Subcontractors See Shift in Market

In the 18 years that he’s been working in Northwest Arkansas, Bob Killion, executive vice president of Marrs Electric, said he’s only seen a significant downturn in the commercial construction market during the past six months.

“That’s not bad,” he said. “That shows you how resilient the area is.”

Since he started with the company in 1990, Killion said, Marrs has landed one project after another.

Then the whole market seemed to slow down for everybody, he said.

“There was a lot going on and then all of a sudden people just quit building,” he said. “All of a sudden the market got tight, people weren’t spending any money — they were waiting for the market to correct itself.”

While building is down, many of the area’s largest subcontractors from electrical construction service providers to glass installers said the downturn hasn’t had a significant impact on their revenue.

John Garrett Whiteside, client services and assistant project manager for RGC Glass of Johnson, said the commercial glass company has yet to experience the effects of the downturn.

The company, which had revenue of $5.5 million in 2007, only saw a 4 percent decline from 2006 and hasn’t had to deal with the layoffs that have plagued some subcontractors.

“It really has been good to us. We’re very thankful, not only for our people, but our clients and the general contractors that put faith in us during an economic crunch,” Whiteside said. “It seems like we have the same amount of business, but the projects are different.”

According to the Arvest Bank commissioned Skyline Report, the market is starting to correct itself. In the office market, there was positive net absorption of 21,854 SF during the second quarter, while in the second quarter of 2007, about 270,000 SF of space became available for lease.

Kathy Deck, director of the Center for Business & Economic Research, which generated the Skyline report, said commercial construction saw a dramatic decrease in 2007 and has continued the trend through the second quarter of 2008.

From March to May of 2008, which Deck said is a good indicator of construction activity for the year because it’s the beginning of the construction season, a total of $8.88 million in commercial building permits were issued for Springdale, Fayetteville, Bentonville and Rogers, compared to $50.73 million for the same months in 2007 and $80.72 million in 2006.

Commercial building permits issued from March to May of 2008 was 17.4 percent of the total value of building permits issued for the same period of 2007.

Deck said a couple of factors have contributed to the slump.

“One is that banks have tightened up on lending standards enormously as the credit crunch has come into full effect, which means it’s much more difficult than it was before to get a project funded,” she said. “Particularly, when you look at a market like Northwest Arkansas, where there is a great deal of available space, it’s a much tougher case to make for new projects.”

Also, Deck said, population and employment growth have leveled off, contributing to the vacancy rates and the declining need for new construction.

Public Construction

Large projects have helped insulate companies from the downturn in the market. Projects like the new Mercy Health Systems building in Rogers, which gave Marrs Electric a three-year, $12.4 million contract, keep subcontractors in business.

Marrs, which reported revenue of $8.4 million in 2007, specializes in providing electrical construction services for health care facilities, something that has kept the company busy despite the construction lull.

“As the private sector began to slow, even nationally there was the sense that public sector would hold up the construction market for some time because of infrastructure needs,” Deck said.

Whiteside said the timing of the public sector isn’t as dependent on the economy as the private sector is.

Institutions are going to build or expand when the need arises, he said.

For RGC Glass, the type of work has shifted from large office buildings to public institutions.

When the construction boom hit in 2005, the company was installing glass and aluminum storefronts for a lot of new office buildings, Whiteside said.

Now builders are hesitant to start new office buildings unless they have a significant amount of the space leased ahead of time.

“Because of the economic climate we’re in, there’s very little speculative space being built,” Deck said.

As a result of an excess of available space, she said, there is a high vacancy rate and therefore, much less construction going on.

According to the Skyline Report, 253,716 SF of competitive commercial property were added to the market in the second quarter of 2008. About 115,200 SF of that space were new warehouse space, 71,400 was new office space, 51,500 was new office/warehouse and about 15,000 was new retail space.

There is now a total of 1.7 million SF available in the office submarket and a vacancy rate of 19.7 percent, the report said.

Fayetteville and Rogers saw the biggest increase in vacant office space. In Fayetteville, available office space increased to 440,601 SF second quarter of 2008 from 273,685 SF in the second quarter of 2007.

Available space in Rogers increased from 305,730 SF in the second quarter of 2007 to 396,669 SF in the second quarter of 2008.

The most available space is in Bentonville, with 780,416 SF in the second quarter of 2008, a decline from the 822,831 SF in the second quarter of 2007.

Market Changes

According to the Northwest Arkansas Business Journal’s annual largest subcontractors list, electrical subcontractors saw a 19 percent increase in revenue in 2007, up to $115 million from $97 million in 2006.

The area’s largest mechanical subcontractors also saw an increase in revenue in 2007, with $77.2 million, a 32 percent increase from the 2006 total of $58.3 million.

The estimated revenue for specialty subcontractors is about $100 million for 2007.

The number of employees for electrical subcontractors declined in 2007 from 475 to 454.

Mechanical subcontractors also saw a drop, from 664 employees in 2006 to 629 in 2007.

The number of employees working for specialty subcontractors fell from 1,070 in 2006 to about 745 in 2007.

Niche Market

As the focus shifts to institutional projects, RGC is finding projects all over the country, installing frameless, open-air window systems in suites and skyboxes in college football stadiums, including Jordan-Hare Stadium at Auburn University, the Vaught-Hemingway Stadium at the University of Mississippi, and the Memorial Stadium at Death Valley at Clemson University.

“We have a niche,” Whiteside said. “Those with a niche seem to fair better than the general contractors.”

The company gets a lot of projects based on its reputation, earned during the construction boom in Northwest Arkansas.

“When the boom was going on, a lot of large contractors came into the market that are on the national scene,” he said. “Those relationships with large, national scale, successful projects helped us.”