general contracting and construction business that will operate within the greater las...
TRANSCRIPT
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The purpose of this executive summary is to acquire a $600,000 loan to create a licensed and insured general contracting and construction business that will operate within the Greater Las Vegas Metro Area of Southern Nevada.
ELEVATE CONSTRUCTION, INC.
Introduction
Elevate Construction LLC provides a comprehensive general construction contracting service for a
wide variety of projects and has extensive experience with constructing restaurants, commercial
buildings / office spaces, medical facilities, casino concepts, retail commercial developments, home
remodels, and home additions; with the primary focus being on tenant improvements.
Opportunity
Elevate Construction LLC (EC) sees the Las Vegas Valley as being on the cusp of another construction
boom. But rather than a new construction building boom, Las Vegas is looking at a remodeling and
building improvement boom; giving EC a unique opportunity to penetrate the big business
construction development arena that currently dominates the Las Vegas marketplace.
Licensing Scenario
Ed Choi, EC principal, and cofounder of Forte Design Build, attained a General Contractors License
back in 2011. Mike Grillo, the other EC principal, was formerly with Austin General Contracting. Both
Ed Choi and Mike Grillo will be acquiring a C4‐Painting and Decorating license, as well as a C3‐
Carpentry Maintenance and Minor Repairs license. And approximately one month after funding,
Elevate Construction will be attaining an approved license limit of $5MM per job.
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Use of Funds
An initial outlay of $65,000 will be used for general business expenditures. An additional first quarter
outlay of $375K will be used for: labor expenditures, material costs, equipment rentals; and is based
upon the first year’s sales of $2MM. The two principals have included an annual salary of $85K each.
Industry Analysis
Few industries suffered more during the recession than the Commercial Building Construction
industry. The collapse of the housing market and its subsequent strain on the financial sector set the
stage for a stifled business sector with little need for new commercial space. A tightened credit
market, high unemployment and low consumer spending also contributed to the industry’s decline as
businesses downsized, which halted demand for new office, retail and warehouse construction.
Stagnant growth in per capita disposable income also cut into demand for the hotel and recreation
market. As a result of the aforementioned environmental factors, commercial construction revenue
is expected to fall at an annualized rate of 8.9% to reach $190.5 billion over the five years to 2013,
which is almost $100 billion less than in 2008. However, overall improvements across the US
economy will drive strong industry growth, with the need for new construction returning as
businesses expands to meet growing consumer demand. Over the five years to 2018, industry
revenue is forecast to grow at an annualized rate of 7.5% to reach $273.5 billion, including a
projected growth of 6.6% in 2014.
Industry Performance
Commercial construction generally lags behind the overall economy by one to two years, due in part
to the length of construction contracts and industry backlogs. The Commercial Building Construction
industry in the United States was still growing in 2007 (and only contracted slightly in 2008) because
many contractors entered the recession with a cushion of projects in the pipeline that were accrued
during the construction boom of 2004 and 2005. However, in late 2008, contracts began to slow, and
in 2009 revenue plummeted 25% as backlogs diminished and the number of new construction
projects virtually disappeared. In 2010, revenue fell another 26.3% as demand continued to slide
and GCs accepted lower fees for construction.
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Industry Material Costs
Over the past five years, the rising costs of construction materials, pitted against falling demand, have
decreased the industry’s profit margins. Steel, copper and aluminum prices have fluctuated
significantly in recent years, often offsetting declines in the prices of lumber and concrete products.
Office and warehouse construction materials rose at annualized rates of 1.2% and 1%, in 2008 and
2012, respectively. Additionally, rising energy prices have bumped up operators’ fixed costs. Amid
these rising expenses, operators started cutting prices below cost to attract business, sacrificing profit
margins in the process. In 2013, profit is expected to remain at suppressed levels and reach 2% of
revenue, which is still substantially lower than levels in 2008.
Industry Life Cycle
The Commercial Building Construction industry is in the mature stage of its life cycle, and this is
characterized by stagnant growth, complete market acceptance, low levels of technological change,
and slow enterprise growth and merger activity. During the 10 years to 2018, the commercial
building construction industry is projected to grow at an annualized rate of 0.5%. On the other hand,
US GDP is forecast to grow at an annualized rate of 2.1% during the same period. The industry’s
incremental growth is largely due to the historic drop in industry performance during the recession,
including two years of double‐digit revenue contractions in 2009 and 2010. The economic recovery
forecast for the five years to 2018 is projected to largely offset the industry’s recessionary decline.
Capital Interest Rates
In addition to growing demand from consumers, businesses will benefit from lower interest rates and
greater profit margins, both of which encourage expansion. In December 2012, the Federal Reserve
announced a policy of tying the federal funds rate (which underlies the interest rates banks charge
for loans) to the national unemployment rate. In particular, it announced that the rate would be kept
near zero until unemployment drops to 6.5%. This policy is expected to help businesses finance
expansion throughout the next five years. Furthermore, businesses that survived the recession have
coped by running leaner operations that maintain productivity with lower costs. This trend has led to
an influx of corporate profit, which businesses will use to expand in line with growing downstream
demand in the five years to 2013, thereby raising demand for new commercial construction.
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Industry Outlook
In 2012, industry revenue turned a corner, and further growth is expected in 2013. Bolstered by a
stabilizing housing market and slowly falling unemployment, post‐recession consumer spending is
beginning to shore up commercial construction. Two other key factors facilitating a recovery for the
industry are relaxed credit conditions and high levels of corporate profit.
Gradual economic recovery over the five years to 2018 will underpin strong growth for the
Commercial Building Construction industry. Falling unemployment will directly increase the need for
more office space throughout the service sector, and growing consumer spending will raise demand
for new retail locations, shopping malls and department stores.
Still, the persistency of office vacancy rates during and immediately after the recession will likely limit
growth in the office building market for some time, delaying a more rapid recovery for the industry.
However, industry revenue is forecast to rise at an annualized rate of 7.5% to reach $273.5 billion in
2018, including a projected growth of 6.6% in 2014.
Highly Competitive
The Commercial Building Construction industry is characterized by highly competitive conditions. In a
positive environment, competition between general contractors (GCs) typically occurs based on
proven quality, timeliness, technical capacity and efficiency.
During construction slumps or recessions, though, price competition becomes more widespread.
Generally, bid price is also a more important factor for smaller projects. During the five years to
2013, rising price competition has been a significant cause of narrowing profit margins in the
industry.
Most small and medium‐scale building contractors confine their activities to a local market. Most
small GCs establish solid reputations in narrow markets and leverage their reputations to generate
contracts across broader regions. Small‐scale operators rely heavily on word‐of‐mouth referrals to
obtain contracts, but they also advertise in general media to promote their businesses.
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Barriers to Entry
Barriers to entering and succeeding in the Commercial Building Construction industry are moderate.
New entrants must contend with a number of hurdles, including the established names and
reputations of existing local general contractors (GCs), the need to hire skilled labor, building
relationships with larger contractors and materials suppliers, the lending environment and whatever
licensing and regulatory requirements exist in the state.
Contracts are typically gained based on a contractor’s track record and on word‐of‐mouth
recommendations. Personal relationships must be established with larger GCs in order to gain
subcontractor work, a significant revenue stream for smaller players in the industry. Developing
relationships with local materials suppliers and wholesalers is also necessary to take advantage of
favorable materials costs, which larger players can easily obtain by buying in bulk.
Licensing requirements of different states can also pose as barriers to entry. Ensuring compliance
with the myriad zoning, building, fire, electrical and plumbing, weight and structural load codes,
personal safety requirements and environmental regulations that govern building sites and materials
recovery can add costs to a GC’s project expenses.
Capital Intensity
The Commercial Building Construction industry has a low level of capital intensity. For every $1.00
spent on wages, the average operator spends $0.11 in capital investment. Wages, whether for in‐
house employees or payments to subcontractors, account for the largest part of the industry’s cost
structure at 66% of revenue.
Capital intensity has changed little during the five years to 2013. It is likely close to what it was in
2008 when the average operator spent $0.12 in capital investment for every $1.00 spent in labor.
Wages, however, have grown as a share of revenue during the past five years. Although firms have
received less revenue for project contracts, the labor required to complete them has not decreased.
Therefore, wages outweigh capital investment as a part of business operations.
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Revenue Volatility
Revenue in the Commercial Building Construction industry has demonstrated a high level of volatility
during the past five years. Like much of the construction sector, this industry rises and falls in
response to cyclical building cycles. For commercial construction, these cycles are influenced by:
movements in long‐term interest rates, general economic growth, business activity and expected
rental yields for commercial space.
During and just after the recession, though, the industry experienced extreme volatility. While
industry revenue began to falter in 2008, it slid in earnest in 2009 and 2010 with contractions of 25%
and 26.3%, respectively. In 2012, the industry turned a corner with 12.3% growth, marking a drastic
change from two years earlier. In the five years to 2018, though, more consistent demand conditions
throughout the economy are forecast to smooth out volatility.
U.S. Economy
More than three years since its low point, the U.S. economy remains in a slow expansion after its
deepest recession since World War II. Such a slow recovery is seen as the relatively normal
consequence of the housing and financial crises that led to the recession.
Although U.S. economic activity remains well below potential, no economic indicators suggest that a
U.S. recession is imminent. U.S. housing markets are recovering. Oil prices are relatively high, but
are retreating. Monetary policy is providing about as much stimulus as it can.
Consumer spending is strong, but a sustained acceleration of U.S. economic growth requires growing
confidence in the economy: from consumers, businesses, financial institutions and financial
regulators. As the economy continues growing, we can expect confidence to build. That is likely to
take the next few years.
Looking ahead, the biggest concern can be found in the negative contribution of business fixed
investment. The decline in investment spending represents a reversal that shows firms either don’t
see much need to invest in expansion or are having difficulty obtaining financing. Neither is
conducive to economic growth.
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Corporate profits are at record levels, which provide plenty of internal financing for big firms. Small
businesses are having trouble convincing financial institutions to support their investment plans. The
austerity in government spending, driven by lower tax revenues, has been an area of weakness for
economic growth. State and local governments have seemingly reached the bottom of their spending
cuts.
The continued weakness of the U.S. economy can be disconcerting; and unlike the previous ten post‐
World War II recessions that the United States has endured, however, the 2008 recession was
precipitated by a financial crisis. Economic research shows that financial crises tend to result in
recessions that are more severe and recoveries that are substantially slower.
U.S. Median Household Income
In opposition to the overall picture of a strengthening economy is the fact that median household
income has declined each year since 2007. In fact, from 2007 to 2011 (the most recently available
annual figure), median household income has declined by 8.1%. According to Pew Research, the
current ‘recovery’ is also the most negative for household income during any post‐recession period in
the past four decades.
Clark County Construction
The industries that most stands out in Southern Nevada are leisure, hospitality, and various aspects of
the transportation industry, and after tourism‐related activities, come real estate and construction.
What is striking about the construction and real estate industries is that construction cannot be
exported. To an economist, construction is the result of economic growth rather than the driver.
High growth in construction and real estate result from building booms fueled by rapid population
growth. High growth for construction can only be sustained when the population is growing rapidly.
Over the past 50 years, the United States has seen a general trend of the population moving West.
The resumption of that trend as the U.S. economy regains its footing should benefit Southern Nevada
construction. From 2008 to 2013, the U.S. population increased by 3.9%, which equates to an
additional 12 million people.
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Clark County Economy
The following localized analysis is based upon the data contained within the 2013 Las Vegas
Perspective, and the visualized charts are on pages 12‐14 within this document.
1. Conventional Mortgage Interest rates have been on a steady decline, and are now at 3.4%.
2. New Home sales have increased from the trough of 2011, and are now on the rise.
3. Las Vegas Apartment Rental Costs have steadied, while Occupancy Rate has risen sharply.
4. Single Family Residential Building Permits have risen sharply, and have surpassed 2008’s total.
5. Multifamily Residential Building Permits have bottomed out, and show a slight increase.
6. Miscellaneous Building Permits values have also hit bottom, but are expected to rise.
7. Commercial Building Permits values are showing signs of increase from the trough of 2010.
8. Industrial Inventory, as well as Industrial Vacancy, has leveled out while on the rise since 2008.
9. Office Inventory has steadily increased, while Office Vacancy has begun to level.
10. Vacant Land prices have fallen sharply, while Vacant Land sales have risen greatly.
The ten key points above, supports EC’s claim of a remodeling / tenant improvement boom. With
interest rates at the lowest in years, new home sales rising, apartment occupancy peaking, residential
building permits vaulting, vacant land sales hopping, and office vacancy leveling out; the Las Vegas
Valley is preparing for another construction boom. For as population grows, demands follows. And
the historically stagnant market, along with the low purchasing prices, has created a pent‐up demand
for all types of general contracting services; thus creating a remarkable opportunity for Elevate
Construction.
Startup Strategy
Elevate Construction intends on exploiting their historical relationships within the local market. Both
Ed Choi and Mike Grillo have worked within the local market for over a decade. And with their
sterling reference list, their remarkable project history, and their proven quality management
abilities, Elevate Construction intends on capturing a sizable share of the general contracting
business. In the final analysis, Elevate Construction, when properly funded, has the unique
opportunity to create a sizable return on investment.
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Projected Cash Flow (first 14 months)
Total Avg. Month
PROJECTED SALES AVERAGE $2,041,000 $145,785
PROJECTED LABOR AVERAGE $918,450 $65,603
PROJECTED MATERIAL AVERAGE $244,920 $17,494
PROJECTED RENTAL EQUIPMENT AVERAGE $10,205 $728
PROJECTED AVERAGE GROSS SALES $1,173,575 $83,826
PROJECTED GROSS MARGIN $867,425 $61,958
PROJECTED OPERATING EXPENSES $573,627 $40,973
PROJECTED NET INCOME $293,797 $20,985
PROJECTED CASH FLOW $1,042,231 $74,445
PROJECTED OVERHEAD BREAKDOWN % Total Avg. Month
DIRECT LABOR 45% $918,450 $65,603
IN‐DIRECT OPERATING 27% $573,627 $40,973
DIRECT MATERIAL 12% $244,920 $17,494
DIRECT RENTAL 0.5% $10,205 $728
PROJECTED SALES $2,041,000 $145,785
PROJECTED NET INCOME $293,797 $20,985
PROJECTED PROFIT 14%
PROJECTED CAPITAL EXPENDITURES / One‐time Initial Expense $65,000
PROJECTED OPERATING EXPENSES / Month 1 $39,486
MONTHLY CASH FLOW NEEDED / Project Months 4 months $124,800 $499,200
PROJECTED START‐UP CAPITAL $603,687
PROJECTED LOAN / 5 YEARS OR 60 MONTHS @ 10%
MONTHLY PAYMENTS 60 month $12,826 $769,594
PROJECTED NET INCOME / 14‐Month Platform $293,797
PROJECTED NET INCOME / Less Investor Pay‐off 14 month $179,572 $114,225
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Return on Investment
With the 10‐year treasury bond rates hovering around 2.6%, Elevate Construction is proposing a hard
money loan interest rate of 10% on the $600,000. Elevate Construction is also proposing a five year
term on the loan, thus garnering the investor $170,000 in profit at the end of the five years.
Legal Business Counsel
Ashworth Law will manage all legal‐business issues as well as manage all financial and accounting
processes. Ashworth Law specializes in business formation and tax‐law services. From forensic
accounting, to business valuation, Ashworth Law’s diverse legal efforts will prove to be a proactive
measure garnering Elevate Construction a sizable competitive advantage.
Elevate Construction Closing Remarks
Elevate Construction’s focus on quality building, punctual completion of projects, and budget
integrity assures both Mike Grillo’s and Ed Choi’s personal involvement in every project, from the
preliminary planning to the final construction completion.
Elevate Construction’s project management program recognizes the importance of having seasoned
construction professionals on the project and the need for providing more enhanced communication
with our clientele. In having a more experienced supervisor in the field we have someone with more
attention to detail and purpose.
Elevate Construction is proud of the fact that we have been able to combine practicality with such a
high level of professionalism.
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Principal Biographies
Ed Choi: Managing Partner
Ed Choi has been a Las Vegas resident since 2001, having relocated here from his native Maryland. Ed attended the University of Maryland, completing his B.A. in economics in 1995. Ed was the Project Manager at the Venetian Resort Hotel & Casino responsible for such projects as the Palazzo Condo Tower ($150MM), the room renovation of the Venetian tower ($80MM), Phantom of the Opera Theater ($25MM), Barneys New York at the Palazzo ($45 million), the high roller suites at the Venetian tower ($35MM), Bouchon restaurant ($8MM), First Food & Bar restaurant ($8MM) Venetian Bourbon Room ($4MM), Venetian/Howard Hughes Office Remodel ($1MM ) and Venezia Tower Re‐paint. Before joining the Venetian, Ed worked on the Venezia Hotel (1,300 suites within the Venetian) for the George M. Raymond Company. After leaving the Venetian, Ed co‐founded Forte. Michael V Grillo: Managing Partner
Michael V. Grillo has been a Las Vegas resident since 2002, having relocated here from his native Omaha, Nebraska. Michael attended the University of Nebraska, completing his B.A. in Business Administration in 1993. Michael was the Project Manager for Austin General Contracting responsible for such projects as Harrah's Remediation ($2MM), Caesars Octavius Tower ($10MM), Robert H. Baldwin/Private Residence ($7MM) Planet Hollywood Gordon Ramsay Burger Bar ($4MM), Treasure Island Exterior Remediation and Re‐paint ($1.2MM), NOBU Restaurant and Lounge/Caesars Palace ($1MM) Venetian Tower and Venezia Tower Re‐paint collectively ($1MM). Michael is a proven leader in both management and production, managing 350 workers and several projects simultaneously.
References
Michael Stratte Executive Vice President W.A. Richardson Builders, LLC 702.866.2101
Howard Tribble Vice President of Construction Services Warner Gaming 702.871.7700
Robert H. Baldwin CEO, President and Director MGM Resorts International 702.693.8333
Mark A. Caspers (Formerly of Tutor/Perini) Chairman Caspers Construction Company 702.227.7377
Joe Manzella Executive Director Las Vegas Sands Corp. 702.414.3662
Carl Pastrone Engineering Project Manager Las Vegas Sands Corp. 702.414.4969
Garrett Byrd Executive Vice President PWI Construction 702.942.8400
Rob Bedsworth Project Manager McCarthy Construction 702.261.7977
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Southern Nevada Statistics
0.0%
2.0%
4.0%
6.0%
8.0%
2008 2009 2010 2011 2012
Convenmonal Mortgage Interest Rates
0 2000 4000 6000 8000 10000 12000
2008 2009 2010 2011 2012
Clark County Nevada New Home Sales
$650
$700
$750
$800
$850
$900
2008 2009 2010 2011 2012
Las Vegas Apartment Monthly Rental Costs
88.0% 89.0% 90.0% 91.0% 92.0% 93.0% 94.0%
2008 2009 2010 2011 2012
Las Vegas Apartment Occupancy Rate
0 1000 2000 3000 4000 5000 6000 7000
2008 2009 2010 2011 2012
Single Family Residenmal Building Permits
$‐
$200,000
$400,000
$600,000
$800,000
2008 2009 2010 2011 2012
Single Family Residenmal Permit Value
13
0
100
200
300
400
500
600
2008 2009 2010 2011 2012
Mulmfamily Residenmal Building Permits
$‐ $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000
2008 2009 2010 2011 2012
Mulmfamily Residenmal Permit Value
0
5000
10000
15000
2008 2009 2010 2011 2012
Miscellaneous Building Permits
$‐
$50,000
$100,000
$150,000
$200,000
$250,000
2008 2009 2010 2011 2012
Miscellaneous Building Permit Value
0 100 200 300 400 500 600
2008 2009 2010 2011 2012
Commercial Building Permits
$‐ $200,000 $400,000 $600,000 $800,000
$1,000,000 $1,200,000
2008 2009 2010 2011 2012
Commercial Building Permit Value
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102.5
103
103.5
104
104.5
105
105.5
2008 2009 2010 2011 2012
Las Vegas Industrial Inventory
0.0%
5.0%
10.0%
15.0%
20.0%
2008 2009 2010 2011 2012
Las Vegas Industrial Vacancy
48
49
50
51
52
53
2008 2009 2010 2011 2012
Las Vegas Office Inventory
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2008 2009 2010 2011 2012
Las Vegas Office Vacancy
$‐
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2008 2009 2010 2011 2012
Las Vegas Vacant Land Prices
0
500
1000
1500
2000
2500
2008 2009 2010 2011 2012
Las Vegas Vacant Land Sales
15
Appendix
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Economic Growth Potential
For an economy to grow at its potential, economic growth needs to be supported by consumer
confidence, business confidence and the financial sector. As shown in the figure below, confidence
and economic growth work together. Growth in consumer confidence leads to a growth in consumer
spending, which fosters increased business confidence. Increased business confidence generates
increases in employment and investment spending. Those gains in turn foster further gains in
consumer confidence and business confidence. The effect is a self‐reinforcing cycle.
A cycle that includes only consumers and businesses can take economic growth only so far. A strong
financial sector is the necessary complement to the investment spending necessary for strong
economic growth. As the financial sector gains confidence in the economy, it provides the additional
funding that supports both investment and consumer spending, and that spending will increase the
pace of economic growth.
In the United States, consumer confidence and financing remain below historical norms. Consumer
confidence has been generally improving, but it has not yet reached the levels associated with strong
economic activity. Financial institutions have recovered, but neither they nor their regulators have
shown sufficient confidence in the economy to provide a broad level of financial support to
investment. And the growth of commercial paper outstanding has not kept pace with the growth of
economic activity.
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Industry Analysis
Commercial construction typically lags behind the overall economy by one to two years, due in part
to the length of construction contracts and the pipeline of projects that general contractors keep on
the books. Industry revenue began to shrink in 2008, and then plummeted 25% and 26.3% in 2009
and 2010, respectively. During those years, most contractors’ backlogs dried up and many operators
cut prices to stay competitive, leading profit margins to narrow significantly.
In 2011, the average margin dropped to 1.7% of revenue from 3.8% in 2008. Profit margins are
expected to make up some ground in 2013 to reach 2.0%, showing modest improvement as economic
recovery stimulates demand for new commercial construction and as operators gradually regain
pricing power. Despite the recession, revenue is expected to jump 4.6% in 2013, though stubbornly
high office vacancy rates will likely delay a more dramatic jump until later in the five years to 2018.
Industry Drivers
Office rental vacancy measures the number of unoccupied office building units against the total
number of such units in the United States. High vacancy rates, or a high number of unoccupied suites
or buildings, signals a surplus of commercial space. Conversely, lower rates indicate demand for new
commercial construction. The office rental vacancy rate is expected to decrease in 2013 as economic
recovery fuels business expansion.
Corporate profit influences a business’s ability to expand operations. As corporate profit rises,
companies become more able and willing to open new locations and hire more workers, driving
demand for new commercial construction. Corporate profit is expected to increase in 2013.
Unemployment is an important driver of industry performance, because the need for additional
commercial space diminishes as businesses lay off employees. Furthermore, as unemployment rises,
the power of consumer spending falls, causing retail businesses to contract and demand for new
commercial space drops. A s unemployment decreases, on the other hand, businesses expand into
new locations and consumers have more money to spend, fueling further business activity. The
national unemployment rate is expected to decrease in 2013.
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Interest rates influence demand for new commercial construction because lower rates make
financing new construction easier. Most property purchases, developments and construction
activities in the industry are financed by commercial mortgages, which are related to the yield on 10‐
year Treasury bonds. Low rates decrease the cost of borrowing money to finance construction and
typically benefit the industry. Interest rates are currently at historic lows, but economic growth is
expected to encourage the Federal Reserve to raise the prime rate in 2013, leading other interest
rates to rise. As such, the yield on the 10‐year Treasury note is expected to increase in 2013 but will
remain very low.
Steel is one of the primary inputs in constructing a variety of commercial structures. During periods
of low demand, construction firms prefer to keep prices low to generate business and are less able to
pass on higher material prices to the customer. Therefore, higher steel prices can negatively affect
profit, particularly during construction slumps. The world price of steel is expected to fall slightly in
2013, but its historical volatility makes it a threat to the industry.
Industry Outlook
To encourage businesses to expand, the Federal Reserve has acted to keep interest rates at historic
lows, thereby decreasing the cost of borrowing money for companies. The yield on the 10‐year
Treasury note, a proxy for overall interest rates in the United States, fell markedly in 2012, reflecting
the Federal Reserve’s plans to ease credit markets.
Additionally, corporate profit has grown significantly since its drastic drop during the recession,
indicating that many companies have the resources to expand when demand reaches higher levels. In
2013, the convergence of consumer demand, credit availability and corporate profit is expected to
raise industry revenue 4.6%.
While the industry’s markets fluctuate based on changes in the US economy as a whole, including per
capita disposable income, unemployment, corporate profit and interest rates, industry services are
an essential part of the US economy and enjoy complete market acceptance. This close connection
with overall economic cycles is highly indicative of a mature industry. Additionally, the industry
undergoes only moderate technological change, with new developments generally limited to new
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kinds of logistical, organizational and design software that may influence the role a general contractor
plays in the building process. Developments in sustainable materials and client preference for
environmentally friendly designs are avenues of growth for the industry, but they are not forecast to
fundamentally change the industry.
Industry Overview
The Commercial Building Construction industry is composed of general contractors (GCs), project
managers and design‐build firms that construct buildings across the full scope of business activity in
the United States, including retail and warehouse space, restaurants, office buildings, agricultural
structures, hotels and motels, amusement parks, gyms and other recreational buildings. Firms in the
industry typically act as the GC for a project, which entails full planning and organization of the build‐
out, including securing materials and hiring subcontractors, as well as obtaining licenses and
maintaining the worksite and clean up. With such a diverse range of client markets, no single sector
of the economy determines the health of commercial construction. Rather, overall business activity
and macroeconomic factors influence the need for new commercial space.
As such, economic booms and busts can cause dramatic fluctuations in industry performance. During
the five years to 2013, the Great Recession severely strained the business sector, causing
bankruptcies, layoffs and business closures as households reined in spending and unemployment
rose. With fewer businesses in operation and less consumer spending, demand for new office and
retail buildings fell. Moreover, the overbuilding that took place before the recession, in 2005 and
2006, created a surplus of commercial space, further reducing demand for new construction.
The business sector’s decline was triggered by the credit crisis, which followed after the housing
market began to collapse in late 2006. The housing boom between 2003 and 2005 led to a surplus of
un‐purchased homes, and many mortgages were made to subprime customers with relatively poor
credit. As these consumers began to default on their payments, many banks were forced to write
down assets tied to mortgages, causing a ripple effect of falling value across the economy. For
businesses, the failure of many banks and the tightening of lending standards meant less financing for
operations and necessary purchases.
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As consumers’ homes lost value and unemployment rose, consumer spending slowed drastically, and
businesses halted or canceled expansion plans. Also, with high unemployment, businesses needed
less space for fewer workers, and many companies shut down altogether. This translated to very low
demand for new office construction, which is one of the Commercial Building Construction industry’s
primary markets.
Industry Performance
The retail buildings (e.g. stores and restaurants) and office buildings market segments (the industry’s
two largest revenue sources) suffered serious blows during the recession. With consumer spending
down, revenue from retail store and shopping mall construction fell, which subsequently sapped
demand for warehouse space, one of the industry’s secondary markets. Furthermore, online
shopping offers very competitive prices that many brick‐and‐mortar stores have to meet. This trend
exacerbated the downward slide in retail demand over the past five years.
Meanwhile, heightened office vacancy indicated little demand for new office buildings. During
periods of business formation, existing vacant office space is typically filled before new structures are
built, leading this market segment to lag behind in times of economic recovery. Office construction
contracts are generally complex and have long lead times, allowing firms to demand high fees but
limiting the tendering process to the industry’s larger companies.
Most industry firms contract workers on a per‐project basis, and the majority of wage costs are
related to shrinking margins subcontracted labor in specialized building trades, such as electricians
and plumbers. To make operations more efficient and flexible, many firms reduced their in‐house
staff levels in favor of subcontracting more workers when the job called for it. As such, industry
employment is expected to fall at an annualized rate of 4.4% to 325,246 people over the five years to
2013. However, because the few projects that firms could obtain still required the same level of
labor as before the recession, wage costs grew as a share of revenue during the past five years and
contributed to shrinking profit
With economic recovery underway, the unemployment rate is projected to steadily fall over the next
five years. Lower unemployment will have two profound effects on businesses. First, more
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employees will increase the need for more commercial space, particularly in the service sector, which
makes the businesses rebound most use of office buildings and similar spaces. Second, higher
employment will increase average disposable income levels, allowing households to spend more on
goods and services. This, in turn, will raise downstream demand for producers and retailers,
indirectly raising demand for new commercial construction. Overall, consumer spending is forecast
to rise at an annualized rate of 2.9% over the five years to 2018.
Concerns about the inflationary risks inherent in keeping interest rates low may lead the Federal
Reserve to raise rates sooner than expected; however, its policies are considered a primary means of
encouraging economic growth, and rates are not expected to rise significantly in the immediate
future.
Industry employment is forecast to grow as firms rebuild staff from low recessionary levels; however,
the popularity of keeping in‐house employment relatively low in favor of hiring flexible
subcontractors more often is expected to persist. As such, employment levels are projected to grow
more slowly than they fell during the past five years. In the five years to 2018, the number of industry
workers is forecast to grow at an annualized rate of 3.9% to reach 394,684.
Contracts & Convergence
Over the next five years, convergence of the general contractor (GC) role and architect‐designer role
within the construction process is anticipated to subtly change the Commercial Building Construction
industry. Under standard design‐bid‐build contract models, a property owner or developer signs a
contract with a building designer, and once the plans are agreed upon, a separate bidding process
and contract takes place for the GC, a party separate from the designer. In recent years, however,
other contract models have gained prominence, and these alternative contracts are expected to
become more popular in the five years to 2018.
In particular, larger GCs have increasingly added in‐house design and architecture services to pursue
design‐ build contracts, in which the designer and builder are the same entity, and one contract is
signed. Design‐build contracts offer the prospect of more efficient communication, quicker build
times and the potential to save on costs. However, such contracts also potentially create conflicts of
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interest because builders and designers typically act as opposing forces, checking one another’s
recommendations to ensure proper pricing, materials and schedules.
Other shifts in contract methods include integrated product delivery, a process made possible by
modern computing technology and remote, internet‐based communication that brings all engaged
parties (owner, designer, GC and subcontractors) into the planning for each element of a build‐out.
Building information modeling software incorporates massive amounts of data to anticipate the
ripple effect of changing minute details of a blueprint and materials list, down to the subcontractor
level. While these alternative and technologically advanced methods will likely have an indirect
influence on the way large GCs compete for more lucrative contracts, they are not projected to
replace standard design, bid or build contracts in the five years to 2018.
Design, Bid, Build Contracts
Under the standard commercial construction process, the property owner or developer hires an
architect or designer to render the plans for a structure and then receives bids from general
contractors (GCs) for the building project itself. These design, bid, build (DBB) contracts are
estimated to account for about 47% of revenue in the industry in 2013. In this construction
management model, separate contracts exist between the owner and designer and between the
owner and GC; the latter relationship is relevant to operators in the Commercial Building
Construction industry.
During the recession, DBB contracts grew as a share of industry revenue because they are typically
less expensive than other, more‐integrated construction management models. Awarding a DBB
contract is based mostly on the lowest tendered price, which appealed to the few property
developers and owners still interested in new construction during the economic slump.
Design‐Build Contracts
During the past few years, design‐build contracts have been quickly gaining prominence as an
alternative to the traditional DBB contract. In a design‐ build contract, the designer and GC are the
same entity; thus, one contract exists between the general contractor/designer, and the owner or
developer. Design‐build contracts account for 22.0% of industry revenue in 2013, which is a higher
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proportion than during the recession when price was the most‐important determining factor in
awarding a contract. The design‐build model creates a single point of responsibility for design and
construction, reducing overall build time by streamlining communication and eliminating the gap
between the legal standards for construction and architectural documentation, which can lead to
litigation between those parties and the owner. It can also better ensure that sustainable building
processes and materials are used.
On the other hand, design‐build contracts can reduce accountability in the construction process. An
architect under direct contract with the owner has a responsibility to suggest improvements,
continued which could involve different or more expensive materials and techniques. The designer
also typically reviews the builder’s work to ensure adherence to the design; conversely, the builder
checks the architect’s work against time and monetary constraints. Combining the designer and
builder into one entity could create a conflict of interest in which neither party has incentive to
provide alternatives and suggestions that better the project.
Design‐build is typically more common in high‐value public or institutional markets in which
considerations of aesthetics, sustainability and schedule make integrating the designer and builder
more attractive. However, this service segment will grow as a share of revenue for commercial
structures during the next five years as well.
Integrated Product Delivery Contracts
Another alternative to the DBB process, integrated product delivery (IPD) involves the three separate
parties, the owner, designer and builder, signing one joint contract at the onset of a project and
holding equal power and responsibility throughout the its life cycle.
These relational contracts often include incentive clauses that allow potential savings during the build
to be shared among the three parties. IPD contracts also typically make use of building information
modeling (BIM), in which each element and facet of the project process is virtually modeled. IPD
contracts account for about 13% of industry revenue in 2013.
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Construction Manager At‐Risk Contracts
In construction manager (CM) at‐risk contracts, the GC operates under a guaranteed maximum price.
If costs surpass that limit, the GC, rather than the developer or owner, is responsible and absorbs the
added cost. With the added incentive to control expenses, CM at‐risk contracts include consultant
services and advising during preconstruction as well as GC services during the build. CM at‐risk
arrangements also integrate the GC’s input at the design stage to a greater extent than DBB contracts
(though less than in the design‐build model). CM at‐risk contracts account for about 9% of industry
revenue in 2013.
Turnkey Contracts
Turnkey projects are constructed so that they can be sold to any buyer as a completed product rather
than as a build‐to‐order project made to an owner’s needs or specifications. Turnkey projects are
most common in the single‐ family home market, with finished flooring and appliances preinstalled
for any family, but turnkey developments also exist for retail and warehousing space. Turnkey
contracts generate about 9% of industry revenue, a share that has fallen during the past five years.
Because business activity slowed down during the recession, demand for new space without a tenant
or owner‐operator already in place was especially low.
Demand Determinants
Because its markets are spread throughout the entire business spectrum, demand for the
Commercial Building Construction industry depends largely on overall economic activity and
macroeconomic indicators. More specific factors can influence demand for different types of
buildings in these markets (see the Major Markets section). On the whole, demand for new
commercial structures is determined by the degree to which consumers are able to spend on goods
and services, which encourages or discourages businesses from expanding. As such, per capita
disposable income and the national unemployment rate are key underlying demand determinants.
Other key economic factors that influence investment decisions include the prevailing interest rate
and availability of finance; current and expected rates of general economic growth; the expected
investment yield (long‐term rental yield and speculative capital gains); taxation treatment of building
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investment compared with other types of assets; vacancy rates of existing building stock; the rate of
replacing aging building stock; and changes in the structure, distribution and population size. The
industry is also subject to unforeseen stimuli to demand resulting from natural disasters such as
tropical storms, hurricanes and earthquakes, which create new building projects.
Office construction is principally determined by growth in the service sector work force, growth in
foreign investment inflow and developer speculative activity. The average age of commercial office
stock is an important demand determinant for the addition of new stock or the upgrade of existing
stock. New technologies in the areas of IT and communications have negatively influenced rapidly
aging building stock, thereby increasing demand for premium stock.
Retail building construction is principally determined by: shopping preference and patterns;
population growth rates and catchment areas; and patterns in consumption expenditure. Hotel
construction is determined by: growth in international and domestic tourism; major cultural,
sporting, entertainment and business events; growth in casino licenses; and existing supply of
accommodation. Other commercial building construction is determined by: population growth and
urban spread; increases in tourism and leisure time; major cultural and sporting events; and
popularity of new sports and recreational activities, can drive the construction of new venues.
Major Markets
Retail Buildings: The construction of retail buildings, including stores for any type of product or good
and restaurants, account for an estimated 37.3% of industry revenue in 2013. This segment includes
the building of shopping centers, shopping malls and general merchandise stores; restaurants, bars
and fast food outlets; drug stores and building supply stores, among others. During the recession,
reduced consumer spending and a trend toward staying home for meals rather than going out hurt
this market segment from 2008 to 2010. This market has also been forced to contend with the
growing popularity of e‐tailers and online shopping, which directly reduce the need for brick‐and‐
mortar retail locations. However, the more dramatic fall in office construction and other segments
has caused the retail segment to rise as a share of revenue since 2008. During the coming five years,
though, as more consumers use the internet to shop, this segment is forecast to shrink as a share of
revenue.
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Office Buildings: The office building market is estimated to generate 24.9% of industry revenue in
2013. Office construction was severely hampered by the recession, which caused many businesses to
contract, halt expansion plans or shut down completely, all of which reduced the need for additional
office space. The total number of businesses in the United States fell each year between 2008 and
2010, leaving office buildings unoccupied or below capacity. The office rental vacancy rate, which
measures the number of empty office units and suites in the United States, jumped 20.4% in 2008
and 26.3% in 2009, indicating little demand for new office construction. Commercial lending also
tightened during the downturn as banks tightened standards and reined in lending to buffer reserves,
making it difficult for businesses interested in growing to finance expansion. As the economy
continues to rebound and business formation and expansion responds to growing consumer
spending, this market’s share of revenue is forecast to grow during the five years to 2018.
Lodging: Lodging Construction of hospitality structures (e.g. hotels, motels and resorts) accounts for
an estimated 12.9% of revenue in 2013. During the recession, demand for this market’s buildings fell
to reflect lower per capita disposable income and fewer trips taken by consumers for pleasure and
business. With less household income to spend on discretionary purchases, such as vacations, and
less corporate profit to fund trips to meet clients or other business travel, consumers and
businesspeople traveled less, reducing demand for hotels and motels. In 2008 and 2009, the number
of domestic trips by US residents fell 4.1% and 5.1%, respectively, and this number has yet to reach
prerecession levels. As consumers and businesses continue to keep discretionary spending on
purchases, such as travel, relatively tight, causing this market’s share of revenue to shrink during the
five years to 2018.
Warehouses and Storage: Warehouse and storage space construction accounts for about 6.7% of
revenue in 2013. Reduced consumer spending left a high volume of unsold inventory during the
recession, but low levels of production on the manufacturing side created little demand for new
storage space in the five years to 2013. As such, this segment’s share of revenue has remained fairly
stable during the period. During the five years to 2018, though, growing economic consumption is
forecast to raise demand for additional inventory space, causing this segment to increase slightly.
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Amusement and Recreational Buildings: This market segment, which includes sports facilities and
gyms, private clubs and social centers, movie theaters, theme parks, casinos and similar structures, is
estimated to account for 6.5% of industry revenue in 2013. Because demand for these buildings’
activities depends largely on consumer disposable income, this market contracted sharply during the
recession and has remained subdued since. This market segment’s share of revenue is expected to
grow slightly during the five years to 2018 in response to loosening consumer spending on
entertainment.
Other markets: Nonresidential farm buildings, including barns, silos and other storage spaces, are
expected to account for about 6.4% of industry revenue in 2013. This share has remained fairly
steady during the past five years. The heavy subsidies allocated to much of the US agriculture sector
kept demand in this market stable compared to the rest of the economy. Other kinds of commercial
structures, such as parking garages, combine to account for the remaining 5.3% of industry revenue.
Market Share Concentration
The Commercial Building Construction industry has a low level of market share concentration, with
the four largest companies holding a combined market share of 4.3% of industry revenue. The largest
players are multinational general contractors (GCs) with the resources and staff to handle massive,
lucrative contracts for state‐of‐the‐art structures like super skyscrapers and professional sports
arenas. However, most participants in the industry are small‐ scale GCs that serve a narrow, local
geographic region.
As such, more than one‐half of industry enterprises employ fewer than five people and often work as
subcontractors for larger firms. While the industry’s largest firms sometimes expand through
mergers and acquisitions to gain market share (such as Tutor Perini’s 2011 acquisition of Anderson
Companies), the prevailing model is to subcontract small and mid‐size firms when the necessary.
Furthermore, industry revenue is increasingly generated through design‐build contracts and
consulting and advisory roles, which both reduce the need to operate larger companies with many
employees. As such, industry concentration is expected to remain low in the five years to 2018.
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Key Success Factors
Access to highly skilled workforce: Ensuring ready access to skilled workers and subcontracting
building trade specialists is essential for industry success.
Ability to negotiate successfully with regulators: It is important to have construction managers who
have sound knowledge of building statutes and regulations. They also need to have the capacity to
deal with local government administration and regulatory authorities throughout the project.
Ability to compete on tender: Most contracts in this market are allocated through the tender
process, and successful contractors ensure they secure a steady flow of new contracts without
compromising their long‐term price margins.
Access to high‐quality inputs: Successful firms establish good working relationships with suppliers of
high‐quality construction materials and fixtures.
Cost Structure Benchmarks
Profit: Profit margins for the Commercial Building Construction industry have narrowed substantially
in the five years to 2013 to reflect decimated demand and tightening price competition for contracts.
In 2013, the average margin (measured as earnings before interest and taxes) is expected to be 2% of
revenue, showing slight improvement from a low of 1.7% in 2011.
While much of the economy had come out of the recession by 2011, commercial construction
demand remained relatively subdued, even as construction material prices rose in line with the
improving economy, leading to substantially low margins that year.
In 2008, before the construction slump hit the nonresidential market, profit was estimated at 3.8%,
reflecting the strong pipeline of projects still available for general contractors. As the pipeline dried
up and new projects were postponed, reduced or altogether canceled, operators cut into their own
margins by underbidding one another to drum up business. This price competition forced some
operators, who were unable to lower prices enough, out of business.
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Other factors have worked to strain the industry’s margins. Even as demand declined and pricing
power deteriorated, the costs of construction materials, including steel, copper and aluminum, have
risen during the past five years. Higher energy and gasoline costs have also contributed to tighter
margins. During the five years to 2018, costs are forecast to continue rising, and with the surge in
construction activity brought on by the recovering economy and pent‐up demand, margins are
projected to reach 4.0% by 2018.
Wages: Total wage costs for the industry amount to 66% of revenue in 2013, including 13.3% of
revenue absorbed by in‐house employee costs and 52.7% of revenue spent in subcontractor wages.
General contractors are typically the managers and organizers of a construction project; when
awarded a contract, they are expected to hire all the necessary labor for construction, the costs of
which are included in the contract’s terms.
Wages have risen as a share of revenue during the past five years because though revenue earned
from projects has fallen, the amount of labor needed to complete projects has changed little.
Furthermore, with more convergence of design and general contractor firms, which echoes the
growing popularity of design‐build contracts, in‐house labor costs have risen to reflect the higher
number of designers and architects on staff.
Purchases: Rising purchase costs during the past five years have contributed greatly to shrinking
profit. Purchases account for 21.5% of industry revenue in 2013, driven by rising construction
materials prices throughout the industry’s markets. The Producer Price Index for new office‐ building
construction and new warehouse‐building construction is estimated to grow at annualized rates of
1.2% and 1%, respectively, from 2008 to 2012 (latest available data).
Fluctuating commodity prices also contribute to the volatility of purchase costs, so it is important to
note that the retail price of gasoline has grown at an annualized rate of 1.9% during the same period.
On large‐scale projects, the general contractor is directly responsible for most material purchases and
negotiates directly with suppliers for discounted prices. On small‐scale projects, subcontractors are
typically responsible for completing discrete segments of construction, including the supply of
materials.
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Other Costs: Rent and utilities costs are estimated to account for 3% of revenue in 2013. Though
construction activity largely takes place on‐site, reducing utilities and rent costs, the varied duties of
general contractors include design, sales and other management services that necessitate office
space. Depreciation costs are also low (1.4% of revenue), with heavy equipment that is usually leased
and handled by subcontractors.
Computer‐aided design software is increasingly being purchased by general contractors, as is other
modeling software that allows firms to better forecast and plan for a project’s costs. Other costs
include marketing (1.7%) and various other expenses (4.4%), which include insurance and other
administration costs. The industry’s larger companies typically provide surety bonds as an additional
level of security for the completion of a project as promised. Similarly, general contractors often
require surety bonds from their own subcontractors.
Basis of Competition
The Commercial Building Construction industry is characterized by highly competitive conditions. In a
positive environment, competition between general contractors (GCs) typically occurs based on
proven quality, timeliness, technical capacity and efficiency. During construction slumps or
recessions, though, price competition becomes more widespread. Generally, bid price is also a more
important factor for smaller projects. During the five years to 2013, rising price competition has been
a significant cause of narrowing profit margins in the industry.
Large‐scale construction projects are typically either put to public tender (i.e. advertised in the media
or through government publications) or put to a closed tender, in which the client invites selected
contractors to provide quotes on a project. The selection of contractors for a closed tender is based
on the operator’s reputation, past performance and close relationships with developers and
financiers. Tendering on extremely large or complex construction projects is confined to a few large‐
scale operators that have the requisite resources and expertise.
During the recession and its subsequent years, some large contractors chose to become stakeholders
in the projects they were contracted to build. This arrangement, in which the GC is both builder and
investor, provides the developer with an added capital stream and allows the GC to receive a fee for
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the construction and a return on the investment made. While the trend is not widespread across the
industry, during periods of tight credit or weak demand, the possibility of a developer‐contractor co‐
ownership agreement can serve as a basis of competition for large commercial projects.
Technology & Systems
Advancements in building technologies and management techniques have significantly altered the
Commercial Building Construction industry during the past decade. New technologies, such as laser‐
and GPS‐equipped machines have transformed complex building processes by speeding up project
completion, lowering costs and improving overall building quality. For instance, lasers and GPS
systems now help construction workers quickly delineate building perimeters, a task that relied on
string and steel tape measures in the past.
During the past decade, there has been a steady introduction of logistic management in project
design and construction, allowing firms to properly align equipment and workers from a remote
location. Better management techniques allow firms to quickly identify deviations from the planning
path. Using computer‐aided design (CAD), stock‐flow software packages, field estimating technology
and personnel skilled in logistics, the industry has become substantially more efficient.
The recent advent of building information modeling (BIM) gives fast‐evolving firms a new competitive
advantage. BIM allows construction companies to view every aspect of a construction project (fully
realized and in vivid 3‐D) before construction even begins. BIM allows firms to calculate minute
details, such as how many light fixtures are going to be needed to illuminate a space receiving little
sunlight. Furthermore, BIM software can determine how a proposed change will affect subcontractor
costs and scheduling, taking much of the estimation once required of general contractors out of the
process. This allows firms to create more accurate budgets.
Technological improvements have also boosted the availability of high‐grade materials that are more
equipped to resist natural disasters or other violent events. Incremental advancements in
construction material in terms of strength, prefabrication, fire resistance and insulation qualities have
improved the efficiency and flexibility of building design and construction during the past two
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decades. The principal area of technological advancement involves using glass and concrete‐based
products instead of traditional steel, timber and ceramic materials in commercial buildings.
Additionally, advanced technologies have allowed the construction of modular buildings, in which
structures are built at a remote location and then brought to a site in sections. Technological
advancements allow the industry to construct buildings of higher quality and functionality.
Increasingly, commercial facilities are integrating the latest technology in computer installation and
climate controls, and they are also demanding the latest advancements in design and materials
handled by subcontractor specialists to promote energy conservation.
Regulation & Policy
The planning and regulatory environment that governs the Commercial Building Construction
industry is often complex and involves local, state and federal government provisions. Construction is
subject to statutory regulations that cover building standards, pollution controls, competing land
usage, disruption to existing businesses or residents and occupational health and safety issues.
Compliance with this regulatory regime generally adds to the industry’s underlying operating costs. In
the long term, compliance may reduce a firm’s exposure to litigation associated with faulty
workmanship and workplace accidents, lowering insurance premiums.
Health and safety regulations require that workers wear protective clothing and helmets on‐site and
that safe conditions are provided for them (e.g. scaffolding, harnesses and ventilation). The Office of
Safety Health Administration enforces standards for the industry that are contained in Title 29 of the
Code of Federal Regulations Part 1926. State, and local building authorities assess and enforce this
code.
A range of building and construction codes govern activity in the Commercial Building Construction
industry, including general building codes, residential codes, mechanical codes, plumbing codes,
electric codes, fire codes, accessibility codes, zoning codes, state codes, local codes and ordinances.
Building codes are endorsed by the International Code Council, which publishes an International
Building Code that covers building planning, fire protection, building envelope, structural systems,
structural and nonstructural materials, building services and special services.
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Liability for environmental cleanup is sometimes found for general contractors under the federal
Superfund law and similar state statutes. The Superfund law can impose the cost of cleaning up a
contaminated property on the construction firm regardless of who owned the site at the time of
contamination. This is a situation that can raise costs for firms if waste or toxic materials are
discovered once construction is complete. General contractors typically obtain insurance for
environmental liability or receive indemnification from clients to cover risks associated with
environmental remediation.
In the past five years, state and local governments across the country have increasingly encouraged
green building through targeted financial and structural incentives. Developments that achieve
measurable and verifiable green building goals often qualify for tax exemptions or credits. Green
building projects can also be exempt from fees during the permitting processes and can benefit from
an expedited review. Grant programs or subsidies are also available for developers of energy‐
efficient buildings as a way to encourage developers to follow green building practices. These
incentives benefit the commercial construction industry by helping drive demand for renovations,
improvements and new construction.
Additionally, the commercial construction industry receives assistance from educational facilities and
training programs, which boost the numbers of qualified employees. Six major trade and professional
associations have officially endorsed the American Institute of Constructors’ (AIC) Constructor
Certification program, which qualifies individuals through education, experience and examination for
the professional designations of associate constructor and certified professional constructor. Since
1997, the AIC accreditation program has sought to strengthen its professional rigor and meet
international accreditation standards. Subsequently, most major industry associations currently
endorse the AIC certification, including the Associated General Contractors of America, American
Subcontractors Association, Associated Builders and Contractors, the Business Roundtable, American
Council for Construction Education and American Society of Professional Estimators.
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American Lifestyles
Five years after the recession, Americans retain many of the budgeting behaviors they adopted
during the downturn. Many also continue to view their personal expenditures with a belt‐tightening
attitude due to price increases in non‐discretionary spending categories that further pinch household
budgets since wages have not kept pace with rising costs.
From 2008 to 2013, the U.S. population increased by 3.9%, which equates to an additional 12 million
people. However, compared with the previous five years, growth has occurred at a much slower
pace due to a declining birthrate as well as lower levels of immigration, which means that consumer
product companies can’t rely on population growth to increase volume sales, and as a result need to
be more creative to grow both sales and profits.
America’s population is skewing older with forecasts for growth from 2013 to 2018 showing that the
number of those aged 55+ is set to grow at a much faster pace than the number of younger
Americans. Specifically, those aged 55‐64 will increase by 8%; those aged 65‐74 will grow by 21.2%;
and those aged 75+ will increase by 12.3%. Meanwhile, population growth among younger
Americans over the next five years is much slower with some age groups (12‐17, 18‐24, and 45‐54)
even showing a decline.
The slow growth in the working age population means that there will be relatively fewer people to
pay the taxes necessary to support public programs for the older population, and fewer people to
provide the services that older people need.
Multicultural America
In 2013, the multicultural make‐up of the U.S. does not look significantly dissimilar to the population
in 2008. However, while whites and non‐Hispanics continue to account for the vast majority (and
represent about four out of every five Americans), their share of the total population has declined
from 2008 to 2013. Over the past five years, the Hispanic share of the population has grown by 1.8
percentage points while the share of whites has declined by 2 percentage points, which shows that
white population growth has not kept pace with the overall rate.
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The trend of a declining white share of the U.S. population will continue while growth of multicultural
groups—Hispanics and Asians, in particular—will outpace whites to account for an increasing share of
American citizenry.
The burgeoning Hispanic consumer market is expected to boost several economic sectors due to the
significant (and increasing) spending power of this group. In 2012, the Hispanic market is valued at
$1.2 trillion, according to the Selig Center for Economic Growth, and is larger than the economies of
all but 13 countries in the world.
American Expenditures
Over the five years from 2007 to 2012 (which included the recession years of 2008‐09), expenditures
increased across a majority of categories evaluated by Mintel. This shows that, despite a weak
recovery, consumers quickly returned to spending and markets’ recessionary declines were offset
(and surpassed) by gains made within the three years post‐recession.
The forecast for 2013 to 2017 shows growth for all categories with home and garden, leisure and
entertainment, and dining out expected to show the most impressive gains.
Consumer expenditures for most consumables posted year‐over‐year growth throughout the
recession and its aftermath. From 2013 to 2017, growth in expenditures on consumables is expected
to outpace growth from 2007 to 2012 for all categories with the exception of non‐alcoholic
beverages, for which growth is expected to slow.
American Conservatism
Although the country officially exited recession nearly four years ago and consumer expenditures are
up, Americans retain a cautious approach toward purchasing and avoid conspicuous consumption.
Americans are not only looking for savings at the cash register, but also in their daily lives. This has
prompted many to make lifestyle changes. While these changes may have initially been the result of
strained finances, some of the recession‐induced habits are sticking as Americans find that giving up
some of their former “luxury” habits isn’t so bad after all, and may actually be preferred.
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Some 36% of respondents say they cook/bake more often from scratch; 31% say they entertain more
at home rather than go out; and 27% say they do more do‐it‐yourself (DIY) projects themselves
instead of hiring a professional. These behaviors were likely prompted by recessionary cutbacks.
However, their lingering popularity shows that consumer behaviors and priorities appear to have
changed, and the focus has turned more inward (home, family, friends, and personal health).
While conservative spending may be a result of lingering concerns over the health of the economy
and a fear of debt (which affects consumers’ shopping behaviors and perception of how they make
spending decisions), it is also likely that consumers’ attitudes have shifted. That is, rather than having
pride in purchases and all things “new,” consumers now appear to take pride in their ability to cut
costs, find deals, and pay lower prices than retail.
In many categories, consumers have been conditioned by a nearly never‐ending cycle of sales,
coupon offers, members‐only discounts, lower‐priced product alternatives, etc., to avoid ever paying
full price. And technological advancements have made price comparisons more accessible.
International Economy
Much of Europe is in recession, and the Asian economies have been slowing. These developments
have led to an estimate for world economic growth in 2012 that is only 1.2 percent.
The International Monetary Fund expects world economic activity to improve only moderately to 1.5
percent in 2013. It sees a gradual acceleration of world economic activity beginning in 2014. As in
the recent past, the developing economies are expected to contribute more to global growth than
the advanced economies.
The effects of weak global economic growth have been evident in U.S. trade. With weak economic
activity elsewhere in the world, U.S. producers are having trouble exporting their goods. The effects
are relatively mild, however, because the U.S. economy is not highly dependent on international
trade. In addition, weak global economic activity has helped keep down commodity prices; which has
helped with inflation. The U.S. economy also benefits from downward pressure on oil prices.
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United States Economic Growth
In third quarter 2012, the annualized growth rate of U.S. real GDP rose to 2.7 percent. Consumer
spending drove most of the growth.
Residential investment also continued to show improvement, and government spending rebounded
strongly as the result of strong defense spending. Business fixed investment and net exports made
negative contributions.
With weak world economic activity, U.S. exports have declined. The U.S. economy is not highly
dependent on trade. Nonetheless, exports are likely to remain a weak spot in U.S. economic activity
until a recovery is well underway in Europe.
After a strong buildup in fourth quarter 2011, inventories were reduced the first two quarters of
2012. The inventory drawdown was reversed in third quarter 2012, and the inventory‐to‐sales ratio
remains relatively high. Consequently, businesses are likely to respond to sales growth by continuing
to draw down existing inventories.
United States Gross Domestic Product
As far as recoveries from a financial crisis are concerned, the U.S. economy remains on track with the
average international experience.
However, the weak growth in real GDP means that U.S. economic activity remains well below
potential. At its lowest, U.S. real GDP was 7.5 percent below potential. That low occurred in third
quarter 2009. Over the next two years, we saw a gradual improvement to 5.9 percent below
potential in fourth quarter 2011.
In third quarter 2012, we are still 5.9 percent below potential, which means that economic growth
has not been sufficient over the past year to narrow the gap between real GDP and its potential.
At the trough (second quarter 2009), U.S. per capita GDP was 5.9 percent below its fourth quarter
2007 peak. With a growth rate of real GDP of at least 2.0 percent in 2013, the recovery of per capita
GDP will occur by fourth quarter 2013.
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United States Housing Market
The U.S. housing supply is coming into balance. Based on recent sales, the current houses listed on
the market provide only about 4.5 months of supply, which is well below the historic average of 6.2
months.
Analysts remain concerned that there may be a shadow inventory of houses in or near foreclosure
that would put the national supply of houses at about seven months. Nonetheless, we are likely
seeing sharp declines in the supply of houses, which bodes well for prices.
Delinquencies on real estate loans are falling, which is some indication that we are seeing a resolution
of the real estate crisis. Improvements are stronger in commercial real estate than the overall real
estate market.
The residential real estate market remains relatively unchanged. With improvements in the overall
real estate markets, prices for shares in Real Estate Investment Trusts (REITs) have generally risen.
Las Vegas Housing Market
Housing prices in the Las Vegas metropolitan area and the United States both hit bottom in January
2012. Las Vegas house prices have risen by 6.9% since then. U.S. housing prices have risen only 4.7%.
The big difference was in the decline. Las Vegas housing prices fell by 61.1% from January 2007 to
January 2012. During that period of time, U.S. housing prices fell by only 33%.
The nationwide housing boom took Las Vegas housing prices upward by 231% from 2000 to 2006.
Over that same period, housing prices throughout the West rose by 92%, and U.S. housing prices rose
by 60%. Median prices for existing homes in Clark County dropped more than those for new homes
during the decline. They also rose much more sharply in recent months. Prices for new homes are
tethered by construction costs, but prices for existing homes are not.
Southern Nevada needs to further improve its foreclosure situation. Cities with foreclosure rates in
the top ten include Las Vegas at number six with 1 foreclosure in every 291 housing units. In
addition, roughly 287,152 out of 548,000 Nevada mortgage properties have negative equity as of the
fourth quarter of 2012 (Nevada has the worst performance in terms of negative equity mortgages).
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The decline of foreclosure sales also correlates with the decline of new listings and hence the
negotiating power of potential homebuyers. Scarcity of listings makes the market favorable for
sellers and homeowners in the sense that price hikes come as a result of increasing competition
among homebuyers. And increasing prices could encourage homeowners to list their homes for sale
in the near future, especially since marketing time for single‐family homes is short. As of February
2013, about 78.1 percent of all single‐family homes sell within three months from list date.
Over half of all single‐family residences sold as a foreclosure in 2009, the peak, and about a fourth of
all single‐family sales were foreclosures in 2012. As of mid‐February 2013, foreclosure sales make up
14.19 percent of all single‐family sales for the current year. This decline in foreclosure sales can be
attributed the growing turnover of the housing stock.
Meanwhile, the Las Vegas median price per square foot of single‐family residences decreases 1.57
percent from January 2013 to February 2013. This brings the median price level to $79.14 per square
foot, representing a year‐over‐year increase of 17.31 percent. The abnormal growth in price prior to
the financial crises that began in 2007 and its subsequent rapid decay can be seen over time.
A simple exponential trend line, computed for January 1994 through September 2000, yields an
average growth rate of 0.24% for the median price per square foot. This implies that prices have
been below the expected trend since November 2008 and the current price per square foot falls
$41.24 below the expected price level.
According to the Case‐Shiller index, housing prices in the Las Vegas metropolitan area and the United
States both hit bottom in January 2012. Las Vegas house prices have risen by 6.9 percent since then.
U.S. housing prices have risen only 4.7 percent. The big difference was in the decline. Las Vegas
housing prices fell by 61.1 percent from January 2007 to January 2012. During that period of time,
U.S. housing prices fell by only 32.9 percent.
The Case‐Shiller index is considered one of the better measures of housing prices because it
uses prices from repeat sales, which more accurately captures quality than a more commonly
used measure, such as median home prices.
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A lack of available supply is pushing up prices for single‐family homes in Las Vegas. For listed homes,
the months of supply is down to 5.6. The decline is coming from a lack of listings. In addition, only
38% of the listings are vacant.
Prices began rising in Las Vegas when the months of supply fell below 6.2. In 2006, prices didn’t
begin slipping until months of supply rose above 7.3. Probably, the built‐up momentum carried Las
Vegas home prices upward even after excess supplies were becoming evident.
Despite recent price gains, concerns about a shadow inventory continue to overhang the Las Vegas
housing market. Figures from Clark County Comprehensive Planning place the months of supply of
vacant homes at 14.7. Figures on mortgages in arrears and foreclosures place the potential months
of supply at around 20. With banks taking an orderly approach to foreclosure, however, these excess
supplies are likely to be dribbled rather than flooded onto the market.
As of second quarter 2012, 59% of the homeowners in Nevada had negative equity. Another 5%
percent were close to a negative equity position. Nevada remains the state with the highest
percentage of homeowners in a negative equity position. Other states rounding out the top six
include Florida, Arizona, Georgia, Michigan and California.
Right now, Las Vegas housing is a very good deal. According to the Housing Opportunity Index, which
considers both price and income, Nevada housing is more affordable than the national average. That
is one of the primary reasons that many long‐term forecasts show strong population gains for the
region, some of which are driven by projected retirements.
Ironically, low housing prices may eventually help the Las Vegas economy grow. In the 1990s and
early 2000s, Las Vegas had housing that was quite affordable by national standards. That was one of
the keys to the region’s growth. The weakness in Las Vegas housing prices has once again restored
that advantage.
Overall, the Southern Nevada housing market moves towards a period of escalating housing prices
and heads onto a path of recovery as fewer foreclosure sales occur.
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Las Vegas Apartment Market
Apartment landlords in Las Vegas can expect some challenges in the upcoming quarter. The average
apartment rental rate in the Las Vegas metro area fell slightly to $739.90 per month as of the first
quarter of 2013, according to survey data from the Center of Business and Economic Research
(CBER). This number represents a slight drop of $3.14 compared to last quarter.
Lower rental rates, however, have not attracted a desired amount of tenants into apartments.
Recently, the vacancy rate among apartments increased slightly to 9.84 percent, but it represents a
decrease of 0.6 percent on a year‐over‐year basis. These conditions make the market unfavorable for
apartment landlords, but more affordable for new tenants.
Meanwhile, the average vacancy rate for apartments in Las Vegas has fluctuated since 2006, and the
average vacancy rate rose from 4.53 percent in the first quarter of 2006 to a peak at 10.96 percent in
third quarter of 2009.
The average rental rate has fallen by 15.67 percent since the fourth quarter of 2007. And while the
fall in the average rental rate was not as profound as the fall in homes prices, the residential market’s
low prices gave investors the opportunity to buy homes and place them for rent.
Furthermore, these new investors can afford to undercut rents as an incentive to attract tenants.
And the growing numbers of rentals place downward pressure on apartment rental rates because
they give tenants more options by offering a greater supply of rental homes.
Further pressure on rental prices and temporary increases in vacancy rates can be anticipated. The
inventory of multifamily units will increase in the valley by more than 10,000 units over the next four
years. But how many of those 10,000 units slip into the rental market, will ultimately determine their
impact on rental rates and vacancy rates.
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Clark County Economy
Clark County saw a small population decrease in 2011. Following many years of strong growth, the
region’s population held relatively steady for the past four years, with a small uptick in 2012.
Combined with reports of a tightening rental market, the upswing in redeemed driver’s licenses is
consistent with renewed population growth.
Despite weak job growth, the Las Vegas unemployment rate has dropped to 11.4 percent on a
seasonally adjusted basis. The decline is mostly a result of increased employment and declining labor
force participation. Nevada still leads all states with an unemployment rate of 11.5 percent.
Taxable sales have been particularly strong. Taxable sales were 6.7 percent higher in the first two
months of third quarter 2012 than the same period in 2011. One factor contributing to rising taxable
sales is gains in personal income.
Total personal income has been increasing in the retail trade and the accommodations and food
services sectors since third quarter 2009. The real estate, rental and leasing sector has been
relatively flat in 2012. Personal income has declined in the construction sector since late 2007.
Economic Indicators
A region’s economic base is determined by which of its sectors export goods or services to others
parts of the country. Tourism is a little different in that the industry brings its customers into a region
to provide them with services.
Economists typically measure the sectors forming a region’s economic base by using location
quotients. A location quotient provides information about whether the region has more or less of a
particular industry than is the national average. With the idea that people across the country
generally consume similar items, industries that are present in a region above the national average
are expected to export to the rest of the country. These industries have a location quotient greater
than one and form the region’s economic base.
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Clark County Economic Drivers
In 2006, the construction industry also stood out with location quotients of 1.88 and 1.96 in Nevada
and Clark County, respectively. Now, both location quotients are close to one.
Another sector that stands out is management of companies and enterprises. This sector captures
corporate headquarters and holding companies; that is, the brains or ownership of interstate and
international operations.
In Southern Nevada, employment in this sector includes bank holding companies and non‐bank
holding companies with interests in gaming, energy, real estate and other activities. This sector has
contributed to the growth of the Las Vegas economy. It has increased by an annual rate of 8.5
percent since 1990, while total employment increased at a 3.6 percent annual rate.
Within the context of location quotients, economic diversification is boosting the presence of
industries that currently have location quotients below one so that they can contribute to the
economic base. As a necessary consequence, the location quotients for other industries must
decline.
Prior to 2007, the rapid growth of construction and of the tourism, gaming and hospitality industry
crowded out potential growth in other sectors and reduced the diversification of the Southern
Nevada economy. The current economic weakness provides an opportunity for future diversification
by freeing up resources for use in other sectors.
Las Vegas Tourism
The visitor picture is stronger for Las Vegas. Las Vegas visitor volume has already exceeded the levels
seen in 2007 before the U.S. recession. In 2011, Las Vegas visitor volume was 4.3 percent higher than
in 2010. For the first nine months of 2012, Las Vegas visitor volume averaged 3.1 percent higher than
for the same period in 2011. If Las Vegas visitor volume continues at the same pace for the remaining
months of 2012, it will exceed the high‐water mark of 39,196,761 set in 2007.
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Las Vegas tourism is changing as it recovers. Visitors are coming from farther away, staying longer
and paying higher hotel rates than in recent years. Visitors also seem to be gambling less and
purchasing less from the retail shops in the casinos.
Visitors came from farther away in 2011. A higher percentage of visitors are arriving by air.
Passenger volume at Las Vegas’ McCarran airport, including those passing through, was 4.4 percent
higher in 2011 than in 2010. During the first nine months of 2012, passenger volume was 0.9 percent
higher than in the first nine months of 2011.
The slow economic recovery in the West has been evident in the changing composition of visitors.
The number of visitors arriving by automobile declined by 0.5 percent in 2011. The number of people
arriving at the California‐Nevada border was up by only 0.3 percent over 2010.
In early 2012, however, we saw a resurgence in automobile traffic, despite higher gasoline prices. The
number of visitors arriving by automobile during the first nine months of the year was 1.0 percent
higher than for the same period in 2011. The number arriving at the California‐Nevada border was up
by 6.1 percent.
One consequence of more visitors arriving by air is increased taxicab ridership. During 2011, Las
Vegas taxi ridership was up 7.3 percent higher than in 2010 and 1.6 percent higher than in 2007.
During the first nine months of 2012, taxicab ridership was 4.6 percent higher than in the same
period in 2011.