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Building Costs on the Rise as Labor Shortages Mount

Myriad changes are taking place within the retail contracting industry. Firms are struggling to handle the pressures placed on them by the combination of a heavy workload, labor and material shortages, rising construction costs, and changes in what retail clients and consumers want and expect in a shopping experience.

The ability to deliver large volumes of product is critical, so it isn't surprising that the larger firms held their position in the 1999 rankings with only minor changes from last year. San Francisco-based Fisher Development Inc. retained the top spot for interior space construction with almost 22 million sq. ft. completed during the past five years.

In SCW's shell space category, Chattanooga, Tenn.-based EMJ Corp. surpassed The Whiting-Turner Contracting Co. of Baltimore for the top spot this year with more than 20.4 million sq. ft. of construction completed in the past five years.

The current market couldn't be much better for retail contractors with regard to the amount of work. A healthy economy and relatively low interest rates are providing the incentive and the capital for real estate developers to build new centers and redevelop older ones, according to comments contained in the survey.

"Interest rates and real estate issues will continue to be factors in bringing new projects online," says Ronald Johnson, vice president with Chattanooga, Tenn.-based Hudson Construction Co. Rates on 10-year Treasuries have increased by more than 150 basis points since October.

Big-box retailers such as Wal-Mart and Home Depot are constructing larger store concepts and vacating the smaller spaces that will be occupied by new users. These moves are driving business in both new construction and retro-fit projects.

"We see repositioning as a strong source of work for us for the next several years," says Adrien J. Jacob, construction manager with Richmond, Va.-based EDC. "This will continue as long as shifts in demographics continue."

A double-edged sword The great number of projects under way has created shortages in skilled labor and materials in multiple markets. "The busy market is pressing the limits of the skilled work force and leading to material delivery problems," states Stephen Klepper, vice president of business development forHolland, Ohio-based Bostleman Corp.

These shortages and delays are having an effect in several key areas. A lack of labor or material "tends to drive construction costs up across the country," says Johnson. "Shortages of craftsmen will also affect quality of work and completion schedules."

"What was once considered a 'normal' schedule may be difficult to achieve, particularly in outlying areas over an hour from urban centers," says Paul Cunha, vice president of business development with Citrus, Calif.-based S.D. Deacon Corp.

Contractors have no control over delays that result from material and labor shortages. However, one firm is attempting to make its clients' time more productive by reducing their travel time to and from the construction site.

Lyle Parks Jr. Inc., an Anaheim, Calif.-based contractor, uses state-of-the-art video conferencing technology that allows clients to talk with managers on-site and view the site either live or on videotape only minutes old. The system is installed in a construction trailer.

"It's just like the client was there," says Jim Carlson, vice president of marketing for the firm. The equipment, which cost $20,000, includes two 32-inch monitors, the video conferencing camera, a standard VCR and a tabletop document camera that can be angled to view papers.

The camera can provide detailed views of the site within 200 yards of the trailer, or a hand-held camera can be used to take video of another portion of the site that's out of view.

Carlson says using the technology cuts a client's travel time in half and is proving very effective in attracting new business for the firm.

"Prices are decreasing and the technical capabilities are increasing, so we think video conferencing will continue to be an effective tool in the future," says Carlson.

Pressing issues The volume of business in the contracting industry doesn't show any immediate signs of decline. The major big-box chains continue to expand at rapid rates. The entertainment center as a stand-alone entity and as a component to be added to existing retail properties is still in a growth mode.

And the purchase and repositioning of regional malls continues strong as REITs, among other buyers, strive to upgrade and reposition their new properties.

"Shopping centers, malls and traditional retailers all are affected by the entertainment trend," says Dana Walters, director of national marketing for Pittsburgh-based Flynn Construction Inc. "The centers and malls are now being anchored by entertainment, theaters, family fun centers and restaurants. Traditional retailers are using 'interactive retail' to incorporate themes and entertainment into the shopping experience."

This interactive approach to retail is placing more demands on contractors. Interactive displays such as climbing walls, fish tanks and streams, as well as sophisticated sound systems to attract younger consumers, requires specialization on the part of contracting firms.

"The diversity of retail venues continues to expand," says Ronald M. Martinez, president of Sedona, Ariz.-based Shrader & Martinez Construction Inc. "Aquariums, museums, airports, zoos, cultural parks, all of these create new challenges in retail and construction strategies."

While current challenges center on managing busy construction schedules, retail contractors do express concern over dark clouds on the horizon.

If the economy were to slow, construction demand would stall. Consolidation, particularly among grocery store chains, could limit expansion activity. Finally, the impact of E-commerce and the speed with which Internet shopping grows could reduce shopping center sales.

In the meantime, retail contractors are trying to maintain current business relationships and capture as much new business as their resources will permit.

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