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Waiting for a Correction

supply challenges would help builders and buyers move forward on projects with confidence

Dave Fontaine Jr. says a ‘correction’ on cost and supply challenges would help builders and buyers move forward on projects with confidence.
Photo by Joe Santa Maria, Kill the Ball Media

Dave Fontaine Jr. hears talk of a recession that could affect the construction industry, but he prefers to use a different word: correction. After a couple years of soaring costs, he feels one is necessary, and coming.

“I think in the last two years, costs have risen over 20% each year. When you go back over the last 30 years, the average increase per year is 2% to 4%,” said Fontaine, CEO of Fontaine Brothers Inc. in Springfield. “It’s been very difficult for projects to absorb, and for clients to absorb. We’ve seen several projects — some we’ve been involved in, some we’ve watched from the outside — that have either stalled or been canceled because of cost challenges.

“We’re hopefully undergoing a correction. And I like to use that word, the idea being that we need to get back to a correct place. Sometimes [rising costs] are a necessary evil: things get overheated; COVID brought challenges with supply chains, labor, and transport that affected materials and pricing. But I think, frankly, construction costs are in need of a correction. When that happens organically, when we’re able to broaden the supply chain again, get things flowing … we’ll get back to a place where people know what the cost is to build, and move forward with confidence.”

That said, Fontaine noted, “it’s been a really good year; we’ve been busy across all the geographies we serve and all the different sectors as well.”

Bill Laplante, president of Laplante Construction Inc. in East Longmeadow, which specializes in home building and remodeling, had an equally strong report.

“The demand carried over from 2021; demand for remodeling was really high, and a lot of that was just people being home during the pandemic. They were able to work from home and wanted to make a nice office or put a bedroom suite in.”

“We had a fantastic 2022. It was probably one of our best years in the last 20 years,” he said, noting that some of that success was driven by expansion onto Cape Cod, but some was based on demand that carried over from 2021. “Some of it was pandemic-related, but we actually have a really strong outlook for 2023 with the jobs we have in the pipeline.”

He agreed, though, that supply and cost challenges have been discouraging.

“Some materials, things like plastic pipe and conduit, have increased five times the cost. It’s not as simple as a 8% or 9% increase here and there; for some materials, it’s completely off the charts. It makes it difficult to sign a contract and build a house, when you’re not going to be purchasing those materials for four months, not knowing where things are truly going to land. Obviously, once costs go up, you try to plan for the next house.

“The supply-chain issues have been brutal over the last couple years,” he went on. “It seems like it’s something different every week. You can’t get the plastic for the buckets for drywall cement. Then the next week, you can’t get runners for cabinet drawers. The next week, you can’t get a hinge. That’s been very, very difficult. Plus, a lot more planning goes into it, with the increased lead times for windows, doors, and appliances. We need to get selections a lot sooner than we would from our customers so we can get orders placed. With high-end appliances, we’re out 10 to 12 months.”

Fontaine echoed those sentiments. “Lead times are still challenging. There are some items getting better, which is good, and most items are not getting worse, which is also good. But we’re still seeing a lot of difficulty with items like electronic components, chips, boards, stuff like that. That’s affecting things like rooftop units, electrical equipment, and generators.

demand has been up for new homes

Bill Laplante says demand has been up for new homes and remodels alike, despite rising interest rates.

“For us, it’s not anything that’s stopped our projects from opening on time,” he added, “just something we’ve had to pay much more attention to, and we’ve become more creative with how we procure things and meet our schedules.”

 

Ups and Downs

Despite reports that some area contractors had a strong 2022, rising interest rates are expected to impact construction nationally in 2022. The 2023 Dodge Construction Outlook predicts U.S. construction starts will drop by 3% next year.

Meanwhile, the Architecture Billings Index, a forward-looking indicator for construction activity, dropped significantly in October after 20 months of positive growth. And the Associated Builders and Contractors backlog indicator, which tracks work construction firms have booked but haven’t yet begun, fell below its pre-pandemic reading from February 2020, largely due to a decline in the commercial and institutional category.

“The construction sector has already started to feel the impact of rising interest rates,” said Richard Branch, chief economist at Dodge. “The Federal Reserve’s ongoing battle with inflation has raised concerns that a recession is imminent in the new year. Regardless of the label, the economy is slated to significantly slow, unemployment will edge higher, and for parts of the construction sector, it will feel like a recession.”

Some sectors are expected to perform well, he added, including data-center construction, manufacturing starts — especially chip-fabrication plants and electric-vehicle battery plants — and publicly funded infrastructure projects. Meanwhile, the office, warehouse, hotel, and retail sectors are expected to lag. Branch also expects single-family starts to drop about 5% next year.

“There’s got to be more emphasis put on job training and vocational schools. The opportunities out there for tradespeople, and what a skilled tradesperson can make, are incredible.”

Laplante said remodeling, additions, renovations, and home improvements comprise 30% to 40% of his firm’s work, and the pandemic played a role there.

“Again, the demand carried over from 2021; demand for remodeling was really high, and a lot of that was just people being home during the pandemic. They were able to work from home and wanted to make a nice office or put a bedroom suite in. We saw that pretty much across the board. People weren’t traveling overseas; they were putting in poolhouses and sunrooms and outdoor kitchens, things like that.”

While he expects interest rates to slow activity in the home-building and remodeling industry, Laplante said the large size of some of his projects, which can take from six months to a year, tends to dampen any slowdown.

“Smaller remodelers are probably seeing more of an effect with interest rates slowing things down quicker than we will see it,” he said. “And then, of course, we’re working with a lot of customers who aren’t interest-rate-sensitive.”

He added that subcontractors may see a slowdown before builders because they don’t deal with the same project duration.

The Cape Cod expansion is a strategic move partly based on the fact that Laplante was already building there, and it’s also a fairly high-end market, where, as he noted, clients are more willing to weather higher interest rates. “So part of that was a hedge against the economy; you don’t see the deep swings in demand you would see in the Western Mass. market.”

the facade of the former Court Square Hotel

A worker from Fontaine Brothers works on the facade of the former Court Square Hotel.
Photo by Joe Santa Maria, Kill the Ball Media

Fontaine said his company, while also expanding its reach geographically, is taking on more housing work now that it’s starting to become a priority again. “We did a lot of it for a long time, and we’re seeing a lot more public housing, affordable housing, make its way back through the funding pipeline.”

His most notable current project in that realm is the ongoing transformation, with Winn Development, of the Court Square Hotel in Springfield into 71 units of market-rate housing, accompanied by retail on the ground floor.

Fontaine’s longtime presence in the education sector is also strong right now, with projects including the new DeBerry-Swan Elementary School in Springfield, an elementary school in Tyngsborough, a middle school in Walpole, a project at UMass Chan Medical School in Worcester, and the $240 million Doherty Memorial High School, the largest project in the city of Worcester’s history.

 

Help Wanted

After inflation and supply woes, the third challenge construction companies are dealing with remains a workforce crunch, which has affected many other sectors of the economy as well.

“The number of people going into the trades is way, way down,” Laplante said. “There’s got to be more emphasis put on job training and vocational schools. The opportunities out there for tradespeople, and what a skilled tradesperson can make, are incredible.”

To that end, he works directly with area vocational schools to cultivate talent, and often schools that aren’t vocational, per se, but have vocational programs. For example, an intern from Longmeadow High School will come on board soon, and Laplante hired another intern from that school last year.

“Through COVID, we’ve had people who have been borderline on retirement, and COVID pushed them to retire,” Fontaine said of one of the stress points in the construction workforce. “But we honestly haven’t had as significant labor challenges as some of our peers.”

That’s partly due to working with some of the large local unions, which can supply a more reliable workforce, he said. “But we’ve also put a lot of focus the last few years into workforce development, even before COVID. We actively go into the community and work with workforce programs, with community organizations, to bring people into the workforce.”

Those efforts are crucial, he added. “When I look at the next 20 to 30 years, that’s one of the biggest challenges, to be able to recruit people into the trades.”

Fontaine added that his company has been able to integrate a lot of technology into projects over the last few years, which has helped overcome challenges related to cost, lead times, and workforce. “We’re using technology to track lead times and inform other projects, so we avoid those ‘gotcha’ moments, and we’re using technology to coordinate mechanical systems and prefabricate them off-site, which helps with some of that labor and lead-time burden.”

In short, he said, “we’re trying to modernize an industry that’s by nature not modern, to the best extent possible. That’s been a big theme for us the last couple years.”

That said, the main theme across the industry in 2023 could be the impact of those rising interest rates finally coming to roost.

“Our planning process is so long, and the jobs we’re getting ready to start now are jobs that were planned four months ago, and when the financing is finally put together, we’re ready to get shovels in the ground. That’s a house that people ultimately will be moving into in the fall,” Laplante explained. “So, because of that, we see a little more of a lag in the drop in demand based on the interest rates, but it certainly is coming.”

Still, Dodge’s Branch believes any downturn in the construction industry will not be as dire as the Great Recession, which settled over the U.S. almost 15 years ago.

“The funds provided to the construction industry through the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act will counter the downturn, allowing the construction industry to tread water,” he said. “During the Great Recession, there was no place to find solace in construction activity — 2023 will be quite different.”

 

Joseph Bednar can be reached at [email protected]

Architecture Construction

Designs on Growth

As one local architect noted, we’re far enough away from the last recession to start worrying about the next one — and recessions tend to hit this sector particularly hard. Still, despite mixed signals in the long-term economic picture nationally, work remains steady locally, with municipalities, colleges, and businesses of all kinds continuing to invest in capital projects. Even if storm clouds do appear down the road, the 2019 outlook in architecture seems bright.

Curtis Edgin put it in simple terms when asked how 2019 is shaping up in the architecture sector.

“We’re busy; I can’t complain,” he told BusinessWest. Those five words sum up a strong outlook in an industry that tends to be a leading indicator for the economy as a whole — when things slow down, construction, finance, and other areas tend to follow — and is currently trending up, or at least holding steady.

“We’re far from the last recession — maybe far enough to worry about the next one,” said Edgin, a principal with Caolo & Bieniek Associates (CBA) in Chicopee. “But I don’t see that coming yet, looking at our workload.”

The American Institute of Architects (AIA) reports a similar outlook, with architecture firm billings nationally strengthening to a level not seen in the previous 12 months. Indicators of work in the pipeline, including inquiries into new projects and the value of new design contracts, also improved in January.

“The government shutdown affected architecture firms but doesn’t appear to have created a slowdown in the profession,” AIA Chief Economist Kermit Baker noted. “While AIA did hear from a few firms that were experiencing significant cash-flow issues due to the shutdown, the data suggests that the majority of firms had no long-term impact.”

Broken down by region, the Northeast is performing better than the West, but slightly trailing the South (which continues to rebuild from a rough 2018 hurricane season) and the Midwest. Nationally, billings softened slightly in February from the January pace, but remain strong in the big-picture sense, Baker said. “Overall, business conditions at architecture firms across the country have remained generally healthy.”

Curtis Edgin says specializing in a range of diverse niches is a plus for any firm

Curtis Edgin says specializing in a range of diverse niches is a plus for any firm, serving as a buffer against a downturn in any one area.

Jonathan Salvon, a principal with Kuhn Riddle Architects in Amherst, reports strong business as well, especially in the education realm, traditionally a strength for the firm, with projects for UMass and a historic-renovation conversion project for Elms College.

“Then there’s a mix of multi-family housing and commercial projects,” he told BusinessWest. “We’ve got a new office building for Way Finders going up on the old Peter Pan site in Springfield, which is our biggest commercial project at the moment. And there’s a 36-unit, multi-family housing project going up on University Drive in Amherst.”

Caolo & Bieniek, known for its wide range of public projects, from schools to fire and police stations, has expanded its base of private projects since merging with Reinhardt Associates in 2017.

“It’s been kind of a good synergy. We’ve blended our strengths and their strengths,” Edgin said, noting that one example is the recently completed Baystate Health & Wellness Center on the Longmeadow-East Longmeadow line, as Reinhardt has a solid history in medical office buildings.

“E-commerce has been growing at about three times the rate of traditional brick-and-mortar sales. The slowdown in housing hasn’t helped, as new residential development often spurs new retail construction activity. Instead, larger shares of investment in these facilities is going to the renovation of existing buildings.”

Other recent CBA projects recently started or well underway include a senior center in West Boylston, a police station in Williamstown, a public-safety complex in Lenox, a renovation of Chicopee’s public-safety facility, a pre-K to grade-8 school in Easthampton, and some work with UMass Amherst, Westfield State University, and other colleges.

“There’s a good mix of private and public, and we seem to be doing a fair amount of work with human-services agencies,” Edgin added, noting that the firm just did a project for Guidewire in Chicopee, and Sunshine Village in the city has also been a consistent client. “We seem to have a bit going in that sector right now. We’re busy, and it’s a good mix all around.”

Strong Pace, but Red Flags

The AIA suggests that growth in architecture should continue at least through 2020, but a number of emerging red flags suggest a cautious outlook.

Spending on non-residential buildings nationally is projected to grow by 4.4% this year, paced by healthy gains in the industrial and institutional building sectors, it notes. For 2020, growth is projected to slow to 2.4%, with essentially no increase in spending on commercial facilities, but gains in the 3% range in the industrial and institutional categories.

“Still,” Baker said, “there is growing concern inside and outside of the industry that a broader economic downturn may be materializing over the next 12 to 24 months.”

Nationally, growth in gross domestic product is estimated to be close to 3% in 2019, while the job market continues to be healthy, with more than 2.6 million net new payroll jobs added in 2018, an improvement over 2017’s figure of just under 2.2 million. In fact, the national unemployment rate was below 4% for most of 2018. Consumer-sentiment levels remained strong, and the nation’s factories also were busy, with industrial output achieving its strongest growth in almost a decade.

Jonathan Salvon says one of his firm’s three ‘legs,’ residential work, has been impacted by a slowdown in single-family construction

Jonathan Salvon says one of his firm’s three ‘legs,’ residential work, has been impacted by a slowdown in single-family construction over the past decade, but a rising portfolio of multi-family projects has picked up the slack.

However, there are several signals that point to an emerging slowdown in the broader economy, and therefore in the construction sector, Baker noted. These include declines in leading economic indicators, weakness in some key sectors of the economy, and softness in the markets of major U.S. trading partners. “These signals may be temporary responses to negative short-term conditions, but historically they have preceded a more widespread downturn.”

Meanwhile, since dropping sharply during the Great Recession, housing starts have had a very slow recovery, the AIA notes, and Salvon can attest to that reality locally. But Kuhn Riddle has adjusted in other ways.

“We’ve always been a stool with three legs,” he said. “One-third is work for various colleges, charter schools, prep schools, secondary schools, and even some day cares — we run the whole gamut in education. The second third is residential work; in the past, before the 2009 recession, that was often single-family residences. That market has never really come back, at least for us. But we’ve been lucky to develop a new market in multi-family projects.”

The third leg is a variety of commercial projects, including office buildings, restaurants, and bank renovations, to name a few, Salvon said.

“Hopefully we all stay busy. But we do know it goes in cycles; we’ve been through plenty of slower times and a lot of boom times. But we’ve been very blessed. We’re pretty busy and hope to stay that way.”

Nationally, Baker sees design work on the commercial front as a bit of a mixed bag at the moment.

“Business investments often reflect what corporate leaders feel is the growth potential for their companies. Investment nationally in new plants and equipment saw healthy growth in 2017 and through the first half of 2018, but slowed significantly beginning in the third quarter of last year,” he noted. “Given the recent trends in business-confidence scores, investment is unlikely to accelerate anytime soon. Business confidence fell sharply through 2018, with the fourth quarter showing the lowest levels in six years.”

In the Bay State, the picture is equally muddy. The Business Confidence Index issued monthly by Associated Industries of Massachusetts (AIM) reported a gain in February after dropping in January to its lowest level in more than two years.

“Employers remain generally optimistic about a state economy that continues to run at full-employment levels and a U.S. economy that is projected to grow by 2.2% this year,” said Raymond Torto, Chair of AIM’s Board of Economic Advisors and a lecturer at the Harvard Graduate School of Design. “At the same time, the erosion of confidence among Massachusetts manufacturers during the past 12 months raises some concern about the long-term sustainability of the recovery.”

On a sector-by-sector basis, Baker reported, design work for retail facilities continues to suffer from the growth on online shopping.

“E-commerce has been growing at about three times the rate of traditional brick-and-mortar sales. The slowdown in housing hasn’t helped, as new residential development often spurs new retail construction activity,” he noted. “Instead, larger shares of investment in these facilities is going to the renovation of existing buildings.”

On the other hand, office projects represent the strongest commercial sector in construction right now, with 5% growth projected for this year and 1% in 2020. “This sector has benefited from strong job growth and the apparent bottoming out of the years-long decline in office space per employee,” Baker said. “Much of the increase has come from the booming technology sector, so the outlook is dependent on continued growth in this industry sector.”

Meanwhile, eds and meds — or education and healthcare, two pillars of the Western Mass. economy — represent very healthy sectors nationally for architects and general contractors. AIA projects 5.5% in the education sector this year and an additional 4% in 2020, and 4% growth in healthcare in 2019 followed by 3.6% in 2020. 

“We’re pretty diversified and active in a lot of different environments,” Edgin said. “It’s not just schools, not just police stations, not just fire stations, but a little bit of everything.” He cited the recent renovation of Polish National Credit Union’s Front Street branch in Chicopee, as well as a new Arrha Credit Union branch in West Springfield and a project with the Boys and Girls Club of West Springfield. “A lot of things take a while, so it’s that advance planning that keeps you busy a year or two from now.”

Leading Indicator

Baker reported that business conditions at U.S. architecture firms in 2018, as measured by AIA’s Architecture Billings Index (ABI), were essentially unchanged from 2017.

“Since the ABI has been shown to lead construction spending by an average of nine to 12 months, this would suggest that the growth in spending on non-residential buildings in 2019 should be close to the growth rate of 2018,” he noted. “Additionally, new design contracts coming into architecture firms grew at a healthy pace in 2018, underscoring the robust level of backlogs currently enjoyed by most firms.”

Meanwhile, Dodge Data & Analytics recently released its 2019 Dodge Construction Outlook, which predicted that total U.S. construction starts for 2019 will be $808 billion, staying essentially even with the $807 billion estimated for 2018.

“There are, of course, mounting headwinds affecting construction, namely rising interest rates and higher material costs, but for now these have been balanced by the stronger growth for the U.S. economy, some easing of bank lending standards, still-healthy market fundamentals for commercial real estate, and greater state financing for school construction and enhanced federal funding for public works,” said Robert Murray, chief economist for Dodge Data & Analytics.

Locally, both architects and builders are maintaining the same sort of cautious optimism, at least in the short term.

“Right now, it’s strong,” Edgin said. “We’ve increased our staffing.”

Finding talented staff remains a challenge, he said, because strong growth among architecture firms in general means stiff competition, and Greater Springfield isn’t always a top destination for young professionals in the field compared to, say, Boston or New York, where pay scales are higher (but, of course, so is the cost of living).

Salvon understands that reality as well, but said Kuhn Riddle has benefited from its location in downtown Amherst, where it has easy access to the UMass architecture program. “We’ve been a little spoiled — we’ve been privileged to get some employees out of that program over the last decade or so, and we’ve tried to make a nice work environment, so people been staying here.”

All things considered, he told BusinessWest, the outlook seems strong in architecture locally, and others agree.

“We’ve been able to build some good staff and a good team, so we’re happy about that,” Edgin said. “Hopefully we all stay busy. But we do know it goes in cycles; we’ve been through plenty of slower times and a lot of boom times. But we’ve been very blessed. We’re pretty busy and hope to stay that way.”

Joseph Bednar can be reached at [email protected]

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