As the aftereffects of the recession continue to fade, commercial retail contractors find themselves in a business landscape quite different from that of several years ago. Retail leasing is finally on the upswing as consumers boost their spending. Contractors are still mostly remodeling existing centers, though a small wave of new ground-up developments is underway. The boom in multifamily development has spurred growth in the service and grocer categories while theaters and restaurants are also active as developers attempt to lure shoppers back to malls.
At the same time, the overhang of the recession persists as contractors face a highly competitive bid environment. Retail tenants demand quick turnarounds even though the labor pool is shallow because of the downturn along with new competition for workers from multifamily builders, leaving contractors with tight coverage on new projects.
"Retail is slowly coming back," says Mark Schoening, senior vice president of national retail at Ryan Companies US, Inc., based in Minneapolis. "But it's coming back in a different form."
Ryan Cos. constructed 222 Hennepin Ave., in downtown Minneapolis. The project contains 286 luxury apartments and is anchored by a 40,000-square-foot Whole Foods Market.The suburban general merchandiser-anchored power centers that were commonly built prior to the recession are not being developed. They are instead being replaced by 450,000-square-foot outlet type malls in close-in or infill locations, Schoening says.
For example, Ryan Cos. is building an outlet mall in Eagan, Minn. The 409,000-square-foot mall, Twin Cities at Eagan, being developed by Baltimore-based Paragon Outlet Partners, is located near the Mall of America. Twin Cities at Eagan is slated to open this fall and will include Saks Fifth Avenue Off 5th, Coach, Gap, Nike and others.
Renovations continue to make up the bulk of contractor work. Dallas-based contractor VCC, for example, is managing the $170 million renovation of Roosevelt Field Mall for Simon Property Group in Garden City, N.Y. The project includes new hardscapes, parking garages and a new luxury mall component and food court.
TURNKEY BUILD-OUTS AND MULTIFAMILY
Turnkey build outs are becoming more common, contractors say. Tenants no longer have large in-house staffs because of layoffs during the downturn. Developers would also rather control costs than write a check for tenant allowances.
Graycor Construction has a project at Westfield Hawthorn Mall in Vernon Hills, Ill., that includes a mall expansion with several new restaurants and a new turnkey AMC theater. Graycor is managing a similar project, also in the Chicago area, at Oakbrook Center, converting a portion of a shuttered Bloomingdale's Home & Furniture store into a turnkey Container Store.
Much of the turnkey work focuses on restaurants and entertainment venues. S.D. Deacon has been working with AMC Theaters to reposition some of the company's properties to create a full entertainment experience by adding restaurants and bars to the venues. S.D. Deacon is also renovating Bellis Fair in Bellingham, Wash. The center is replacing a former theater space with 10,00 square feet of retail space and two new restaurants, Buffalo Wild Wings and Chipotle Mexican Grill.S.D. Deacon constructed two buildings at Jantzen Beach Center in Portland, Ore., including full turnkey tenant improvements for West Marine and TJ Maxx.
Urban in-fill retail projects with an apartment component are popular formulas that seem less risky than ground-up retail, contractors report. Ryan Cos. has two new projects in the Minneapolis area that combine a Whole Foods Market and apartments. One project is a five-story building in downtown Minneapolis anchored on the first floor by Whole Foods. There are 286 luxury apartments above the store, along with a parking structure. "The recession made everyone more cautious," Schoening says.
The recession also focused attention on cost cutting. "Price was king," says Chuck Taylor, director of operations at Englewood Construction Inc., Lemont, Ill. "Everyone was chasing projects."
While price is still important, Taylor notes that retailers are slowly returning to negotiated contracts. He figures about half of Englewood's projects are still completed by a competitive bid process. During the recession, retailers sometimes had up to 15 general contractors bidding on a project. "It sets up an adversarial relationship with the retailer," says Taylor, explaining that change orders sometimes had to be absorbed by the contractor. Like many contractors, Taylor prefers working with a negotiated contract. "If we have a relationship with a retailer, then we know their expectations and can catch something when it's missed on the archtecturcutal drawings," he adds.
Englewood vets opportunities and when clients have six-to-eight bids, the company backs out of the competition. "We pay attention to who the other bidders are to see if a client is looking for a partner and not the lowest price," Taylor says.
Contractor and subcontractor failure due to the recession is still impacting the industry. Retailers and landlords are seeking low prices, but they also demand reliable vendors.
"Owners are recognizing the value of having someone financially viable on board early on," says Brian Northcott, vice president at S.D. Deacon. About two-thirds of the company's work is done through negotiated contracts, and the company doesn't bid competitively in markets where it doesn't make sense for the client and project. The pre-construction process is changing, according to Timothy Hanifin, general manager of retail and entertainment at Graycor Construction, Oakbrook Terrace, Ill. "Everybody's resources are at a premium," he says, explaining that developers are less likely to create a full set of work documents before pricing the project. Owners expect contractors to provide accurate pricing information based on little information, Hanifin adds. "It places a high premium on us to provide quality budgeting and preconstruction services from our historical data base of comparable work."
Balfour Beatty Construction spent two years in the pre-development process for Buckhead Atlanta. The $1 billion mixed-use project was started in 2007 as a luxury retail, hotel and residential complex. Balfour began construction but work was idled in 2009 in the wake of the financial crisis.
Graycor is handling the renovation of Oakbrook Center near Chicago, converting a Bloomingdale's Home Store to a Container Store, among other facets.The project was bought by San Diego-based developer OliverMcMillan, which retooled the development and brought Balfour back on the job. Balfour rebid the work with subcontractors and conducted a variety of cost studies. "It was an exhaustive pre-development process," says Mike Macon, vice president at the Atlanta office of Balfour Beatty. The reconfigured project has 300,000 square feet of retail, entertainment and restaurants, office space and 370 residential units. Retailers are expected to be in the luxury category. Portions of the project are slated to open in late summer or early fall.
Materials pricing is back to pre-recession levels. Englewood built a bank branch in 2009 for $200,000 less than the same building cost in 2007. The project today would probably cost about the same as it did in 2007, Englewood's Taylor says.
While work volume is increasing, contractors report that their fees are still depressed. Retailers and owners expect 2010 pricing and low-ball bids are still the norm in less active markets, contractors say.
The availability of workers is a concern, and contractors expect labor costs to rise. Competition for certain types of subcontractors is intense in some markets, especially those with a lot of multifamily construction. Shortages of framers and concrete subcontractors are evident in Houston and other Texas markets, sources say. Subcontractor shortages are also reported in San Francisco and Seattle.
Many subcontractors cut staff during the downturn, and some workers left the trades altogether. Subcontractor attrition is a problem with subs agreeing to price a project and then never submitting a proposal on bid day. "A lot fall by the wayside," says Hanifin at Graycor.
Contractor Balfour Beatty is exploring offsite manufacturing and prefabrication of certain materials as a result of labor shortages. "We're trying to figure out how to deliver a timely product at the right price," says Macon at Balfour Beatty. He adds that new offsite construction techniques being used in Europe could be brought to this country.
Short-staffed retailers are also leaving more duties to contractors. And big projects can sometimes tie up the available subcontractors, leaving contractors shorthanded.
Englewood Construction built several stores last year at the new outlet mall in Rosemont, Ill., near O'Hare Airport. The $250 million mall, Fashion Outlets of Chicago, is a 530,000-square-foot center co-developed by Florida-based AWE Talisman, and the Macerich Company of Santa Monica, Calif. With 130 stores opening at once, Englewood encountered labor shortages. Once the project opened, Englewood was flooded with requests from subcontractors ready to work. "It's a concern," says Englewood's Taylor.
Contractor VCC worked in advance for 18 months with local subcontractors prior to starting work at River Oaks, a $135 million retail development in a dense urban neighborhood in Houston. Without that advance work, the project would have "shocked the (labor) market," according to Derek Alley, senior vice president of VCC in the Dallas office. The company's average size project ranges from $10 million to about $15 million.
For the River Oaks project, VCC set up a communications plan along with a schedule of dates to make sure the subcontractors could hit the production milestones. In certain cases, VCC hired multiple subcontractors in the same trade in order to work on several aspects of the projectS.D. Deacon handled the remodel of the Market at Lake Tapps in Bonney Lake, Wash. The company performed a major remodel on the center while it remained in operation. simultaneously.
Retailers are still demanding aggressive production schedules. Once a site is selected and approved, the push is on to quickly open the store. Whole Foods Market is expanding operations to 1,200 stores across the country. Ground-up store construction from slab on grade to completion is 12 to 15 weeks for outlets built by Chicago-based Novak Construction, which has completed 30 Whole Foods projects in the Midwest. "The goal is to get the cash register ringing," says Karen Rugh, project manager at Novak.
Other grocer chains are demanding quick roll outs. "It's a challenge for retailers to grow so quickly and that is where we add value," says Northcott at S.D. Deacon, which works with Natural Grocers, a chain making a push into the Northwest. S.D. Deacon is completing a store for the chain in Tulsa, Okla.; a store in Corvallis, Ore., just opened.
The $215 million Shops at Summerlin in Las Vegas is being built in 14 months by contractor VCC and is slated to open later this year. The 1.7 million-square-foot center will serve as the shopping and entertainment district of the master-planned Summerlin community. Because VCC is a national contractor, the company draws on its strong relationships with local and regional subcontractors, says VCC's Alley, adding that about 600 workers are on site at any given time. "It's a fast turnaround," he says. this project.”
— Jane Adler