Will the boom continue?

Since the great economic expansion began in 1992, commercial real estate has seemingly known no bounds. The growth has been practically limitless — one look at any major metropolitan skyline will tell you that.

Without a doubt, one of the primary beneficiaries of this growth has been the construction industry. Business has been brisk, but it has often come at a steep price. As with so many other industries during this period, labor has been in peak demand — for roofing, electrical and other building trades. Labor and material costs also have soared.

While many industries have used technology to help streamline their overhead (i.e. body count), in the construction business, technology has actually added jobs to the payroll.

The biggest question today is, “Will the good times last?” According to a recent Federal Reserve quarterly survey of 60 large banks and 24 branches and agencies of foreign banks, 40% of domestic banks tightened their standards on commercial real estate loans from October to December 2000. A less favorable economic outlook was the most important reason for tightening terms on the loans, according to the Fed.

But if you look at the raw body count for workers employed in the construction industry, the U.S. Department of Labor reports that total construction employment grew 42.6% from 1992 to 1999, from 4.5 million to 6.4 million. The Labor Department also forecasts that total construction employment will grow by nearly 1 million by 2008.

The industry itself is huge. According to the U.S. Commerce Department, there were almost 667,000 construction companies in the United States in 1997 — 197,091 general contractors; 37,701 heavy construction or highway contractors; and 431,877 specialty trade contractors. And most of the firms tended to be small — the majority employing less than 10 workers, so this is a fragmented industry.

One obvious spillover of the economic good times has been the rising cost of new construction. The combination of higher wages, new technology and power demands from owners and tenants is pushing up total construction costs.

A tech break-out

Looking back, it was bound to happen. The construction industry, long the domain of hard hats and cranes, is finding a way to build buildings of concrete and steel using high technology. Now, you're likely to see row after row of computers running the latest Computer-Aided Design (CAD) software, aimed at building a better mousetrap.

“Technology is playing a much greater role in the day-to-day operations in-house and in the field,” confirmed Michael Bolen, CEO of St. Louis-based McCarthy Building Cos.

“Due to the limited labor force, we are now aggressively pursuing other avenues to improve productivity,” added Bolen. “At the staff level, this means project Web sites, intranets and advanced project management software. At the trade level, we are continually pushing the envelope to develop new techniques to enhance efficiencies.”

Bolen added that McCarthy recently developed a unique concrete placing and finishing system on a 10,242-car parking structure that was completed in Anaheim, Calif.

“Although there was an upfront cost for developing this technique, this enabled us to reduce the number of man-hours required for the work,” he said. “In addition, we are going to be reusing this technology on future parking structure projects.”

With the changing face of technology, advancements in the telecommunications field have spawned a surge in the construction of smart buildings. “These state-of-the-art facilities, ranging from telecom hotels to corporate headquarters, encompass electrical and telecommunications requirements never before seen in this industry,” said Peter Marchetto, president of the Northeast region for New York's Bovis Lend Lease. “Today's firms need to offer expertise in not only classic construction techniques, but also in the latest advancements with specialties such as fiber optics and high-tech communications equipment,” he said.

Lend Lease Corp. acquired the Bovis Group in 1999, creating Bovis Lend Lease, one of the world's leading companies in the project management and construction services industry. Today, the firm employs 7,000 workers in 93 offices in 38 countries. Recent projects include Time Warner Center and Trump World Tower, both in New York, the Sydney (Australia) International Airport terminal, and the 90,000-seat Wembley Stadium now under construction in England.

One unique standard that has been adopted is the advent of project Web sites. “Today's clients and stakeholders are more technologically advanced than ever before,” said Marchetto. “In turn, the need to do things bigger, better and faster is a top priority. Our ability to offer the use of Web sites for each of our construction projects will contribute value to the collaborative aspect of the business.”

A need for speed

More than anything else, today's tenants are demanding speed, said Bolen. “This demand for shorter construction schedules is having a far-reaching effect on the building industry,” he said. “We have seen the demand change from aggressive schedules to fast-track schedules, to what I term ‘hyper-track’ schedules. In many cases, contractors are asked to join the building team earlier in the development process.”

Other owners are looking to the design/build delivery method to simplify the process. Design/build offers a single point of administrative contact instead of separate contacts for design and construction. This process makes it easier to coordinate the deliverables on the design side with the schedule needs of the field people.

The use of “green” [environmentally friendly] materials in buildings also is becoming popular, but presents a challenge for the contractor, according to Bolen. “Unusual materials require in-depth investigation to locate sources, longer lead times for ordering and detailed planning for integrating with conventional materials. Balancing the goal of ‘building green’ with other goals of cost, speed and quality further complicates the process,”

Still, tenants are demanding more today than ever before. “Perhaps one of the biggest trends in the construction field today is the complexity of tenant demands, particularly in mixed-use projects, as well as the need for more technologically advanced buildings,” said Marchetto.

Tenant demands have increasingly become more complicated in mixed-use projects due in large part to the variety of income streams surrounding any one particular project, as well as the varying time frames during which each of the various components are required to come on line, he added.

Marchetto cited the new Time Warner Center in New York, which ultimately will include a combination of office, retail, hospitality and entertainment spaces. “Each of these areas has varying clients, which in turn have varying delivery dates. As a construction manager, Bovis Lend Lease must ensure that all of the individual stakeholders receive the same level of service and that each of their individual goals and expectations are met,” he noted.

And that's only one of many challenges. There is also the challenge of allocation issues to each one of the development entities. In a mixed-use development such as Time Warner Center, the various operating entities or users often debate the proper allocation of materials.

New alliances take hold

With more work than they know what to do with, many of the largest firms have bought out their competitors, capitalizing on their size differential. Still others are forming strategic partnerships (consortiums) to leverage their collective power.

Nowhere is this more prevalent than overseas. Last year, five of Great Britain's leading construction and engineering companies formed Arrideo, a joint-venture company that creates a business-to-business exchange serving the entire U.K. construction and engineering industry.

Arrideo is a joint venture between AMEC, Balfour Beatty, Bovis Lend Lease, Kvaerner, John Laing and AECventure. The Arrideo exchange will operate as an independently managed business and will be open to all organizations working within the construction and engineering market and related sectors.

AECventure is a new exchange that boasts it will revolutionize the entire architectural, engineering and construction industry by linking global and regional portals in an innovative business model. The initial partners are AMEC, Bovis Lend Lease, Hochtief and Turner and Skanska. Combined, the partners manage billions of dollars in construction projects around the world each year, and discussions are already under way with important global and regional partners to join the venture.

This unique business model is the first of its kind in this industry, which is the world's largest in terms of revenue, $3.3 trillion (U.S.) annually. It employs almost 15% of the global workforce and represents 10% of world GDP. AECventure's goal is to improve the efficiency and effectiveness of the entire industry by creating a value foundation for owners, architects and engineers, general contractors and other construction industry groups through real-time information exchange and online collaboration.

Changing role of the firm

One of the more interesting developments in the construction business is the popularization of the “design-build” process, where different construction disciplines — contractors, architects and engineers — work together more closely to complete projects.

The Design-Build Institute of America, a non-profit organization founded in 1993 in Washington, D.C., advocates the seamless integration of architecture/engineering and construction services under a single contract, thereby reintegrating the roles of designer and constructor.

Overall, the use of design-build has grown from 5% of total U.S. construction in 1985 to 33% in 1999, and is projected to surpass low-bid construction by 2005, according to the Institute.

“Except in select markets such as healthcare, historically a construction company was only called upon once the project was designed and permitted,” said Bolen. “In contrast to this traditional role, contractors now are consistently playing an integral role much earlier in the building process for a variety of clients and building types.”

According to Marchetto, the role of today's construction manager/contractor has changed significantly in recent years. “Often at the conceptual level, clients ask of us a commitment to ensure that the developer assumptions ‘pencil out.’ This involves reviewing the program in its infancy, reviewing the speculative design and any available documents, and analyzing the budget.”

Costs are still a big concern

Every project is a delicate balancing act, but cost overruns are never good news to the project client.

“The three basic elements of every construction project are schedule, quality and cost,” said Bolen. “The challenge is to balance the need for speed and quality that is appropriate for the project within the budget parameters.”

Early coordination of schedule and quality issues can assist in the prevention of cost overruns. With the contractors' involvement in the design phase becoming more common, they now have the ability to provide value-engineering assistance, construction reviews and estimating services while the design is still in flux.

“We place a large emphasis on making sure we are provided with a true scope of the project that can be translated into measurable quantities,” said Marchetto. “In our experience, if a mistake occurs, it's usually a result of a missed or undervalued scope item.”

A team environment involving the client/owner, construction manager/contractor and architect/engineer can foster the flow of information and can minimize or even eliminate the possibility of problems before they occur.

Don't go changin' orders

The need for speedy work has forced more construction firms to monitor the pace of changes to their projects, which can often be costly once the work has reached a certain point.

“As the demand for speed on construction projects increases, change-orders are becoming more of a concern,” said Bolen. “Today, half of the project already may be in the air when you make this decision. As a result, it is more expensive and disruptive to make the change.”

Others acknowledge that changes are just an inevitable part of the business. “I wouldn't say that change-orders are any more or less a problem today; they are just more a part of the business,” said Marchetto. “We understand that developers may have to reinvent their project midstream to respond to a changed market condition.”

Bringing architects in-house

Obviously, if the building trades are busy, the people designing those buildings are equally up to their ears in work.

“As contractors become more involved in the planning and design management phase, they are finding a need for having in-house architectural expertise,” said Bolen. “Having this design capability enables the contractor to have someone acting as facilitator to translate the information coming over from the design team. This, however, does not necessarily extend into bringing the entire design function in-house.”

The same is true at Bovis Lend Lease. “We definitely have more architects with the firm than ever before,” said Marchetto. “I think that architects within the firm will have an increased value going forward as we as an industry embark on more design/build.”

Integration and efficiency do not look to be going out of style any time soon, and today, a whole new group of companies has formed to bring many of the traditional construction activities online to the Internet world.

But as with any industry, the problem with technology is that it's a two-edged sword. With developers and their tenants demanding more technologically advanced properties, a shortage of skilled technology workers is slowing the commercial construction industry to a crawl in some locales.

That's where the “e-companies” are now stepping in. Take e-Builder — founded in 1995 and based in Boca Raton, Fla. Its suite of products streamlines the exchange of information among construction professionals throughout the project life cycle. As a result, quality, cost management and construction timelines are significantly improved.

“The three basic elements of every construction project are schedule, quality and cost. The challenge is to balance the need for speed and quality that is appropriate for the project within the budget parameters.”
— Michael Bolen McCarthy Building Cos.

The dot-com offers an Internet-based set of communication and collaborative tools that allow for an instantaneous exchange of information through a secure environment among construction project participants, while also providing a detailed record of construction.

Its Constructor CAM is a Web camera that can either take still shots of a project site or stream a live feed, allowing contractors to review multiple sites from the comfort of their own offices, according to Jonathan Antevy, e-Builder's co-founder and CEO.

San Francisco-based Buzzsaw.com is attempting to create an online standard for the entire building design and construction industry. Already it has reached a milestone of 20,000 projects since the launch of its site nearly one year ago. With Buzzsaw.com's suite of collaboration and e-business, construction professionals are able to manage the lifespan of a project via the Web.

Is it enough to sustain the firm as an ongoing dot-com? The jury's still out on that one, but late last year Buzzsaw.com launched its new Orange Pages directories, a collection of more than 850,000 building and construction professionals.

The Orange Pages directories combine data from Buzzsaw.com listings, CMD Group's ProFile directory and The Blue Book of Building and Construction, to create a single resource that can be used by everyone in the construction industry to quickly locate qualified professionals.

Together, the directories provide detailed listings of specialty contractors, material suppliers, building product manufacturers, architects, general contractors, and reprographers that can be searched by work type or location.

BidCom Inc., also based in San Francisco, helps companies manage risk, improve profitability and complete building projects on time, according to company officials. Bidcom's suite of services is delivered through a comprehensive, integrated e-business environment that allows building industry professionals to communicate and collaborate, manage business processes, conduct e-commerce and access valuable industry content.

These days, it's pretty obvious that the rough-and-tumble construction industry is moving in lock-step with the same changes that are facing the commercial real estate business in general. It's all about finding the best people to use new technologies to deliver products to the market.

Ben Johnson is an Atlanta-based writer.

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