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Construction is still building.

CONSTRUCTION IS STILL BUILDING

Conventional wisdom has it that the commercial construction business in Oregon is dead.

After all, goes the thinking, developers are standing on the sidelines, hands firmly in pockets, reacting to major changes in the rules to get financing.

And, depending on whose figures you believe, protecting the spotted owl could shut down the state, not exactly sending waves of confidence through those who would build something new.

But we do 80% of our work outside the Koll family of companies, and between what this local client base is saying and our regional perspective, Koll Construction-Portland may well be in a position to view the market differently.

What we see - and what our clients are saying - is at odds with the "doom and gloom" commercial construction picture painted by the pundits.

Based on today's information, it is the Northwest's turn. The entire country's attention is focused on the Pacific Northwest, in large part because of a quality of life unavailable elsewhere, and its relatively low cost.

The clean, commodious lifestyle, particularly contrasted to many of California's crowded population centers, will continue to act as a magnet for businesses.

The same holds true for the area's relatively inexpensive electricity. Heavy energy users, particularly from such high energy price areas as San Francisco, are likely to find energy costs here extremely attractive.

Our clients, many involved in the high tech industry, say the quality of life and cost of living will continue to draw industry into the Pacific Northwest from areas suffering from astronomical housing costs, traffic congestion, and all the other negative factors considered when a company is looking for an appropriate location.

If these projections are accurate, incoming industries will spawn additional colonies of support services similar to the pattern experienced in the boom of the mid-to-late 1980s, which saw Portland area vacancy rates fall - even downtown - to among the nation's lowest.

Developers Face Changing Rules

And this, of course, is a recipe for a strong commercial construction market.

Having said that, however, it's important to note that while the climate may remain excellent, the rules of the game definitely have changed for both contractor and developer.

A couple of months ago, it was as if development stopped in mid-stride. As a result of new policies by major lenders and procedures requiring strong cash equity positions by real estate developers, caution now appears to be the watchword.

Among other things, lenders now want 40% to 50% of a project leased prior to a commitment for financing. If you think Missouri is the "show me" state, talk to real estate agents trying to prelease projects to Portland area businesses.

This doesn't mean that the situation is impossible. But it does mean that developers may have to look at adding a little more glamour to products in order to attract the necessary preleasing activity.

Of course, much of the sudden change in policy comes on the heels of recently publicized problems in the savings and loan industry.

Lenders, which typically financed large development ventures based on a developer's track record and optimistic pro formas relating to market conditions, have pulled in their horns and taken the current, more conservative approach to lending practices.

Contractors are just beginning to feel the ripple effect of these recent changes and are having to take a hard look at their marketing plans to determine how to adjust to the resulting decrease in speculative building volume.

There is little question that, under today's rules, the future belongs to the efficient.

It is now more important than ever to approach projects on a design/build basis, with the contractor completing value engineering and cost analysis in the preconstruction phase of a project.

This allows architects to design on the basis of cost, rather than the other way around.

Computerized estimating and critical path scheduling also are going to be even more critical for major contractors.

Conventional wisdom also would suggest a construction market where the big firms get bigger and many of the small disappear.

The market should remain strong enough, however, for efficient contractors of many sizes to survive.

Worker's compensation and other government regulations probably will continue to pose more important problems for smaller contractors relative to their ability to survive an increasingly sophisticated construction environment.

STEVE LILLY Steve Lilly is director of business development for Koll Construction-Portland, a commercial construction contractor of business parks, office buildings, multi-family housing, and retail projects.
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Title Annotation:Viewpoint
Author:Lilly, Steve
Publication:Oregon Business
Date:Nov 1, 1990
Words:739
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