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Building confidence.

1992 promises to be a rock-solid year for Alaska's formerly crumbling construction industry.

Alaska's construction industry is one of the last preserves of eternal optimists. A business as volatile as this must attract people who can see silver linings in the darkest clouds for years. But the optimism finally may be rewarded. The industry, after being battered by the late-1980s recession that followed a crash in oil prices, has been making a slow comeback.

Mike Swalling, president of Swalling Construction Co. of Anchorage, a firm specializing in heavy industrial, dock and bridge work, says although 1991 was slower than he had hoped, things are looking up. "There should be some growth, but not a boom year," he explains.

One reason the outlook seems brighter for 1992 is that previous years have been so bad. Jerry Harman, president and founder of Eastwind Inc., an Anchorage heavy civil contractor bought by Veco International in 1991, says, "I'm optimistic things will start turning around. We had a slight increase in 1991, but anything would beat '89 and '90."

A barometer noting a rise in construction is the number of licensed contractors, which has increased from 3,349 in June 1991 to roughly 3,650 in March, according to Judy Weske of the state's Occupational Licensing Division in Juneau. She estimates that an equal number of unlicensed contractors are working in the state.

How a company fares depends a lot on which part of the state and which part of the construction industry it competes in. Some observers expect residential and commercial construction in the coming year to show small gains, especially in the Anchorage area. Also, the outlook for heavy-construction firms that build large industrial or public-infrastructure projects has improved as a result of increased federal highway funds.

More work is expected for Alaskan constructors as the oil companies seek to enhance production from existing North Slope oilfields through several large projects. Bob Schacht, manager of Alaska construction for Arco Alaska, says that he expects 1992 North Slope construction to total less than $75 million. But consolidated construction operations between Arco and BP Exploration (Alaska) should jump to more than $125 million in 1993 as the oil companies begin work on the GHX-2 gas-handling project and the installation of modules at the Point McIntyre field.

In 1994, North Slope construction is expected to drop to about $100 million. "After that, we have no new major projects planned, and the amount of construction probably will drop off rapidly," says Schacht.

A problem that keeps Alaska contractors looking over their shoulders when business picks up is competition from Lower 48 contractors. As yet, there has been no great migration to Alaska, and some in the industry think previous bad experience in Alaska and a lack of financing may keep Outsiders out.

Bob West, president and chief executive officer of Construction & Rigging Inc. of Anchorage, an industrial and marine construction contractor, notes, "We're seeing some Outside contractors and there will be more." But he says the environment has changed, and bonding will be difficult for out-of-state companies.

Alaska's construction leaders continue to chafe at increasing state and federal regulations. Leo Walsh, president of Walsh & Co. and a partner in Aleutian Constructors, both of Anchorage, says, "There are more environmental and safety regulations all the time, and these restrictions all cost money. It requires more record keeping, and contractors are not able to work these expenses into their bids."

John Peterson, an estimator for Alaska Interstate Construction of Anchorage, blames environmental regulations for holding back development and for keeping project profit margins slim. "We haven't had any encouragement. Everything is curtailed because the oil companies don't have access to new areas for development," Peterson notes.

Contractors also are unhappy about the state's capital projects budget. The design and construction budget for fiscal year 1992, which ends June 30, was $349 million. With negotiations in progress, no one can say definitely how much will be appropriated this year. According to Traci Cramer, program budget analyst with the Office of Management and Budget, Gov. Walter Hickel anticipated capital expenditures of roughly $300 million, based on a spending plan submitted in January.

Allen Vezey, secretary/treasurer of Lakloey Inc. of North Pole and president of the trade organization Associated General Contractors of Alaska, predicts, "There will be a tremendous scramble for funds. The legislature has shown it doesn't place much emphasis on capital improvement."

Employment Picture. The construction industry provides jobs for some 10,500 workers in Alaska, representing about 4.4 percent of the work force. According to figures from the Alaska Department of Labor, the industry added no new jobs in 1991. In the late 1970s, at the height of the trans-Alaska pipeline construction, the state's construction industry employed more than 30,000. The post-pipeline high was 20,700 workers in 1983 -- almost twice as many jobs as construction provides today.

Neal Fried, state labor economist, calls 1991 a "not bad, but not great year" for the construction industry. Noting the lack of growth in construction employment, he says, "It's been fairly uncharacteristic -- almost a stable industry for the last three years."

Nationally, construction workers can count on having a tough time finding a job. Swalling says, "I get resumes every day from all over the country. It's going to be very difficult to get a job here. There are a lot of qualified people already." He adds, however, that workers with special skills can still find jobs.

Fried says the number of unemployment claims filed for all types of employment grew significantly in December. He points out that the U.S. construction industry last year suffered its biggest decline since 1947 and that hard times Outside may have sent construction workers to Alaska.

"It's an extremely competitive job market. There was sort of a labor shortage in 1989, but not now. I think a lot of construction workers with previous Alaska experience are recycling through here. I don't think the work force will be able to absorb them," adds Fried.

The Anchorage area supplied 5,750 of the state's 10,400 construction jobs, according to the Alaska Department of Labor. Fried notes that Anchorage 1991 construction employment figures, which were unchanged from 1990, may be misleading because employees of Anchorage-based companies working elsewhere in the state are counted in the city's total. He says the number of these out-of-town jobs probably have decreased in 1991, causing Anchorage's construction employment to be understated.

Fairbanks lost construction jobs in 1991, with employment dropping 6.9 percent from 1,450 workers in 1990 to 1,350, despite construction of a new Fred Meyers and refurbishing of the city's Sears, Roebuck & Co. Construction employment in the Kenai Peninsula/Gulf Coast area remained stable -- a performance Fried describes as positive considering that the Bradley Lake hydroelectric project was completed there in May 1991. Southeast construction employment posted a gain, increasing from 1,290 in 1990 to 1,500 jobs last year.

Federal Funds. One bright spot for Alaska contractors was passage in December of the Interstate Surface Transportation Efficiency Act by the U.S. Congress. According to Boyd Brownfield, central region design and construction director of the state's Department of Transportation and Public Facilities, the act, which goes into effect this year, will provide $203 million for Alaska highways, airports and marine facilities, an increase of 37 percent from 1991's federal transportation spending.

The federal grant, which is administered by the state's transportation department, totals $1.3 billion over six years and will accelerate the six-year plan already in place. "We can only gear up so fast," Brownfield explains. "The impact of new projects will be in later years." Brownfield says in 1991, 60 percent of actual project design and all of project construction for state-sponsored transportation construction went to the private sector.

The funds appropriated by the surface transportation act can be used for any roads not considered local or rural carriers. Brownfield notes that the federal funds are for capital projects only and will not pay for routine maintenance such as filling potholes or snow removal. The highway act, however, will fund major upgrades and rehabilitations.

The legislation also mandates certain set-asides new to federal highway funding. About 5 percent of the allocation must be spent on safety improvements, and an additional 5 percent must be spent on enhancements such as scenic routes, bike trails and historic preservation of existing roads.

Although Alaska's contractors are pleased with the federal largesse, most are cautious about assessing the impact. Lakloey's Vezey points out, "The surface transportation act is very difficult to figure out. It probably will be amended by Congress. But it's the biggest program ever for state highways."

Says Construction & Rigging's West, "This billion dollars or more will increase heavy marine and civil construction, as well as roads. Overall, road and bridge construction should have a good couple of years."

West also expects continued marine construction as Alaska becomes more of a transportation hub for cargoes traveling between North America and the Far East. "I think some of the transportation may move from Seattle-Tacoma to the Aleutians. A lot of docks are needed. Many places don't have any, and a lot of existing ones are inadequate," he says.

Military spending continues to be a bright spot for Interior construction. Because of its strategic location and the closing of U.S. military bases in the Philippines, Fairbanks is one of the few areas of the state with significant military construction slated for 1992.

"Eielson Air Force Base is having one of its biggest years," Lakloey's Vezey notes. Air Force construction plans for the base call for spending $157.5 million by 1994 and employing as many as 700 workers. Projects include housing, visitors' quarters, a sewage treatment plant, and facilities to house Cope Thunder, a fighter-pilot-training program transferred to Eielson from the Philippines.

Residential Rise. Sue Fison, manager in the economic development and planning department of the municipality of Anchorage, anticipates increased residential construction in Anchorage in 1992. She notes that 1991, although a relatively good year for residential construction, was not as strong as expected. In response to a March 1991 survey, builders had estimated that some 850 homes would be built in Anchorage; 651 residences were built, of which 633 were single-family dwellings and the rest luxury apartments, duplexes and fourplexes.

The 1991 housing prices -- the average price of a new home exceeded $200,000 in Anchorage and $160,000 in Eagle River -- were a surprise, Fison says. "There were lots of custom luxury homes being built. The average price for all homes, both new and existing, rose from $116,000 in 1990 to $125,000 in 1991," she explains.

Fison says a lack of bank support for apartment financing has resulted in a shortage of apartments. But Wes Clubb, president of Crowne Pointe and chairman of the Building Industry Association of Anchorage's marketing committee, says the possibility of new apartment construction is good. He explains, "It's a supply-and-demand scenario. As vacancies approach 1 percent to 3 percent -- as they are now -- what you have is either transitional vacancies or apartments that are uninhabitable. I think we're real close to building more apartments in Anchorage, especially in the affordable sector.

"The only caveat I would add to that is the problem of term financing. Term financing is done by secondary lenders such as insurance companies or the permanent fund, not local lenders. Some of these secondary lenders got clobbered big-time in the past on Alaska apartments."

Ken Kincaid, an appraiser with Shorett & Riely, real estate consultants and appraisers, says the only Anchorage office construction on the horizon is government work such as the new Alaska Railroad headquarters and the Veteran's Administration Hospital's out-patient and administration facility. He notes that the vacancy rate for office space in Anchorage has dropped from 10.8 percent in 1990 to 8.5 percent in 1991, but rents have not risen enough to prompt new construction.

Clubb adds, "In 1991, we had almost twice the number of single-family houses built as in 1990. We expect this year to be equal to or greater than last year. I expect 600 to 700 new houses to be built, and some commercial projects. We've had some pretty tough years, but now we're on the upswing."

In the Interior, Carrin Halffman, research analyst for the Fairbanks North Star Borough, reports that in 1990, 21 single-family and 4 multiple-family houses were built. Those figures jumped to 42 single-family and 49 multiple-family houses in 1991.

Fairbanks contractor Vezey says, "Residential construction is going to increase, which means going from zero to a positive number. There is a shortage of quality space in Fairbanks. I think there will be a few spec-built houses in 1992. Prices are still depressed."

Juneau saw 79 new residences built in 1990, and that number increased to 89 in 1991. As of the end of February, 6 permits for new houses had been filed, according to Chris Roust, a building official with the city.

Commercial Outlook. The labor department's Fried notes that it is much more difficult to track private commercial construction than public-infrastructure construction. He says many potential Anchorage-area commercial projects still haven't been nailed down.

Sam Gaston, president of Gaston & Associates of Anchorage, says his business is sufficient, but commercial building appears to be shrinking in Anchorage. "The school district doesn't have much, and there's a lot less military construction. Most of the military budget is going to Fairbanks," he explains.

Others take a more upbeat view, pointing to commercial projects such as the new Native hospital, the Elmendorf hospital, the Eagle Hardware outlet on Tudor and new Costco and Pace stores. Both Federal Express and Alaska Airlines are considering hangar construction at Anchorage International Airport. Site preparation began this fall on the expansion of Alyeska Ski Resort in Girdwood. The project, which includes a 300-room hotel and two restaurants, is expected to be completed for the winter 1993-94 season.

Of Fairbanks' commercial construction, Vezey says, "1991 was not a great year for us. It was better than 1990, which was one of our worst. I think 1992 will be better." Vezey notes that Fairbanks had a large increase in retail space last year.

"The Fort Knox gold mine is estimated to need a $225 million plant, but they won't start building until they get the necessary permits and that could take as long as three years," Vezey says.

The construction industry can point to definite gains in 1991 and some good reasons to expect a profitable 1992 and beyond. But the depletion of North Slope reserves creates long-term concerns because traditionally oil money has driven both public and private construction in Alaska.

World-class projects such as a natural-gas pipeline or the opening of the Arctic National Wildlife Refuge to oil exploration are years away. But as Alaska's population continues to grow, construction demand will be created, keeping the construction industry busy if not booming.
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Title Annotation:Construction Review & Forecast
Author:Gerhart, Clifford
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:May 1, 1992
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