Sunday, February 15, 2004

Building outpaces regional job growth

By John Byczkowski
The Cincinnati Enquirer

[IMAGE] The St. Elizabeth Medical Center expansion in Edgewood was the single largest construction project in Greater Cincinnati last year.
(Glenn Hartong photo)
The local construction industry closed the books on 2003 as one of its best years ever. Stores, offices, roads, churches and other structures valued at about $3.7 billion were begun last year in Greater Cincinnati. Commercial construction jumped 47 percent from 2002, and homebuilding set a record.

But while the activity created business for suppliers of building materials and kept 48,000 construction workers busy, there are other stories behind the numbers.

Take retailing, for example. Since 1999, $906 million has been invested in the construction of new stores in Greater Cincinnati, the research firm McGraw-Hill Construction reports. The more than 5 million square feet of new space equals 25 Wal-Mart supercenters.

But retailing in Greater Cincinnati employed 113,000 people in 2003, about 1,000 fewer than five years earlier, according to the federal Bureau of Labor Statistics.

So while construction had a great year in 2003, some elements of economic development didn't.

"It was slow," said David O. Smith, manager of economic development at Cinergy Corp. Companies concentrated on improving their productivity with new machinery, and not buildings.

"Business is cautious. Until we start to see unemployment drop, we're not going to see much in the way of expansion," said Rob MacLachlan, vice president of leasing and business development for developer Miller Valentine Group. "Office (construction) is highly correlated to job creation. There's just not been enough job creation either here or nationally to warrant most companies to expand."

Building trends in Cincinnati were not unlike those nationally, said Robert Murray, vice president of economic affairs at McGraw-Hill:

• Anything that involved consumers was strong. That includes homebuilding and construction of stores and shopping centers. Homebuilding boomed in Butler County, up $109 million to $416 million, and for the first time it surpassed Warren County. And since stores follow homes, Warren and Butler together were host to five big retail projects worth more than $90 million.

• Outside of retailing, anything built to house a for-profit operation was weak. Warehouse construction in 2003 was a fraction of what it was five years ago, and office and factory construction are down by about half.

• Filling the gap was institutional construction - mainly schools, universities and hospitals. The single largest project in Greater Cincinnati last year was the expansion of St. Elizabeth Medical Center in Edgewood and six of the next 10 largest were either health- or education-related.

• Public works projects - like roads and stadiums - were off 25 percent from 2002 in Greater Cincinnati, reflecting the weak fiscal condition of state and local governments.

This added up to a decent year for construction companies. At Reece-Campbell Inc., "we had an excellent year," said Peter Chronis.

Peter Strange, president of Messer Construction Co., likewise said his company had a good year, "but it was flat."

Despite the construction flurry, employment in Cincinnati stood at 1.02 million in December, down about 2,600 from a year earlier and off nearly 16,000 from 1999.

Why? To some degree, analysts, say, construction follows the migration of people within the region. In 2001 and 2002, more than 22,500 people moved out of Hamilton County, while nearly 11,000 moved into Warren County and 4,200 to Boone County, according to the Census Bureau.

"When you have a massively expanding suburban population, you also have to have the infrastructure to support it, and that includes schools and hospitals and stores and all that," said Jim Costello, senior economist at Torto-Wheaton Research in Boston.

But stores don't necessarily create jobs. Analysts say stores hire workers, but in many cases, they displace jobs rather than create them. Consumers don't eat more food just because a new grocery store opens. Instead, they shift their shopping from one establishment to another, so a successful new grocery may put other businesses under.

Similarly, hospitals and schools provide jobs, but as non-profits, they generally don't pay most taxes. "Strong levels of office and retail are more indicative of a strengthening economic base," said McGraw-Hill's Murray.

In Greater Cincinnati, however, there's too much empty space. "There's a two to three-year overhang of vacant industrial and vacant office space," said Miller-Valentine's MacLachlan. "As long as we've got that overhang, you're not going to see a lot of new development in Greater Cincinnati."

Still, there are a few projects under way. The Ackerman Group's $23 million Cornerstone office building in Norwood began construction in October. "Cornerstone is very busy and there's quite a few prospects looking to move there," said broker Bob Ryan of Colliers Turley Martin Tucker.

But that project was risky: Ackerman began construction with few signed tenants. "It's very difficult to prelease office space," Ryan said. "If you want to be successful in this marketplace, you have to put the shovels in the ground, but that is sometimes risky."

Now that it's under construction, it's drawing interest from business. That may be a sign of an improving commercial real estate market. McGraw-Hill's Murray said the forecast is for homebuilding to weaken somewhat this year, while office and industrial gets better.

Messer's Strange said he's already seeing improvement. "Anecdotally, we feel that folks are more positive about major capital projects. We're seeing some private customers moving ahead" on projects they've been talking about for years, he said. "The flow of projects - how many projects we're tracking - is up significantly from last year."


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