State Construction Forecast: Look to ’05 for Clear Skies

Fri May 14, 2004 - Southeast Edition
Giles Lambertson

Anyone looking for a clear picture of how Georgia contractors will fare in 2004 probably will have to keep looking right on into 2005.

That is the conclusion drawn from a variety of forecasts by economists and industry observers. Georgia is recovering from the same economic downturn the whole country experienced, but the full strength of the recovery is not liable to be felt from Varnell to Valdosta for another calendar year.

Still, some sectors of the construction economy are expected to rebound this year while others hold steady. Yet other segments of the industry could lag or even sag some in their recovery.

Highway construction reflects all of the above.

The Georgia Department of Transportation (GDOT) is expected to pay out close to $1 billion in project funds in 2004, according to Vicki Gavalos, GDOT media representative, “pretty much all over the state.”

That generally bodes well for highway contractors and subcontractors. One of the numerous projects under way is reconstruction of Interstate 75 across four counties just north of Valdosta. The first three of eight contracts have been awarded, picked up by Douglas Asphalt Company and Reeves Construction Company.

The total project will widen the roadway to six lanes from four, resurface the existing pavement and install a median barrier. The 40-year-old interstate carries approximately 40,000 vehicles a day, rising to 100,000 a day during peak vacation periods, so progress on the job will be scrutinized by innumerable pairs of passing eyes.

Yet a breakout in new highway construction isn’t expected to happen until early 2005. That’s when an initiative of Gov. Sonny Perdue could begin to blossom.

Called “Fast Forward,” the initiative will spend $15.6 billion over six years. No new projects are envisioned in this wave of new funding. Rather, new funding sources will be tapped to build in six years what had been planned to be built over 18 years.

That is serious front-loading and is funded several ways. Most of the money will come straight out of the DOT budget, but $1.5 billion in general obligation bonds also will be floated.

Another $3 billion will be raised through so-called GARVEE bonds, which stands for “grant in anticipation of revenue vehicle.” Essentially, money is borrowed using future federal road payments as equity.

Not surprisingly, half of the total pool of money will be spent around metropolitan Atlanta. Funds spent there will increase miles of high-occupancy lanes, improve high speed bus service and expand intelligent transportation monitoring systems, among other projects.

But nearly 400 mi. of interstate corridors across the state also will be widened in the next six years. Yet little of any of this will happen this year, said Gavalos, though it should early in 2005.

“It takes a little time for the bonds,” she said.

Jeff Humphreys, the director of the University of Georgia’s Terry College of Business, also believes the Fast Forward program is “more a story of 2005.”

Humphreys for 15 years has been one of the authors of the college’s annual economic outlook report. The report is presented at a luncheon each December by the college’s dean, George Benson.

Humphreys said he hopes the governor’s initiative works, but he doubts it will any time soon, and he gives two reasons for his skepticism.

One is the widely recognized time lag needed to crank up the bonding mechanism. The other is what he sees as an increasing tendency of environmentalist organizations to challenge highway projects.

“I don’t know that any of these Fast Forward projects will be blocked, but I’m leery,” he said.

Michael Dunham, executive vice president of the Georgia Branch of the Associated General Contractors, is more comfortable with the governor’s plan — though he concurs with Gavalos’ assessment that it won’t happen this year.

“Will we see concrete poured in 2004? Probably not,” Dunham said. “It will be 2005 most likely.”

But the AGC executive believes the governor’s initiative is being felt in other more immediate ways, without a cubic yard of concrete being formed.

“Just having a plan moves us ahead,” he said. “It will make other businesses up and down the interstate corridor want to expand because they see what’s coming. It gives everyone encouragement.

“What the [governor’s] plan is bringing to people is confidence. That in itself is a good thing.”

Humphrey’s Terry College forecast for the overall economy in general is “very good.” However, not as upbeat is its outlook for the goods producing sector of the state economy — which includes construction.

Humphreys expects construction to decline somewhat this year. He said the amazingly enduring residential building component — more homes have been built in Atlanta than any other city in the United States for 13 years in a row — has masked overall weakness in the construction industry. This year, even residential construction will cool somewhat, said the economist.

Also predicting a decline in residential building is McGraw-Hill Construction Dodge Analytics, but its overall analysis predicts the downturn in homebuilding will be offset by activity elsewhere. These analysts see a 6-percent rise in construction activity across the board for the remainder of this year.

In fact, this could be the best year in quite a while for the nonresidential segment of the industry, McGraw-Hill analysts said. They predict double-digit gains in such key areas as office buildings and hotels. Health facilities construction looks promising, though building of new schools might slow some.

Dunham, the Georgia AGC executive, doesn’t believe Georgians will see “big, tall office buildings” going up this year. Such vertical development probably is 18 to 20 months away, he said.

One reason is the cost of steel. Recent conversations with contractors seem automatically to turn to the subject of steel costs, he said. Contractors understand that 3 to 4 percent increases in prices “are part of the game,” he noted, but contractors have seen steel prices double.

That could be changing. The price of scrap steel has dropped fairly dramatically in recent weeks, noted Ken Simonson, chief economist for the AGC of America, even if so far the falling prices haven’t fallen to the level of finished steel products bought by construction firms.

Dunham also reported that not far behind steel as a favorite topic of some of the 650 Georgia AGC builders with whom he talks is the price of concrete, and a seeming shortage of it. That, too, is worrying builders.

Georgia’s construction story really is two stories: Atlanta and the rest of Georgia.

“Some states don’t have an Atlanta,” Dunham said, “It’s a different market altogether.”

Not only is half of the Fast Forward highway funding going to the metropolis, lots of other capital is being expended in the area. For instance, the next phases of the huge redevelopment of Hartsfield-Atlanta International Airport include a terminal that will cost just shy of $1 billion and a $450 million consolidated car rental facility.

A new aquarium is being built near Atlanta and close to the heart of the city, a 138-acre (55 ha) redevelopment called Atlantic Station is taking shape. It has high-rise buildings, hotels, residential living areas, transportation centers and a new bridge over the adjacent interstate and will cost in the neighborhood of $2 billion.

That epitomizes Atlanta. South of Atlanta is the rest of the story.

“From Macon south things are much, much slower,” acknowledges Dunham. “There is less opportunity there than anywhere else.”

Still, the interstates run south, too, and bringing work, as in the widening of I-75 outside Valdosta. Subcontractors in that region of the state are picking up projects and hope Fast Forward helps them pick up more. Humphreys believes that non-highway construction activity outside the metropolitan areas of Georgia increasingly will key on some people still living outside Georgia: future retirees and tourists.

In areas ranging from near the Atlantic Coast and along the Georgia border with Florida to the more mountainous regions northward and around recreational lakes, Humphreys believes these migrants from across the United States hold promise for rural Georgia contractors.

He sees continued second-home developments springing up in these areas, with new commercial and retail communities to support them, as well as infrastructure to serve them.

This construction activity might be represented by the $100-million 2,100-acre (840 ha) theme park that is just beginning to be developed between Brunswick and Savannah on the coast. Area contractors will help build hotels, retail outlets and a waterpark in development called Steamboat City, all of which will draw paying visitors –– including Atlantans traveling outside the city to see how the other half in Georgia lives.