On a Roll

Cautious confidence underscores Virginia’s construction outlook.

By Jim Parsons

The best way to sum up 2007 in Virginia’s construction industry is that it has been all about location, location, location.

Good timing didn’t hurt, either.

The confluence of a diverse economy, reliable federal spending and a massive military building program have insulated construction activity among many major Virginia firms from increasing upheaval in the national economy. And that has set the stage for what may be a busy, albeit somewhat cooler, 2008.

Major firms reported strong 2007 revenues in northern and eastern Virginia, particularly around major metro areas and military bases affected by Base Realignment and Closure work. Many firms are bolstered by the boom in BRAC work, which is on the rise just as some private-sector work shows signs of softening in light of the credit crunch and recession fears.

David Birtwistle, vice president of business development for Balfour Beatty Construction in Fairfax, calls 2007 “as good a year as we’ve experienced in recent times.

“We finished up some good projects, kicked off some new ones and had the good fortune to consider several significant opportunities.”

John Gillenwater, vice president for business development for KBS Inc. in Richmond, agrees. “Our growth in 2007 tracked with 2006, which was also a good year for us,” he adds.

To be sure, not every sector is firing on all cylinders. John Lawson, president of W.M. Jordan Co. Inc. in Newport News says that credit issues and other economic trends have altered the mix of projects.

“We’re doing more for municipal, state and federal agencies, and Fortune 500 companies and less for individuals and developers,” he says.

Brett Hitt, co-president of HITT Contracting Inc. in Fairfax, also reports that Northern Virginia’s signature commercial market is leveling off.

“Vacancy rates are starting to creep up along with unemployment,” he says. “Firms aren’t growing, so they’re not looking to add space.”

Hitt adds that pockets of activity remain across the area. At Reston Town Center, for example, his firm is preparing to start Democracy Tower, its fourth office tower for Boston Properties’ South of Market complex.

To be built atop an existing parking structure, the seven-story tower “is already leased out,” Hitt says. “There are other places such as Fairfax Corner where the retail and office components are still catching up with past residential development.”

A comparable slowing in the high-rise, multifamily market appears to be due more to oversupply than the mortgage crises, though it, too, is far from idle.

In Arlington’s Pentagon City area, for example, BE&K Building Group of Vienna is starting the 482,541-sq-ft Two Metropolitan Park, which will provide more than 310 rental apartments and two levels of underground parking.

The reason for such resiliency, at least in Northern Virginia, is obvious, says Mike Sloan, BE&K senior vice president. “Our proximity to Washington, D.C., and the federal government brings stability to the market that balances out the roller coaster,” he adds. “Recessions, when they occur, don’t last long. I expect the condo market will be back by 2009.”

Marching orders

At Fort Lee, Balfour Beatty is also constructing the new two-building, 396,000-sq-ft Combat Services Support Center Logistics University, and Tompkins Builders of Washington is leading the 230,000-sq-ft headquarters for the Sustained Center of Excellence.

In Tidewater, Tompkins Builders has been selected to construct a new 847,280 sq-ft, 752-unit apartment building for enlisted personnel at the Norfolk Naval Base, while W.M. Jordan has multiple projects under way at the area’s various Naval facilities.

Virginia’s major urban areas also continue to attract new businesses and residents, which has lead to projects such as BE&K’s new multimillion dollar lab project for American Type Culture Collection near Manassas. Richmond is bookended by two KBS projects, the 115-acre West Broad Village mixed-use lifestyle center and the 900,000-sq-ft White Oak Village retail center. The firm is also working on the nearly 240,000-sq-ft High Street mixed-use development in Williamsburg.

“This area is seen as a good place for business, which in turn drives the need for health care, schools and retail projects,” KBS’s Gillenwater says.

Growth also has localities catching up on their school needs, as evidenced by projects such as the new 290,000-sq-ft Renaissance Academy, which W.M. Jordan is constructing to house the Virginia Beach school district’s alternative programs for grades 6-12.

“There’s always work at colleges in Virginia due to projects funded by bond issues, student fees and baby boomers giving back to their alma maters,” Lawson adds.

Perhaps the only dark cloud shrouding Virginia’s mainly sunny construction picture is transportation. Although the new Capital Beltway high-occupancy-toll lanes, scheduled to begin construction this spring, will continue the string of congestion-relieving megaprojects on Northern Virginia’s “Main Street,” the planned start of the Dulles Metrorail extension remains on hold while the state and federal transportation officials grapple over the project’s financing strategy.

Many major highway projects slated to be funded under the six-year, $3.1 billion transportation bill enacted by the 2007 General Assembly are also being threatened by an approximately $400 million shortfall in revenue from fuel and sales taxes and vehicle registration fees.

“Virginia’s economy is still growing, but not as fast as was projected due to the slowing national economy,” says Jeffrey Southard, executive vice president of the Richmond-based Virginia Transportation Construction Alliance. “The leadership in the General Assembly doesn’t support an increase in gas tax as a way to boost transportation funding.”

Still unresolved is the fate of a lawsuit challenging the legal ability of the newly created Northern Virginia Transportation Authority to raise funds and issue bonds for a full slate of area transportation projects that Kala Quintana, the agency’s spokesperson, says are “essentially ready to go” to construction. Though not named in the suit, observers note that the outcome could affect a counterpart authority responsible for overseeing transportation projects in the Hampton Roads area. Both were created by the 2007 transportation bill.

Prognosis positive, but…

Even though the overall outlook for 2008 is largely optimistic, some continued sector-specific slowing is inevitable, contractors say.

“Slowdowns in the commercial sector historically trail downturns in the residential market by a year to 18 months,” HITT Contracting’s Hitt says. “Things will cool off, but I don’t expect the same kind of problems that housing is dealing with.”

Gillenwater adds that the ceiling in new retail work can’t be far away. “It really depends on how that economy goes and for how long,” he says. “Eventually, things will have to change.”

Less certain is how continued sluggishness in the national economy could influence state and local spending plans.

“Governments will find that while their revenues may be lower, they still have needs for schools, water and wastewater treatment and other facilities, which could create more opportunities for public-private partnerships,” says Balfour Beatty’s Birtwistle, whose firm is working on a 1,000-bed, medium-security correctional facility in Grayson County under the state’s 2002 Public-Private Education Facilities and Infrastructure Act.

The quality of project financing is also a real concern, says George Kries, senior vice president for preconstruction for Tompkins Builders. “We don’t want to waste time on a deal that won’t get done,” he says.

Labor also looms as a potential problem in Northern Virginia, especially with the large-scale projects on the Beltway and Fort Belvoir. Kries predicts that the completion of the Gaylord Convention Hotel and Nationals Stadium across the Potomac, “will free up capacity for the big projects in Virginia.”

Politics are also on the minds of Virginia’s construction firms, particularly when it comes to the contentious immigration issue. “The trade subcontractors are watching what happens,” Hitt says. “You hope that their workers are here legally, but any change in local, state and national policy could have an impact.”