A New Year Dawns - Part 1

Feast or famine? Boom or bust? In 2008 it will depend largely on where you are and what segment of the industry you're involved with. And you can blame it all on the sub-prime mortgage disaster.

Some Mountain states are still booming. In Utah, for example, the non-residential construction market is approaching near record levels, with an annual total of nearly $2 billion expected by the end of 2007. The highest level yet was reached in 1997. "Non-residential construction usually lags behind residential construction by a year or two, and that's exactly what's happening here," said Jim Wood, director of the University of Utah's Bureau of Economic and Business Research. "We've got a real boom in non-residential construction. It could peak next year, and with what the [Mormon] Church is doing, it could go on even longer than that." Through October, construction employment in Utah had gained 11 percent from a year earlier. Next door in Wyoming, where there is no end in sight to the ongoing energy boom; the gain was a whopping 12 percent. October data released by the Wyoming Department of Research and Planning show that the state's construction sector added 2,800 jobs compared to October 2006. The additional jobs translate to a growth rate of nearly 12 percent, with warmer than average weather credited for at least some of the increase. Overall job growth in Wyoming continued at a steady pace and was up 9,500 jobs, or 3.4 percent from the previous year. The seasonally adjusted unemployment rate in October was 2.9 percent, down from 3.1 percent in September. During 2007, unemployment rates fell in every county in Wyoming and were below 2.0 percent in five counties. These are hardly distressed conditions!

But other states are suffering. Most economists believe that Nevada — even with all the multibillion-dollar megaresort construction in Las Vegas — has slipped into a recession, joining California and Florida, all because of the severe decline in homebuilding. Arizona, though it still has a very low unemployment rate (3.5 percent in October), lost 19,000 construction jobs over the past year — again, virtually all in homebuilding. "Construction hasn't entirely stopped in our state, and I think that needs to be a key point to look at," said Don Wehbey, economic analysis manager with the Department of Economic Security. But it has definitely slowed, and 2008, according to Beckie Holmes, director of economics for Cox Communications, will be "one of the weakest years we're going to see," with most indicators showing it will be a "challenging year." Both Arizona and Nevada are going through a tough period of trying to reduce state, county and municipal budgets for the coming year, keeping expenditures to an absolute minimum, and in a number of cases postponing or canceling planned construction projects.

In the remaining states it seems to be business as usual. Colorado's economy, particularly along the Front Range, should continue steady growth in 2008 — unless the wider economy of the region or nation plunges into a recession, according to Patty Silverstein, chief economist for the Metro Denver Economic Development Corp. The big question in Colorado is how the turmoil of the plunging residential market will affect the red-hot commercial real estate sector. In New Mexico, where the construction industry added more than 3,000 new jobs during 2006 and early 2007, that job growth has virtually stopped, and no new construction jobs are expected in 2008. The economy remains basically sound, however, and Larry Waldman, senior economist with the University of New Mexico's Bureau of Business and Economic Research, notes that the current situation "doesn't mean we're going downhill. It just means we're going uphill slower."

That last statement pretty well defines Mountain America as a whole: It's not going downhill, it's just continuing the upward climb at a slower rate. Even in the two most depressed states, bond rating service Fitch Ratings gave an 'AA' rating to two recent bond issues: Clark County (Nev.) School District's $650-million general obligation bonds for school construction and renovation, and the Arizona Department of Transportation's latest $68 million in Grant Anticipation Notes for Phoenix area freeway work. Justifying its high rating of the Las Vegas school bonds, Fitch explained, "The 'AA' rating is based on Clark County School District's large and growing economic base, historically strong property tax revenue gains, moderate debt levels, adequate financial position supported by a sizeable state funding guarantee, and good long-term capital planning and management practices. Credit risks include the overall economic slowdown precipitated by the significant weakness in the residential housing market." Even when it's down, the Las Vegas area economy is still good!

Highway improvements and energy-related construction will remain strong in 2008, even as several states continue the search for sources of additional highway funding (Arizona, Colorado and Wyoming expect their legislatures to address the topic this year). Though coal-fueled power generation is taking hits from the environmental sector, coal will remain a major source of electrical energy in this region for years to come, with a new plant just underway in Wyoming and one expected to begin construction in Colorado. Uranium mining and milling is hot again (no pun intended), with a new enrichment facility under construction in New Mexico and a second one under consideration, while a new nuclear power plant has been proposed in Utah. Wind farms are rising with considerable regularity throughout the territory. New oil and natural gas pipelines are going in all across the region, with many more in various stages of planning. Only ethanol production is not meeting expectations, with Bloomberg reporting that, even with oil nearing $100 a barrel, ethanol markets are so depressed that existing plants are shutting down and new ones are being postponed — and worse, "energy experts contend ethanol isn't reducing oil demand." Associated General Contractors of America chief economist Ken Simonson notes, "Construction of alternative energy and power facilities appears to be booming, aside from ethanol plants, which are rapidly being canceled or deferred." For example, the Kansas City Business Journal reported on Nov. 16, "U.S. Energy Services ... has energy management and development contracts with 125 ethanol plants. ... Of the plant projects that have engaged the company but have not yet started construction, more than half have been put on hold, and, of those, about a third have been canceled."

Following is a look as some of Mountain America's bigger projects just getting underway or planned for construction starts during 2008.

Salt Lake City — Utah's non-residential construction market is approaching near record levels, with an annual total of almost $2 billion expected to be reached by the end of 2007. Through August, new industrial construction was up $143 million from the previous year, while office construction was up $121 million. Retail was down slightly. In Salt Lake County, the value of non-residential construction was up 46.4 percent over 2006 levels. Among new projects recently announced, First Industrial Realty Trust has purchased 154 acres at Sortech West Park, 5100-5600 West and 300-700 South in Salt Lake County to develop a new industrial park. Construction will begin shortly on phase one, a 460,000-square-foot speculative distribution facility, and three additional buildings are planned within the next 18 months. Procter & Gamble Co. has announced it will build a $300-million manufacturing plant for paper products in northwestern Utah's Box Elder County, with construction to begin next year. The plant, located a few miles west of Brigham City, will open in 2010 with at least 300 workers and could have 500 employees by 2012.

Denver — In November, Denver voters approved all nine elements of the largest bond issue in the city's history, with a total value of $549 million. Approved by substantial margins were questions 1A, a $27-million mill levy for building and facility maintenance; 1B, $48.6 million in health and human services bonds; 1C, $51.9 million in library bonds; 1D, $149.8 million in street, transportation and public works bonds; 1E, $93.4 million in parks and recreation bonds; 1F, $10.4 million in bonds to refurbish city buildings; 1G, $60.5 million in bonds to refurbish cultural facilities; 1H, $70 million in bonds to expand and build new cultural facilities; and 1I, $65.2 million in public safety bonds. The street improvement bonds passed by the largest margin, 67 percent to 33 percent. In neighboring Douglas County, voters approved extension of two existing sales taxes to fund infrastructure: a 0.43-percent tax until 2020 to fund more cells and courtrooms at the county justice center, and a 0.40-percent tax until 2030 to fund continued road and bridge improvements. Voters in adjacent Elbert County endorsed a new 1-percent sales tax, exempt from annual revenue caps, for roads and bridges.

Denver — Colorado Gov. Bill Ritter is asking the legislature to appropriate $12 million for badly needed repairs to the 99-year-old gilded dome atop the state Capitol. "We have pieces falling down that we need to do something about now," said Lance Shepherd, manager of design and construction of the Office of the State Architect. The dome is basically a series of cast iron plates held together with bolts, and many of the bolts are corroded. Last year a chunk of cast iron broke off the exterior of the dome and fell to a stairwell below. The restoration plan is focused on the iron plates and bolts, along with gutters and downspouts, foundation walls, wooden window frames, and broken skylights. The 24-carat gold leaf on the exterior of the dome is dimpled by hail but is otherwise intact and not in need of replacement. If the legislature approves the funding, restoration work could begin in 2008.

Denver — Colorado Democratic leaders have unveiled a proposal for consideration by the Legislature in its 2008 session that would employ increasing revenues from state-owned school trust lands to leverage up to $1 billion for use in replacing and repairing K-12 public schools throughout Colorado. The plan calls for raising $500 million in capital by leveraging an estimated $30 million to $40 million in annual revenue from mineral leases, royalties, rentals, and interest from the 3 million acres of school trust lands. Revenues from these lands have grown dramatically as energy development has expanded and are projected to hit $90 million next year. State Treasurer Cary Kennedy said that, using the same mechanism the state already uses to fund college and prison construction, improvements to K-12 schools could be made without raising taxes. Following a statewide assessment of all public school buildings and needs, the $500 million would be distributed to districts with the greatest need, primarily on a matching fund basis.

Cheyenne — Gov. Dave Freudenthal has made a capital construction budget recommendation of nearly $153 million for the 2009-10 biennium, topped by a $55-million business college at the University of Wyoming. Second-largest item among the recommendations is just under $55 million for statewide building maintenance projects. State agencies had requested a total of $348 million in general fund money for building projects, and the governor pared the list by over half. The Wyoming Legislature will address the funding request when it convenes in February.

Las Vegas — The Las Vegas-based Clark County School District — the nation's fifth-largest — plans to ask voters to approve a record $9.5-billion (yes, billion, with a "b") bond issue to finance construction of at least 73 new schools over the next 10 years. The funding would allow the district to continue building new facilities after it uses the last of a $3.5-billion bond issue approved in 1998. District officials predict enrollment will grow from nearly 309,000 students today to 473,000 students by 2018. The magnitude of the bond proposal "represents the continued growth that is on the horizon," said district superintendent Walt Rulffes. "It also represents a program that could be sustained without a tax increase." State schools superintendent Keith Rheault said the $9.5-billion proposal would "definitely be the biggest in Nevada history." If approved by district trustees, the measure will appear on the November 2008 ballot. When the last schools under the 1998 bond issue are completed in August 2010, the district will have built 101 new schools and 11 replacement schools with the $3.5 billion. The district had originally intended to build just 88 new schools under the program.

Phoenix — Ground was broken in late October for CityScape, a $900-million, 2.5-million-square-foot mixed use project of RED Development (Scottsdale and Kansas City) and CDK Partners that will ultimately cover three city blocks in downtown Phoenix, extending from First Avenue to Second Street and from Washington Street to Jefferson Street. The first phase, on the center block, will open in November 2009, with construction of subsequent phases continuing through 2011. Financial services firm Wachovia Corp. will be the anchor tenant in the 600,000-square-foot CityScape office tower, while Kimpton Hotels & Restaurants of San Francisco will build a 250-room luxury boutique Hotel Palomar as part of the project. Other project tenants include AJ's Fine Foods, Twelve Hotels & Residences (with a 150-room hotel in a later phase of the project) and P.F. Chang's China Bistro. The residential component of the first phase will include about 1,200 residential units, 65 rental apartments and 150 condominiums. Hunt Construction is general contractor for the project's initial phase. Demolition of the parking garage at Grand Avenue and First Street will commence in February 2008 following remedial site work. Transformation of the existing County Mall to a new, 16-acre civic park will begin next fall. More than $120 million in city incentives helped to cinch the deal, with Phoenix agreeing to purchase the project's underground parking garage and pay for repairs to an existing garage at a combined cost of $96.5 million. Property taxes on key components will be waived for eight years, an incentive worth at least $26 million according to city estimates.

Oro Valley, Ariz. — Sanofi-aventis, French-based global pharmaceutical firm, has broken ground on a new 110,350-square-foot research center in Oro Valley, north of Tucson. Sited on 11 acres in the 300-acre Innovation Park high-tech campus that is becoming a significant biotech hub in Pima County, the $60-million center will be built to LEED certification standards and is scheduled for completion by June 2009.

Tucson — University Medical Center in Tucson has announced plans to build the area's first hospital for children. The $55-million Diamond Children's Medical Center will occupy the top three floors of a six-floor patient tower already under construction. Tucson developer Donald Diamond and his wife, Joan, are donating $15 million to the project, and UMC will raise the remaining $40 million. Hospital design is by NTD Architecture, construction by Kitchell Corp., project management by the Innova Group, and "theming" design by nationally renowned Studio Productions. The facility is expected to open in 2010.

Tempe, Ariz. — Arizona State University, situated in the heart of the Valley of the Sun, has announced plans to install enough solar panels on its Tempe campus to produced as much as 20 percent of the university's electrical needs. "If you want to be a premier solar research facility, you should make the commitment to use solar energy on your own facility," said Bud Annan, one of the solar project's leaders. The decision is one of the first developments to come from a year-long survey of campus energy needs conducted by the Global Institute of Sustainability. The photovoltaic panels will be owned, installed and operated by a private company, though ASU has yet to select the company. Work, however, is expected to begin in early 2008.

In an unrelated announcement, ASU said it has completed a ground lease with American Campus Communities Inc. of Austin, Texas, for construction of a new campus for Barrett Honors College, and construction has gotten under way. The development is part of a broader partnership between ASU and American Campus under which the Texas company is privately funding three projects expected to consist of more than 5,000 beds and have an estimated development cost of more than $350 million. Barrett Honors College at ASU was created in 1988 to provide exceptional educational opportunities for outstanding students. The college community will include housing for 1,700 students and feature its own dining center, classrooms, café, faculty, and administrative offices and activity space. The entire complex is designed to meet LEED silver certification standards.

Denver — The first project in the redevelopment of lower downtown Denver's Union Station and adjacent property broke ground in late October, though the project is not an official part of the Union Station redevelopment. A $125-million, 17-story, 375,000-square-foot office tower at 16th and Delgany streets will constitute the first phase of the 690,000-square-foot 1900 16th Street mixed use development, to include offices, retail and residential. Trammell Crow is developing the project for owner Multi-Employer Properties Trust. David Owen Tryba is architect for the project, and Saunders Construction is general contractor. The office tower will rise 250 feet on the current site of a parking lot behind Union Station. Xcel Energy is considering the tower for its new Colorado headquarters.

Golden, Colo. — The Department of Energy's National Renewable Energy Laboratory, sited on the south face of South Table Mountain in Golden, Colo., is planning a research support facility to live up to the agency's name and achieve a platinum LEED rating from the U.S. Green Building Council. The 210,000-square-foot lab will represent one of the greenest buildings built by the government, and a DOE spokesperson said the agency hopes the project will become "a showcase and an example and help lead other federal agencies into doing the same kind of projects." In addition to the building's energy efficiency, it will have a five-acre solar power system to provide up to 7 percent of the entire Renewable Energy Laboratory's electricity and a renewable fuel heating plant burning waste wood to provide hot water, cutting natural gas use by 75 percent. The building itself is estimated to cost $72.9 million and will be completed by the end of 2009. The solar power system and the heating plant will be built separately and financed by private companies.

Las Vegas — The New Frontier, second hotel-casino resort on the Las Vegas Strip and the first themed resort in "Sin City," went up in a cloud of dust Nov. 13 as the 16-story hotel tower on the southwest corner of Las Vegas Boulevard and Desert Inn Road was imploded by over 1,000 pounds of explosives. It is due to be replaced by another multibillion-dollar resort complex, this one bearing The Plaza brand. Israeli billionaire Yitzhak Tshuva and his Elad Group (which owns The Plaza hotel in New York) are partnering with IDB Group to build the new $8-billion resort on the New Frontier site. Aimed at the high end market, the project will include a luxury hotel of about 3,500 rooms, private residences, retail space and, of course, a large casino. Following implosion of the neighboring Stardust earlier this year, the New Frontier became the last of the original low cost/low key gaming halls on the Strip. Its demolition marks the end of an era. "It's another budget option on the Strip that's gone," commented David Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas. "The future is really high end." And developer Tshuva reinforced that premise when he told the crowd gathered to watch the demolition, "Let me promise to all of you today that we will build in this beautiful city one of the most magnificent hotels in the word. I think there should be no price tag for a place with such enormous potential." The Plaza hopes to open in 2011.

Hawthorne, Nev. — The slumping housing market has caused developer Peninsula Floors of Livermore, Calif., to postpone plans for a major industrial, commercial and residential project in struggling Hawthorne, about 140 miles south of Reno. Peninsula's $175-million to $200-million project was to have broken ground in January. Plans called for a multibuilding manufacturing plant and distribution facility for the company's flooring and other building materials, plus a shopping complex and upwards of 2,000 housing units. Peninsula is said to be rethinking the project and has put it on hold until the economy improves. According to reports, Peninsula's sales volume is off about 50 percent from the year before, impacted by the housing slump.

Glendale, Ariz. — Though actual construction had already begun, formal groundbreaking ceremonies were held Nov. 18 for the new ballpark and spring training facilities for the Los Angeles Dodgers and Chicago White Sox. The complex at 10710 W. Camelback Road, estimated to cost $80.7 million, is scheduled to open in time for the 2009 spring season. The Arizona Sports & Tourism Authority is providing two-thirds of the funding, with the other third coming from Glendale. Present for the groundbreaking were Arizona Gov. Janet Napolitano, Glendale Mayor Elaine Scruggs, Phoenix Mayor Phil Gordon, Dodgers owner Frank McCourt, White Sox owner Jerry Reinsdorf, longtime sportscaster Vin Scully, Glendale city council members, and Rick Burton, principal of Rightpath Development, whose adjacent mixed use project is expected to help pay Glendale's share of construction costs.

These are but a few of the many sizable projects expected to be under construction during 2008 that offer evidence that the year will, on the whole, be another good one for Mountain America.