Snapshot: A look at the construction and real estate industry

BY ROGER T. GINGERICH

This year marked the fifth edition of the Skoda Minotti Real Estate and Construction Group’s surveys of the Northeast Ohio Real Estate and Construction industries. The following is an overview of the survey highlights, but to download the complete survey results, please visit www.skodaminotti.com/survey.html.

Construction summary
One good overall gauge of the Northeast Ohio construction industry comes from the question, “What do you see as the biggest threat to your business over the next 12 months?” While the number one answer was again “lack of work” as it has been each year of our survey, this year, only 36% of respondents selected that choice. That is the lowest percentage since we started the survey. While this number was certainly influenced by some of the mega-projects that occurred over the last year, it has been trending downward since “lack of work” was selected by 81% of respondents in 2009.
Although opportunities for work seem to be on the rise, construction professionals now seem to be focused on financing that work. “Tightened credit” was cited as the second biggest threat (up from third in 2011) to our respondents’ businesses with 24% choosing that option. That was up from only 8% in 2009. However, it is important to remember that 81% of our respondents chose “lack of work” as their biggest threat in 2009, so obtaining credit may not have been a top priority at that time.
Due to the increase in available work, other challenges, such as labor concerns, became more apparent. In regard to labor, 14% felt labor costs were their biggest challenge while 11% felt that securing skilled labor was the number one concern.
Our survey respondents predicted that the current level of work in the region may continue as well. In response to, “In the next three years, do you see your business having more, less or the same amount of opportunities in Northeast Ohio?” 83% of our respondents thought that they would see “more” or “the same” amount of opportunities over the next three years. That percentage represents the highest amount in the history of our survey.
Where are the increased opportunities coming from? We asked the question, “Where do you see your potential construction opportunities in Northeast Ohio over the next five years?” As with past years, “institutional” and “governmental” finished first and second respectively. The “industrial/manufacturing” selection moved up this year from 4th last year to the 3rd most popular response. We also saw a slight uptick in respondents that chose “residential: multi-family” and “residential: single-family” as their top response. Both categories set high marks since the start of the survey–9% had “multi-family” as their top choice while 12% chose “single-family” first.
A new topic on this year’s survey was Ohio Construction Reform. The consensus on construction reform was that there really was no consensus from our respondents in terms of its impact when measured by our multiple choice questions. One third of respondents felt it would be beneficial to their business, one felt it would be harmful and one felt it would have no impact. As one commenter put it, this may be due to lack of education on the topic – “I am not overly familiar with the act although once it hits the bid market I am sure I will become familiar quickly.”
One commenter described how he felt the act could be a positive for their business. “As a subcontractor that feels it provides exemplary service–at not always the lowest price–we welcome greater opportunities to sell to these customers outside of the competitive low bid wins environment.”
Other commenters were not so optimistic. One respondent stated, “In 2-3 years, we anticipate a significant portion of the small-medium sized market segment will have nowhere to operate. They will either have to reinvest in themselves or close up shop.”
Another said, “This is the worst construction legislation to ever come out of Ohio. It will have a material impact on every small-medium size GC/CM. All of the rules favor the jumbo firms, at the expense of smaller medium firms and at the expense of taxpayers.”
As more contractors familiarize themselves with the legislation, it will be interesting to see how the responses change in next year’s survey.

Real Estate summary
This year, 73% of our real estate respondents felt that they will have “more opportunities” in Northeast Ohio over the next three years. Although this seems like a positive sign, the response fell this year from a high of 81% in 2011.
While the real estate survey respondents tended to take a positive outlook on the opportunities in the Northeast Ohio market going forward, the lending environment seems to be taking a step backwards. One respondent stated, “Our greatest challenge is being able to obtain credit. Without adequate funding, we won’t be able to increase our holdings of inventory.”
Several respondents echoed the same concern.
The question, “In today’s lending climate, what type of equity demands are lenders making on new projects?” provided some interesting data. Last year, 12% of respondents chose, “Don’t know, unable to secure credit” and this year, that choice rose to 21%. Also, it seemed that while in 2008, 92% of respondents were seeing equity demands of less than 30%, that number has plummeted to only 46% this year. That represents the lowest level in our survey’s history and a significant drop off from 81% last year.
This difficulty with securing financing has led to a change in the way that real estate professionals are choosing to fund their deals. We asked, “When you seek to refinance, where do you anticipate refinancing your existing mortgages?” For the first time since we begin asking this question in 2009, less than half of our respondents (47%) said that they were going back to their existing lender. That represents a significant fall from the 73% that were returning to their existing lender in 2011.
This was also in-line with the responses to the question, “How are you funding new construction and acquisitions?” Traditional methods of funding such as national banks, regional banks, private equity, individual investment, and seller financing all fell off from their response rates last year. This year, the increases were in more non-traditional areas such as insurance companies, pension funds and other institutional funds.
This year, for the first time, we asked several questions comparing the residential, commercial and industrial rental markets. The responses indicated that the residential rental market is much stronger than either the commercial or industrial markets. One commenter stated, “Downtown residential redevelopment opportunities are under hot pursuit by numerous developers.”
The survey results back up the comments. In terms of the residential markets, 76% of respondents saw rents staying stable or increasing. By comparison, the commercial market seemed to be struggling with 72% of respondents seeing rents decreasing either “slightly” or “significantly.” The industrial market fared slightly better with just over half (52%) of respondents seeing decreasing rents.
With the difficulties that many respondents are having securing financing for projects, one respondent may have summed up our real estate survey with a response to the question, “What is the greatest challenge that your company currently faces and why?” The response was, “Uncertainty. People can deal with bad news, but it’s dealing with uncertain news that is problematic.” BXM

Roger T. Gingerich, CPA/ABV, CVA is the partner-in-charge of Skoda Minotti’s Real Estate and Construction Group. You can contact Roger at 440-449-6800 or rgingerich@skodaminotti.com.