Contractors Keen on Commercial

Sam Hollis saw his company’s revenue jump 49 percent last year.

The owner of Milestone Construction Co. in Springdale doesn’t expect 2008 revenue to perform that well but he’s counting on an increase.

“It will definitely be slower than it has been in years past,” Hollis said. “The declining residential market does have an indirect effect on the market but commercial construction will continue to do OK this year.”

Hollis, whose company made $12.8 million in ’07 revenue, echoed other contractors and economists who are still bullish on commercial work.

Contractors and developers never like to see slow years but, Hollis said, a slight slowdown will allow the industry to avoid the problems experienced by the residential construction market.

Many contractors and economists said outside influences will pull the strings in the construction industry and they pointed to commercial lending practices and vacancy rates as the main forces controlling the Northwest Arkansas construction industry in 2008.

During 2007 the combined total number of commercial building permits in Bentonville, Fayetteville, Rogers and Springdale was up 4.5 percent (from 287 to 300), though the total value was down slightly.

There were 318 permits issued in 2005 and their total value ($598.1 million) was almost twice as much as 2007.

In January there were 16 building permits purchased for commercial remodel and tenant in-fill work in those four towns. Their total value was $974,000.

A Feb. 6 press release from the Associated Builders & Contractors Association stated that the national value of residential construction spending was down 18.3 percent from 2006, while nonresidential construction was up 18.3 percent from the previous year.

“The factors are almost exclusively outside the control of the construction industry right now,” said Kermit Baker, chief economist for the American Institute of Architects.

“The fundamentals of the industry are very good but my sense is that some of the these projects that looked nice a few months ago may have been taken off the table because economic and lending conditions may have caused developers to pause or re-think their plans.”

Anticipating a continued weak economy and weak consumer spending, Baker and a panel of economists at the AIA have predicted a 0.7 percent increase over 2007’s nonresidential construction activity nationwide.

That’s not much, but at least its’s positive.

Available Space

Nearly 1 million SF of new commercial space was added to the market last year.

According to fourth quarter data from Streetsmart Data Services Inc. there is a seven-year supply of professional office space and three years of retail space in the Northwest Arkansas market.

Vacancy rates at the end of the third quarter indicate demand has not kept up with supply.

Third quarter data from the Arvest Bank-commissioned Skyline Report states that all sub-sectors of the commercial market recorded more than 5 million SF of available commercial space and double-digit vacancy rates in all commercial sub-markets.

Warehouse and office/warehouse had 21.4 percent and 21.5 percent vacancy rates, respectively. Office space was 20.7 percent vacant.

Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas, the entity that researches the Skyline Report, said strong commercial lending and a continued influx of new businesses to the market will help Northwest Arkansas’ commercial construction industry experience another year of growth.

Jeff Collins, economist and partner with Streetsmart Data Services, said the more than 5 million SF of available commercial space has caused lease rates to inch downward in many commercial sub-sectors.

Lower lease rates have made finishing out existing commercial space an attractive alternative to building a new facility for new end-users entering the market.

Bob Clinard, owner of Clinard Construction Management Inc. in Bentonville, said he anticipates a strong year for tenant finish-out work and said the jobs can only help the construction industry.

Clinard’s company had 2007 revenue of $16.5 million.

Money Matters

Commercial lending will play a major role in the number and type of projects available for bid in 2008.

Area developers said they have already noticed lending institutions tightening the reins on the commercial lending process.

Mark Ryan, executive vice president and loan manager with Arvest Bank-Rogers, said the types of projects receiving the go-ahead are changing, but the number of projects receiving funding is not declining.

“We are still seeing a pretty steady demand for commercial loans and we really aren’t anticipating any significant slowdown over the course of the year,” Ryan said. “I think the developers in general have done a good job of making the needed adjustments.”

Ryan said the slower market has not caused Arvest to dramatically change the way it is underwriting commercial loans, but lenders are taking a second look at each project’s feasibility before the first draw is allowed.

Of the 27 banks doing business in Benton and Washington counties, there are eight community banks that are charted out of and do the majority of their business within those counties.

A look at those banks’ commercial lending from Sept. 30, 2006 through Sept. 30, 2007 shows an increase of 22.2 percent in value, from $483.5 million to $591.2 million. Those same banks had an increase of 87.9 percent in their construction lending from 2005 to 2006.

While that group is not comprehensive and doesn’t speak to transient lending or refinancing, it is indicative of the market.

The days of walking into the bank with a project and walking out of the bank with a loan are long gone, said Tommy Van Zandt, managing partner of Sage Partner Real Estate Solutions in Fayetteville.

“You need to have a very well thought out building plan and market study to secure financing right now,” Van Zandt said. “Lenders aren’t just going to give you money because you bought some land and want to build a building. The lending criteria have tightened quite a bit at a lot of banks and projects aren’t getting the OK like they used to.”

The end of the speculative building market means new dedication to finding and developing niche markets and concepts.

“I know there are still a lot of areas seeing growth,” Clinard said. “Medical and school construction is still very strong and retail, in the right locations, will continue to go up.

“Restaurant construction will slow down and there are already plenty of hotels under construction in the area so I don’t expect a lot more of those.”

Ramsay Ball with Colliers International in Bentonville said there are still many end users in the market that are ready and looking to build new facilities.

And building for an end-user, Van Zandt said, helps ensure funding, which makes the trend attractive for developers and contractors.

Staying the Course

Clinard knows there is little he can do to control the number of projects coming to the market.

“All I can do is make sure we continue to deliver quality work and let our work and reputation speak for itself,” Clinard said. “We continue to get calls from word-of-mouth referrals and in times like this that is all you can ask for. As long as we continue to deliver a quality product and do our best to save people money in the process I think we’ll be just fine.”

Projects left over from 2007 will continue to occupy much of Hollis’ time in 2008. Public construction will also continue to provide a steady stream of projects for contractors.