The 50 States of Construction: Why FL companies are keeping a sunny market outlook

Posted on April 11, 2017

Florida may have been one of the states hit hardest by the Great Recession, but demand levels and market indicators have rallied to create an environment of optimism within its construction industry.

Construction firms still carry lessons from the recession and consider potential risks at a much higher degree, but they also are now riding high on a booming market, especially in the multifamily sector, according to Dan Whiteman, vice chairman of Miami–based Coastal Construction and a 50-year veteran of the Florida construction industry.

Coastal, one of the state’s largest contractors, is currently underway with the $1.7 billion Miami Worldcenter mixed-use megaproject in a joint venture with Tishman Construction as well as several projects in Miami’s Design District, which involves a “complete repurposing of a previously neglected area of downtown Miami” over the next 10 years, Whiteman said.

Construction Dive spoke with Whiteman about how the presidential administration change is impacting the industry, the continued strength of the multifamily sector and the trends that are expected to shape the Florida market in the coming years.

Editor’s note: This interview has been edited and condensed.

How would you describe demand in the Florida market right now?

WHITEMAN: The demand seemed to peak in mid-2016. I had some apprehension from mid-2016 through the election, which gave the impression that [demand] might taper off. However, since the election, there seems to be — at least from a business perspective — an increased confidence that we’re not going to have a major drop-off in construction, and we are continuing to see a pretty solid backlog of work coming in.

Why did that shift occur after the election?

WHITEMAN: In general, the business industry seems to think that the policies of the Republican Senate, House and the executive branch will favor business — at least that’s what they’re hoping — in terms of tax relief, healthcare reform and other business areas. It’s yet to be seen whether or not that’s going to turn out to be the case. At least for the first quarter of 2017, there seems to be that type of optimism.

Which sectors are currently seeing the strongest demand?

WHITEMAN: Multifamily housing and the apartment industry. We have a strong presence in the luxury condominium market, but we also have a strong presence in the mid-level rental apartment market, which seems to be very strong now. There is a trend of millennials not necessarily wanting to buy. They want to rent for a few years and have the flexibility to move.

There have been some reports about a potential overheating of the Miami luxury condo market. Are you concerned about that trend? 

WHITEMAN: I’m not worried about it. There’s certainly a limit in the ultra-high-end luxury market, in terms of how much of a demand there can continue to be. I’m talking about those projects where the cost per square foot is between $2,500 and $3,000. That market seems to be one where there’s only a certain amount of demand that can be filled. But in what we previously have referred to as a mid-range luxury market — in the $1,000 to $2,000 square foot range — there still seem to be those coming from South America, from Europe and from the Northeast that are still looking for those units.

How does the Florida market differ from that of other states?

WHITEMAN: Florida will continue to be one of, if not the strongest, markets in the U.S. because of the strong connection to Central and South America and Europe. Miami has become a destination location for both of those areas. [Developers of our projects are] certainly seeing a very high percentage of foreign buyers.

Do you expect that strong demand to continue?

WHITEMAN: Yes. We have a theory here at Coastal: When times are good, people from Europe and South America want to come to Florida. When times are bad, they really want to come to Florida. When times are good in their countries and they’re making money, they want to come and have a place here to vacation. But when times are bad in those countries, it’s a great place to own a piece of real estate that is stable.

Are you concerned about the change in the new administration’s immigration stance affecting that trend?

WHITEMAN: No. The only thing I could see that could change with immigration is whether or not they’re going to change development opportunities through EB-5 financing.

We have very strong policies in place at Coastal for getting the documentation for any employees. That part has not been a problem for us. The problem has been that with the market increasing the way it did after the recession, so many people left the industry, moved out of Florida and moved back to other areas, and they have not returned. Plus, [there is a] change in demographics of an aging workforce, and construction isn’t being perceived as an attractive career for young people to go into. [That] is a bad perception because you can import cars, you can import watches, you can import clothing, but you can’t import construction. It’s a great career for anyone to go into.

How is the labor shortage impacting your business?

WHITEMAN: We’ve not seen timelines get extended because of it yet. Salaries are starting to creep up, but they’ve not reached any type of unexpected inflationary trend.

Do you expect salaries to see steeper increases in the future?

WHITEMAN: They could in the skilled trades — the electricians, the plumbers, the air conditioning contractors. [Salaries] could creep up, and more than that, what could happen is that if the subcontractors start getting enough work, then they are potentially going to increase their fees on the project to a level that does cause costs to go up more than the standard rate of inflation, or what we call opportunity costs. You’ll have a subcontractor that may have three projects to pick from and only has enough people to manage one of them, so he’ll pick the one he wants the most and put a little bit higher fee on it.

How did businesses change their mindset after the recession, especially in Florida, which was hit particularly hard by the downturn?

WHITEMAN: Every contractor is looking at their risk profile in a much greater way now than they were in 2008. We’re looking more carefully at projects and ensuring that owners have adequate financing to survive a downturn. We’re also looking much closer at the deposits that [developers] are getting from buyers. In 2008, many of the buyers had so little as a down payment to hold those units until closing. When the market dropped, they forfeited their deposits and walked away. We’re looking at developers that are getting much higher deposits now, upward of 40%, to ensure that if the market does go flat, we’ll [be able to] go ahead and close on it. We also have a full-time risk-management department that reviews the qualifications and financial ability of every contractor that’s allowed to bid on a contract.

In addition to labor cost increases, have you seen material costs start to rise?

WHITEMAN: We are starting to see some material prices begin to increase. Not dramatically, but they are starting. Steel, concrete, drywall — those are the three we’ve seen impacts in. Part of that is because, in some cases, plants shut down during the recession and are not gearing up their capacity yet.

Do you expect material prices to continue climbing?

WHITEMAN: It’s going to depend on how the market performs over the rest of this year. If Congress gets its act together and provides some stability in terms of confidence to the industry, then I think the prices will continue to increase because work will continue to increase, and they won’t be able to meet the demand. But if Congress doesn’t get its act together and consumers lose confidence in healthcare reform and tax reform, there may be a downturn in the market that causes construction costs to stay level.

What are some of the biggest opportunities in the market that you’re most excited about going forward?

WHITEMAN: We’re starting to see a lot of projects in the $50 million to $100 million range. Many are built on previously not-favorable project sites that are inland instead of coastal properties in areas like mid-town Miami and north Miami and north Miami Beach, where they’re starting to build nice apartment complexes in that range. That’s been a very positive trend this year.

Are there any other characteristics of the Florida construction community that set it apart from others?

WHITEMAN: We have a solid group of general contractors and construction managers that are familiar with our area. While we compete regularly, there’s a great deal of respect in our industry amongst our competition.