Challenged by tough economic times, construction companies still see the silver linings

Author: Jan Mathew
Recognized as industry leaders, their projects range from health care facilities, baseball stadiums, and bridges, to campus buildings, corporate headquarters, and cultural/performing arts centers. And although they remain rooted in longtime family ownership, their branches have expanded nationwide, touching the commercial/industrial, health care, and infrastructure sectors.

Collectively, The Hagerman Group, M.A. Mortenson Company, and The Walsh Group serve as a microcosm of an industry rocked by a rapid and largely unanticipated economic downturn—yet one determined to revive and re-create as a result.

Jeff Hagerman“My grandfather went through the Great Depression,” recalls The Hagerman Group President Jeff Hagerman (BSCEM ’93) of the 101-year-old company’s second generation, “and that was the single toughest crash the market has ever seen. Grandpa had one project—a gas station in Fort Wayne, Indiana.

“We’ve had a number of downturns and fought the rollercoaster a few times since, but today’s economy is second only to the Depression,” Hagerman adds. “It was amazing how quickly this cliff came, and how it sent a huge ripple effect throughout the entire industry.”

The Hagerman Group, Indianapolis/Fort Wayne/Lafayette, Indiana

Diversification among six vertical markets — college and university, health care, K-12 schools, institutional, industrial, and commercial/retail—has helped Hagerman Construction navigate current economic waves. Another buffer is the trio of companies under the Hagerman umbrella: Hagerman Construction, founded in 1908 by William Hagerman and brother-in-law Frederick Buesching; Hagerman Inc., created in 1992 to offer additional general contracting services with greater delivery flexibility; and Geupel DeMars Hagerman, a nationally recognized construction manager acquired by Hagerman in 1998.

“Our institutional and higher education markets have been particularly affected by the recession,” says Hagerman, whose company also built the Isaac Ray Treatment Center in Logansport, the state’s first project to earn LEED silver-level certification. “As their public and private endowments decreased, so did the desire to commit to capital improvements. The health care market, however, is surprisingly strong.”

Even the most robust sectors, however, hold fewer opportunities. Scale has shrunk, too, with current projects for GDH, LLC averaging $10 million total, versus $18-$20 million several years ago.

“In the past, once we secured a project we’d typically be authorized to proceed within three to six months,” Hagerman says. “Today, I can’t say that. We do as much due diligence up front as possible, but sometimes we still find out about a client’s fiscal challenges after the fact.

“Now, more notably in the private sector, it’s typically six to 18 months from the time we get the project until we break ground, if at all.”

According to Hagerman, clients increasingly view The Hagerman Group as a solution provider—particularly in the area of financing. Numbers of design-build-lease projects have escalated, and Hagerman is frequently asked to step into the role of developer.

“Three years ago, I could have counted on one hand the number of clients asking whether we’d help with funding or become an equity partner,” Hagerman says. “Now those requests have increased tenfold.”

Still, projects such as a $15.2 million addition and renovation on the Ivy Tech Community College campus in Madison, along with campuses in Logansport, Greencastle, and Fort Wayne indicate that clients are still building—they’re just reining in quantity and scale.

“The economy is changing the way we all do business,” Hagerman says. “Budget, on-time delivery, and quality are considered the baseline. Today, clients expect more innovative solutions with respect to financing, design and delivery.”

M.A. Mortenson Company, Denver, Colorado

Dean TowlDean Towl (BSCNE ’91) likens the present economic downturn to a one-hundred-year storm—one best weathered by flexibility and the tenacity to see beyond the short-term turbulence.

“Expectations are for a drop in revenue in ’09 of 20 percent or more in a more highly price-driven marketplace,” says Towl, who joined Mortenson in 1991 and currently serves as training and development manager and scheduling manager. “Presently, cost is king in the marketplace.”

Headquartered in Minneapolis, Minnesota, the company was founded by M.A. Mortenson Sr. in 1954. In 1990, Mortenson reached Engineering News-Record’s list of top 50 contractors, and has remained in that bracket since. In ENR’s most recent list, Mortenson was ranked the country’s 22nd largest general builder, with annual revenue of approximately $2.5 billion.

According to Towl, some market sectors like residential infrastructure and site development have been severely affected. The company’s game plan is to focus efforts in more active sectors, such as federal government projects, R&D and manufacturing facilities for renewable energy products, and higher education facilities. The company continues to thrive on the challenge of architecturally complex projects and stadiums as well.

“We’re presently experiencing a downturn in the renewable energy sector, such as wind generation projects, primarily due to tight capital markets,” Towl says. “But we anticipate that the government’s actions in the banking industry and the federal stimulus package will help remove some of the barriers, allowing more alternative energy generation projects to move forward.”

At Mortenson, technology also will power the company’s future. Specifically, Mortenson Construction is an industry leader in the use of Building Information Modeling (BIM), which employs three-dimensional, real-time, dynamic building software that increases productivity and reduces costs throughout the building and design process. “This is the future of the industry,” says Towl, adding that BIM is likely the most significant construction technology to gain industry-wide acceptance since Computer-Aided Design (CAD). “Effective use of BIM is now the price of admission on many complex projects.”

One example of the software’s capabilities is the Walt Disney Concert Hall in Los Angeles, completed by Mortenson in April 2003. The company adopted the use of the virtual building process to translate unique design
elements and shapes to a computerized model from which building components could be fabricated and installed. Mortenson also integrated its construction schedule with the 3D database to create one of the first uses of four-dimensional simulation in the building industry. Mortenson has been implementing BIM for over 10 years.

“As a company, we’re rolling up our sleeves and working harder than ever before,” Towl admits. “And we’re asking our team members to be flexible, patient and open to change in response to the present market conditions.”

“But we’ve weathered these kinds of cycles in the past, and we’re positioning ourselves to come out smarter, and thus stronger, on the other side.”

The Walsh Group, Chicago, Illinois

When it comes to tough economic times, there’s power in partnerships; specifically, alliances that apportion the risk and build for the future.

Jeff Lemna“We’re joint venturing more now than we have in the past,” says Jeff Lemna (BSCNE ’88), director of corporate training for The Walsh Group. “It’s part of the company’s culture—to develop relationships and create opportunities for the future.”

A 110-year-old family business in its third generation of leadership, The Walsh Group provides services through its two subsidiaries—Walsh Construction and Archer Western Contractors—and maintains twelve
regional offices. The company employs approximately 6,100 managerial and hourly workers.

Diversity has been key for Walsh throughout the decades. While the private condominium/apartment and health care markets have virtually “dried up,” Lemna says the company’s airport and bridge sectors are showing strength. One joint venture example is a recent $400 million contract with Sacramento County to build Landside Terminal B at the Sacramento International Airport, a project that includes the terminal, administrative building, central utilities plant, and an automatic people mover station.

In May 2009, Walsh Construction also was awarded a $59 million contract to replace the Amelia Earhart Bridge, which spans the Missouri River between Atchison, Kansas and Buchanan County, Missouri. The existing two-lane structure will be replaced with a ¾-mile, four-lane bridge.

“The recession has definitely affected the work we’re pursuing,” Lemna admits, “and although it’ll be a challenge going forward, we have a pretty solid backlog that will allow us to keep our employees busy through 2009.”

According to Lemna, Walsh’s financial strength enables the company to focus on large, multi-million dollar projects instead of relying on smaller projects that may attract influxes of unqualified or inexperienced bidders. “We’re seeing far more bidders on smaller projects, and are finding that some pricing can be irresponsible.”

The company also has prioritized its workforce. “Throughout this downturn, we’ve needed to relocate our management people much more frequently,” Lemna says. “We’ve traditionally prided ourselves in keeping managers within the same regional office for years, but are now needing to move people based on where we have work. “It’s hard, but I think they appreciate that we’re trying to keep them employed.” At every level, perspective is key.

“I’ve heard our owners say that they haven’t seen anything this severe in forty years,” says Lemna. “But history shows that, through every downturn, Walsh has always done well and has come out stronger on the other side.”

Building Back Up?

Although they acknowledge their looking glasses may be no clearer than anyone else’s, construction and management industry leaders offer their personal prognostications regarding an economic rebound:

“This recovery will be unique. In most recessions, you see a downturn, a trough, an upturn, and then things are rolling again. In respect to our industry, I think we’ll soon see the bottom, followed by a quick, significant ramp up in opportunities related to the federal stimulus package and TARP funding, all within the next 2-3 years. But then I believe we will have another downturn correction prior to full recovery. Instead of a typical U-shaped pattern, this recession will resemble a W.”

Jeff Hagerman, president, The Hagerman Group

“I certainly think the rest of this year will be challenging, and next year will be much the same. By 2011, things might get better. The Federal Stimulus Program might help with smaller projects, but I don’t think it will make a big difference for companies like ours. Based on President Obama’s desire for high speed rail, though, transportation jobs will be released sooner rather than later. Hospitals will be among the first private market projects to move once the money comes around.”

Jeff Lemna, director of corporate training, The Walsh Group