building (where Polsinelli is the tenant), the Black & Veatch headquarters renovation and addition, and the new Perceptive Software Headquarters,” she said, running through Dunn’s laundry list of bigger local projects.

The uncertainty of federal health-care reforms on businesses construction planning and the state of the federal budget will continue to influence bigger health-care and federal projects, she said, meaning Dunn will continue to compete for smaller and mid-size projects, as well, into 2014. But data centers, industrial work and warehouse activity is up, and multi-family housing is soaring, she noted, “especially in communities that haven’t traditionally seen new multi-family housing” such as Kansas City, Kan., Bonner Springs and Edwardsville.

Over the next four years, the Architectural Billings Index predicts the strongest Kansas City-area growth markets will likely come from construction of:
•    Offices and banks
•    Schools, libraries and labs
•    Miscellaneous non-residential buildings
•    Leased-space warehouses
•    And religious buildings.
Mark Jansen, a partner in the Construction Services Group for RubinBrown, said a continuing decline in government spending would be offset in part with an active health-care construction sector. More than anything, though, “continued confidence in the economy will help commercial construction,” he said. “There is still quite a bit of uncertainty in consumer confidence and an owners’ ability and/or willingness to borrow.”

Some of that transfers over from what’s happening in residential construction, Jansen said, where consumer confidence is still lukewarm. “There are still a lot of buyers who don’t want to make the commitment to buy a new or different house because of their individual uncertainty regarding their employment status,” he said. “A buyer’s ability to obtain a mortgage continues to be subject to stringent underwriting standards.”

Commercial Properties

If you could have rated the Kansas City commercial property market at a 3-4 a few years ago, says Owen Buckley, “I think it’s a 6 or 7 now.” That might well represent some sharp improvements, but given where it started, it still leaves a lot of upside for improvement, said the president of LANE4 Property Group. “Some of the office guys might say things are pretty good now; they’re backfilling space, there’s a lot of filling up stuff, but retail is different,” Buckley said. “When you think about retail, what really drives growth is construction—new stuff. And there’s not a lot of new stuff being built” along the lines of Walmarts, Kohl’s, Home Depots or Costcos, he noted.

But the adage in retail is that business follows rooftops, and the rooftops are going up across the region. Until that lag time closes between residential development and new retail, Buckley said, “our biggest issue is finding the quality space. If you are a landlord with quality space, it’s a good time for you. If somebody goes out of business, goes bankrupt or needs to move because he wants a drive-through, that creates some wonderful opportunities” for other retailers.

One of the big things going on in that sector, Buckley said, was the continued trend of low interest rates. “They’re creating transactions, and when interest rates low, your cap rates are low, which means your prices are high. If your shopping center is well located and occupied, the value is probably as high now as it’s ever been.”

David Block, of Block & Co., Realtors, said that outside of Downtown, the Kansas Speedway area seems to be very hot right now, as is the area between Kansas City and Liberty north of the Missouri River, southern Johnson County and Lee’s Summit. While landlords sitting on the prime sites can still command premium rates, Block said, the market overall still has some soft spots.

“There’s still quite a bit of product available in all areas of greater Kanas City,” Block said. But some new space is coming on line, and some repurposing of Class C space and lower-end Class B space will likely continue, as some service business, educational institutions and niche health-care businesses infill in what had once been retail strips.

“They’re filling up a lot of space where in previous years that was not a factor in the retail environment,” Block said. “They want a lot more parking, convenience, and easy access for their customers, and they’re finding that retail centers are very viable alternatives to straight-up medical or office environments.” It can also be cheaper space, he said, depending on which part of town a property is in.

Residential Real Estate

Let this sink in: July 2013 was the 21st straight month of higher year-over-year performance for residential building permits in the region’s eight most populous counites. July saw a combined 410 single-family permits, well up from 333 in June. And through seven months, total permits were the highest in five years. “More builders are returning to the industry and they are on average pulling more permits,” said Sara Corless, executive vice president of the Home Builders Association. “The growth has been substantial in the past three years, according to the numbers we see today.”

All eight area counties in the heart of the region are up this year, and combined, the increase stands at 33 percent, Corless said. Far and away the leader of that trend is Johnson County, easily on pace to top 1,000 permits before the end summer. Then came a string of Missouri counties: Jackson County was No. 2 at 452 permits; Clay County had 377, Platte County 217 and Cass County had 119.

The percentage increases are indeed welcome, but then again, cracks Brian Rodrock, “when you’re coming up from zero, that’s pretty easy to do.”

With this resurgence in residential construction, said the CEO of Rodrock Homes, there’s no question: “We feel it.”  That’s a good thing, considering the types of homes his company builds. A pair of developments in south Overland Park—the city leading the metro area in permitting—feature homes starting at $400,000 and going up to $650,000. And they’re selling.

“That’s not a first-time-buyer market,” Rodrock says. “Normally, it’s the first-time buyer with lower-end house prices who leads us out of the recession, but for some reason, that’s not happening this time. That person who can afford a $450,000 or $500,000 home, who’s got a job, they’ve continued to buy.”

The company normally has a new-home inventory of 90, but let that number decline as low as 35 in anticipation of lower sales. “But they’re selling faster than I foresaw,” Rodrock says.  That could be the leading edge of a housing shortage in affluent Johnson County. “Right now, it takes about 2½ years to start and finish a development,” he said, and with 27,000 lots on the periphery coming into the residential marketplace, “that’s the real problem we’ll have.”

And it’s one that will contribute to higher labor costs. The labor pool right now, he says, “is non-existent. Everybody that was in construction that had a skill has moved out of the industry,” he said. So jobs are plentiful for Sheetrockers, concrete finishers, flat-workers and foundation workers “and we’re seeing a tremendous amount of Hispanic labor filling that void.”

Already, he says, the need for workers is adding $3–$4 an hour to laborer’s wages.  If those were union labor costs, the price of homes would soar, “and houses can only go so high before it stops the whole purchasing cycle.”