Backlog fuels success in construction industry

Contractors have kept project pipelines filled for the past three years.
Backlog fuels success in construction industry
Construction firms are hoping rampant inflation levels off and begins to recede in 2023. <strong> Courtesy iStock </strong>

Despite inflation, a hike in interest rates and swirling rumors of a recession, local construction experts foresee continued growth in the industry.

Michael Garrett, CEO and president of Pinnacle Construction Group, said the backlog of construction projects from 2022 will allow his firm to continue to grow despite the outside challenges.

“Some of the inflation that we are having is here,” he said. “It is baked in. But is it going to continue to go higher from here? I am not seeing that. I don’t think we are going to see the big decreases to what construction prices were two or three years ago. I think the prices that we are experiencing now are going to stay with us for a while. It is probably going to reset to these higher interest rates due to the inflation we have been experiencing, but I am still very bullish on West Michigan and its growth.

“We are still busy. I think all of 2023 we’ll stay busy. It takes a year and a half from when someone thinks about doing a project to when we actually give them the keys, because there are permitting and design and financing (steps) and then building the projects. So, a lot of stuff that we are doing this year, we were hired to do a year ago.”

Ben Wickstrom, president and CEO of Erhardt Construction, said his company had its highest revenue mark ever 2022 as a result of the backlog of projects from 2021. While his company had a record year, Wickstrom said it also added projects in 2022 so there will be further growth in 2023. He said he anticipates a 10% to 15% increase this year.

“2022 was a strong revenue year for us so there was plenty of work for us to do. There was a strong pipeline of new projects coming on. So, for us, coming out to 2021, as far as our ability to land new work in 2022, was positive. Our backlog coming out of 2022 is the strongest it has ever been.”

Chris Veneklsen, CEO of Veneklasen Construction, said 2022 was a good year for his company, in part, due to some projects that may have been delayed in 2020 or 2021 due to pandemic-related challenges such as mandated shutdowns and supply chain delays, among other things, that were filtered through to 2022 and were completed or underway through the end of the year.

As a result of the success of 2022, Veneklsen said he believes 2023 will be a “normal” year.

“Ignoring the market challenges of 2023 mostly related to rapidly rising interest rates, this year looks to be a more ‘normal’ year as most supply chain challenges have improved and the demand bubble from the pandemic has diminished,” he said.

Veneklsen also said one of the primary issues individuals will face this year is higher borrowing costs. While there are still creative ways to finance projects at rates that are historically competitive, he said, those new rates are still double what they were a little over a year ago.

“We have seen some moderation of construction input prices and we expect that to continue to improve, which will benefit those clients looking to push forward with their projects and hopefully help to offset some of the increased cost of capital,” he said.

While the experts foresee a year that will yield success, there is a sector of the industry that will continue to face challenges. Garrett, Veneklsen and Wickstrom agree that there is continued demand for housing in the region; however, Garrett said increased interest rates are hindering individuals from moving to a new home.

“People are already in a low-rate mortgage that they’ve locked in for 30 years and they don’t want to sell their house and then go into a 7% mortgage, so that is keeping them from moving,” he said.

Wickstrom said the municipal sector will continue to grow in 2023 as local municipalities are going to continue to ramp up investment in facilities, services and infrastructure to serve the public.

“There is a good amount of work coming from local cities, townships and counties, which I think is good for our region and our industry,” he said.

The West Michigan region, Veneklsen said, has strong business fundamentals that indicate some insulation from the current market headwinds.

“Specially, vacancy rates across most market segments are historically low,” he said. “So, while there may be some slowdown across those markets, we don’t feel like there are any red flags in a particular segment. Nationally, the warehousing and logistics markets have seen some pullback since the e-commerce balloon of 2020/2021 deflated. However, due to the scarcity of available buildable land in West Michigan — especially the Grand Rapids market — this impact has been minimal.”

While the supply chain challenges may have diminished, the cost of construction materials has been on a “roller coaster since March.” Veneklsen said there have been three spikes in material costs since 2020 that seemed to coincide with changes in demand, dramatic supply chain issues and the war in Ukraine. 

Those spikes in pricing mostly peaked last March and have slowly returned to more manageable levels, according to Veneklsen.

With construction projects underway or set to begin this year, Veneklsen described the labor market as tight as the industry still is looking to increase the number of young people seeking jobs in construction. He said the West Michigan Construction Institute will help to fill that need.

New employees at Erhardt Construction were instrumental in its ability to post its highest revenue year ever. Wickstrom said that they added 28 trade specialists.

“I am really proud of that,” he said. “We’ve been able to find some really great people. We are continuing to add people to our team, and I do anticipate that will continue this year. We are still adding jobs as an industry so I think the labor market will continue to be tight, but I do think it will soften a little bit as we continue into 2023.”

Demand will be the key to success.

“People want to be in the West Michigan market, so we are seeing people coming from outside of our community that are moving here, that are bringing their businesses here,” Garrett said. “They are seeing Grand Rapids as a growth area, so I think that is creating demand. We are all still busy. The subcontractors in our industry are still busy. My competition is busy. I am busy.”

This story can be found in the Feb. 6 issue of the Grand Rapids Business Journal. To get more stories like this delivered to your mailbox, subscribe here.

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