Market Tightens in Most Sectors, Health Care, Infrastructure Still Active

By Deb Wood

Tough economic times have slowed new private development, but public owners with funding see opportunities in the year ahead as bids come in lower than expected. But on the private side, “it takes a miracle to get a project going,” says Dennis Wilde, a principal with Gerding Edlen Development of Portland. “There’s no money, and if you can get it, the terms and conditions are so onerous, it’s almost impossible to put a deal together.”

Rhine Inc. demolished the Wilburton Tunnel in Bellevue as part of a design build contract to widen SR 405. Guy F. Atkinson is the general contractor. (Photo courtesy of WSDOT)

Gerding Edlen is finishing projects already in the pipeline but has placed on hold an office building, which was 70% leased and had equity secured.

Wilde says two things need to happen for deals to start in 2009:

• The federal government has to add a condition to the $700 billion Troubled Assets Relief Program, the financial bailout, that lenders must put money in the pipeline.

• The government has to increase federal funding for infrastructure improvements, retrofits and redevelopment, which President Obama has talked about. Douglas Howe, president of commercial developer Touchstone Corp. in Seattle and national chairman of NAIOP, the Commercial Real Estate Development Association, says he expects some money to start flowing by midyear but it will take 12 to 18 months for the credit markets to open up.

“We think it will take closer to 18 months before we get back to the new normal,” Howe says. “We see lenders reluctant to go beyond 50% or 60%, meaning we will need more equity.”

Touchstone has a couple of projects planned for 2010 but no jobs scheduled to start this year. Howe says, “I’m not too concerned about contractors going belly up because we work with strong contractors that have been around a long time.”

Health care may be an exception, with developers still interested in pursuing projects, says Jeff Veilleux, chief financial officer for Swedish Medical Center in Seattle, which has several projects planned in conjunction with private developers who have been able to find capital.

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“We’ve been able to limit the balance sheet impact and leverage the income statement,” says Veilleux. “You don’t borrow. You use monies out of profit and loss to pay for lease expenses.”

Swedish expects to break ground this year on a $31.5 million, 100,000 sq ft outpatient center and medical office building at its Ballard campus. The health system will own a portion, as will a developer. Veilleux would not release the name of the private developer.

The Washington State Department of Health gave Swedish the green light to build a new, 120-bed hospital in Issaquah, but several area hospitals have appealed the decision. Darren Redick, vice president of facilities for Swedish, expects the health system will move forward with a medical office building at Issaquah this year. It also would be co-owned with a private developer. As for the balance of health systems’ capital program, Veilleux says planning will take place in real time as he and others monitor the stock market and evaluate Swedish’s spending tolerances.

Redick says fewer projects will move forward than first anticipated, due to the changing economy. An American Hospital Association survey released in January indicated that 46% of hospitals surveyed are postponing capital projects and 13% have stopped those already in progress. But on the positive side, Redick says he expects favorable pricing on the projects that progress. Swedish will carefully prequalify contractors and encourage those firms to be just as careful when hiring subcontractors, he adds.

“Health care is a fairly unique market, and it’s important to get teams that understand that type of construction or design,” Redick says.

Schools

Paul H. Eggleston, director of facilities for the Bend-La Pine Schools in Oregon, relies on a stable of about four contractors having long track records working with the district. He says 2009 should be busy, with about $60 million in construction and renovation work planned, including additions to La Pine and Bend Senior High schools and Bear Creek Elementary. Voters passed a $119 million construction bond in November 2006 to catch up with growth in the region. The district has completed about half the work.

“We anticipate a good year with the economy the way it is,” Eggleston says. “Contractor and subcontractor bidding will be extremely competitive.”

On the last couple of 2008 lettings, bids for Bend-La Pine projects came in about 15% less than expected. Eggleston has noticed an increase of subcontractors from other parts of Oregon and from Washington state and California bidding on jobs.

The Camas School District in Camas, Wash., expects to let approximately $20 million in projects this spring and summer, including a small alternative high school and a stadium. Funding for the projects comes from a bond program approved by voters in February 2007.

Heidi Rosenberg, capital projects manager for Camas schools, anticipates receiving competitive bidding because the district received some good bids for smaller projects let in summer 2008. Camas does not plan to change any of its existing requirements for bonding and references from bidders, although Rosenberg says there have been some problems with general contractors not paying their subcontractors in a timely fashion.

School projects may hold steady, as many districts have a backlog of work.

“We have seen in some smaller projects that firms that are less established and less well-funded may be having trouble,” Rosenberg says. “We follow the same procedures and make sure they are paid only for the work they do. The tricky part comes with the subs. We cannot get involved with that. We pay the contractor for everybody.”

Transportation

Sound Transit in Seattle also has found bids coming in lower than anticipated on early contracts associated with the $1.8-billion, 3.15-mi, underground University Link light rail project connecting downtown with the University of Washington. Condon Johnson & Associates of Seattle submitted the $19 million low bid for the most recent letting to prepare the area where the tunnel-boring machine will pass beneath Interstate 5 downtown.

The bid came in at $10 million less than anticipated. All six bidders on the work submitted proposals to do the work for less than engineers’ estimates.

Bruce Gray, Sound Transit spokesman, says he hopes that bodes well for the rest of the year as the agency moves forward on two major contracts and lettings for stations, utility and other work, after securing an $813 million Federal Transit Administration New Starts grant.

“Jim Spaid, roadway construction engineer at the Washington State Department of Transportation, says one recent letting attracted 19 bidders.

“A lot of unfamiliar faces are bidding projects,” Spaid says. “Contractors are telling us private work is falling off, and people who normally work in the private sector are bidding.” WSDOT prequalifies bidders by class of work. Contractors must have prior experience with projects at the same level of work they are applying to bid on. The agency also completes a financial evaluation before awarding a job.

WSDOT has 164 projects, valued at $2.4 billion, anticipated to start this year. Many are funded through a state gas tax increase passed in 2003 and 2005 to fund specific projects. However, with a recent falloff in gas tax revenue and prior year cost inflation, the state is reassessing the schedule.

Washington also has compiled a list of $1 billion capital, transportation and green industry projects that could move forward quickly.