Commercial construction poised for recovery

While most American industries face challenges in recovering from the COVID-19 pandemic, commercial construction in Northern Colorado appears poised to come back quickly, said industry and lending experts.

“There’s going to be a flood of work; right now is the calm before the storm,” said Jeff Laird the senior vice president and team lead for the Sunflower Bank Construction Trades Group, headquartered in Broomfield. “We’re primarily preparing — them (the general contractors) and ourselves — for when those floodgates open. We’re telling them not to take on too much cheap work now.”

Laird said that while the second quarter of this year may remain slow, he expects that commercial construction will begin to rock in the second half of the year. In the meantime, he said, contractors still face challenges in material costs, tight margins, hot competition for existing work and ambiguous timelines in the bidding process.

Other than that, “it’s unlimited optimism,” said Laird’s associate Marc Hendrikson, who also works in the Construction Trades Group.

That enthusiasm was mirrored by Michael Gifford, president of the Associated General Contractors of Colorado. He pointed out that an index of architectural work billings being processed recently took a big jump.

“Architects are being hired and developers are looking to pull the trigger,” Gifford said. “Residential construction is up a bunch, commercial construction is up in Fort Collins and Colorado Springs.”

Commercial construction was not without difficulties during the pandemic, but the construction industry as a whole was considered an essential industry, with outdoor work deemed less risky. The construction industry as a whole stayed strong in Colorado, especially in the residential arena where many of the skilled trade people remained employed.

Gifford said the downturn during the pandemic accounted for about a 20% drop in building, but that was quick and far less devastating than a 40% drop during the Great Recession beginning in 2008. For most of the trade partners, or subcontractors, many are still finishing work begun by general contractors before the pandemic.

Gifford said the major weaknesses are hotel, hospitality and retail construction, but office construction will be mixed and industrial construction looks strong. Adding a bit of a kick is an expected jump in K-12 school construction, which has been delayed partially due to last year’s lack of state funding, $100 million of which has been restored.

At Centennial Lending in Firestone, executive vice president Kirk Wiebusch said the fears that general contractors had early in the pandemic had largely eased by mid-summer of last year. He said some contractors had approached the bank for forbearance — in financial terms that means renegotiating loan payments in lieu of delinquency — early on, but most soon found it was not necessary.

“Those contractors are busy.  Subs are busy. Much of the work is in residential, but you still see cranes out there,” Wiebusch said.

“Our portfolio is very sound. There’s no delinquency in the portfolio,” he said. “Rates are very favorable, and will continue to be for the next 12 to 24 months.”

On the banking side, lenders in general agreed the sound base of Colorado’s economy helped weather the pandemic. While there may not have been as many large investments in commercial construction, many smaller businesses were still in expansion mode during the pandemic, said Shawn Osthoff, president of the Bank of Colorado headquartered in Fort Collins.

“We’re seeing a lot of commercial owner-occupied industrial. Not as much on the retail front investment,” Osthoff said. “We work with a lot of small-business owners in industrial and medical office building lending. I think a lot of those businesses are doing well and finding ways to expand.

“We’re excited in a general way with what’s happening, and the good underlying economy that’s weathered this,” he said.

But Osthoff and others interviewed noted the seriousness of materials supplies, especially materials coming from overseas where the pandemic recovery may be much slower. The skilled trade situation is also a continuing concern here in Colorado, as well.

“Supply chain disruptions and major material cost increases are widespread,” said Sunflower’s Construction Trade Group in a written statement. “For example, today PVC is now almost as expensive as copper due to resin shortages. China, Mexico, and the US can’t keep up on multiple fronts for raw or ‘ready’ materials.”

Laird said there are still pitfalls for many general contractors that are sort of a hangover from the pandemic, mostly revolving around the year spent in survival mode. He said that projects that are ready to build often see large numbers of bids, as both general contractors and subcontractors are still uncertain about work availability.

Those growing bid lists have driven down the margins that allow general contractors to bring in a profit, but Gifford noted that many of the general contractors, having weathered the Great Recession, were prepared with cash reserves.

“They know there’s going to be some years when they just don’t take a profit,” Gifford said. “But they are still covering their costs.”

Laird said other existing pitfalls for the sector include scheduling difficulties, as some projects are coming out with ill-defined deadlines. With so many contractors competing for work, as well, scheduling conflicts may erupt from over commitments.

In lieu of the uncertainty of the situation, bonding requirements have also risen as general contractors seek to protect themselves from the uncertainty of subcontractor failure.

“We think that increased bonding requirements are a wise move by GCs though we expect they will be loosened again when the risk of subcontractor failure declines,” said Laird in a written statement.

But in comparison to other down times in the Colorado economy, Gifford said the situation is ripe for a quick rebound. Part of that was that the Paycheck Protection Program allowed general contractors to keep key employees. Pink slips were kept to a minimum, he said, partially because many employees had already reached retirement age.

And few things can probably brighten any general contractor’s outlook more than a banking industry looking to pump capital into a sketchy situation.

Sunflower’s Construction Trades Group was willing to put its optimism in writing, as well.

“Looking forward, we think this situation will improve in the second half of 2021 as things reopen and more projects are starting to move forward. Contractors (will) gain confidence that their pipeline will firm up.”

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