Rochester Business Journal

Though commercial builders in the Rochester area are bracing for another tough year, they remain cautiously optimistic about a turnaround.

"At this point, 2010 is uncertain, but it could end up being a great year," says Thomas Judson, chairman and CEO of the Pike Co. Inc. "We are planning for the worst but hoping for the best."

Commercial construction has become more competitive because of a decline in other sectors such as residential and retail, local builders say. More companies are vying for the same work.

"We don't expect it to be a particularly good year," says Aaron Hilger, president of the Builders Exchange of Rochester.

Hilger says 2008 was the best year of the last five for the commercial building industry in the Rochester area. Work was still strong in 2009, despite a drop from the year before, but in 2010 he expects a further decline, which could start to hurt the region.

Nonresidential building dropped 33 percent nationwide in 2009 to $162.4 billion, according to data from McGraw-Hill Construction, a division of the McGraw-Hill Cos.

The commercial sector plunged 47 percent, much more than the 16 percent drop of 2008. The retail categories were hit hard in 2009, with building of stores and shopping centers falling 42 percent while warehouse construction plummeted 62 percent.

An even larger decline was reported for hotels-66 percent-which included sharp reduction for hotel-casino projects. The office building category in 2009 dropped 37 percent. The institutional side of nonresidential building fell 17 percent in 2009, with health care facilities dropping 36 percent and educational buildings down 19 percent.

On the plus side, McGraw Hill noted that the public buildings category grew 10 percent in 2009, lifted by a large increase for courthouse projects. In many cases, those were able to proceed because of funding provided by the federal stimulus bill.

Locally, Pike was profitable in 2009, Judson says, but did not do as well as in 2008, which was a record sales year. Despite a decline in sales during 2009, Pike posted a decent profit, largely because of a backlog of work that kept the firm busy.

That backlog, however, has started to diminish.

"We tend to have large contracts, and the past two to three years have been busy. But we aren't restocking the shelves as we normally would," Judson says.

"But with a few big jobs, that can turn around."

Pike has $400 million to $500 million in annual sales. Roughly 25 percent of the company's projects are in the Rochester area, and that number has been growing, Judson says.

The company has seen an increase in work in the fields of health care and academia. Pike is currently working on projects at the University of Rochester, Rochester Institute of Technology and Cornell University, as well as St. Joseph Hospital in Syracuse and Mercy Hospital in Buffalo. Pike also is recladding Eastman Kodak Co.'s headquarters tower.

The power industry has been interested in projects as well, but traditional funding for those projects is harder to get, Judson says.

While he notes that some improvement in commercial construction could occur this year, he expects activity in areas such as retail to remain limited.

Still, the Rochester area is faring better than other parts of the country, Judson says, notably places such as Texas, Seattle and Florida. He adds that he supports the Unshackle Upstate agenda and believes state government can play a role in making the region more attractive to developers.

"I want to see economic growth in the region," he says.

Like Judson, Anthony Soprano, vice president of preconstruction services at DiMarco Constructors LLC, says strong backlogs helped some companies last year, including his firm.

"The first and second quarters of this year will be the true test for some companies, especially those not as diversified," Soprano says.

Diversification is what has helped the DiMarco Group, a family of companies that provides services in areas including general contracting, asset management, facility maintenance and construction equipment sales and leasing.

There has been an increase in preconstruction work, but the projects are smaller and the competition is greater, Soprano says.

He expects some growth in the public sector and at schools, partly due to federal stimulus funding.

"The architects are still designing projects. It's now the financing that has to get started, but it will eventually unplug," Soprano says. "Hopefully we'll go from steady to busy soon."

Retailers, particularly big-box vendors, have opted for remodeling projects versus new construction. That affects a project's pricetag, Soprano says. He noted that new construction, including site development, for a store can cost roughly $15 million. Instead, the retailers are opting for $1 million to $2 million renovation projects.

DiMarco's projects include an 89-unit senior housing project in Ogden, a renovation project for Building 9 at Monroe Community College, and a 151,000-square-foot WalMart Supercenter in Lancaster, Erie County.

"The second half of the year should be better," Soprano says. "The industry will start to catch up. It will just take time."

Analysts at McGraw-Hill also expect some improvements in 2010.

Housing and public works are expected to pick up, but commercial and institutional building will continue to be adversely affected by weak employment, tight bank lending and the eroding fiscal health of states and localities, said Robert Murray, vice president of economic affairs for McGraw-Hill Construction, in a statement last month.

With more general contractors bidding for projects, Hilger of the local Builders Exchange notes that competition can work to a buyer's advantage.

He is less optimistic about growth from public projects because of New York's financial struggles, and he says that will be tough for the Rochester area, which normally has a number of continuing public projects. Delays or cutbacks in large-scale local projects, including Renaissance Square and a modernization project of the Rochester City School District, have added to the industry's difficulties.

Hilger, however, has seen signs that private industry might be thinking of upgrades, expansions and additions.

Michael Spoleta, CEO of Spoleta Construction LLC, says the halt in retail projects, coupled with the rising unemployment rate, will continue to hurt the commercial construction industry.

"Now it's very difficult to increase backlog, because it's difficult to get jobs at this point," he says. "It's tricky out there right now."

The one bright spot could be publicly funded projects, but like the other industry players, Spoleta points to the competitive climate.

To deal with what could be a challenging year in the building industry, Spoleta Construction also focused on development projects and is about to begin a roughly $5.5 million apartment project in Churchville. Most of the firm's projects are in New York.

"It should be a trying year," Spoleta says.

2/5/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail service@rbj.net.