Construction sector feeling the pinch

The economic downturn has hit the construction industry hard this year.

Recent figures released by the Economic and Statistics Office illustrate the large drop-off in business the local construction industry has seen.

construction pinch

John Gray High School construction site earlier this year. Photo file

In the one-year period between June 2008 and June 2009, construction permits decreased 15.9 per cent; the value of building permits dropped 17 per cent, while their numbers dropped 11.8 per cent.

Developer Clarence ‘King’ Flowers of Orchid Development says that the 70,000 square foot Willow House office building – a new addition planned for Cricket Square – has been put on hold.

‘We had three floors rented, but the tenants put the brakes on,’ he said. ‘But when the economy turns around, we will start construction right away,’ he said. ‘The building can be ready for occupancy in 14 months. Everything is set and ready to go.’

Other office building projects, such as Citrus Grove 2 and Ugland House, have also been delayed.

Ian Pairadeau of McAlpine construction said his business has be hard hit by the economic downturn.

He noted that construction companies are usually the last to know what’s going to happen to the development market as they come in only at the end to price projects that have already been given the go-ahead.

‘We have had very few projects in front of us to price over the last six months,’ he said. ‘There is definitely not a lot of work out there, and right now we don’t have anything in front of us.’

Mr. Pairadeau noted that since the time lapse between signing a contract and commencing work usually takes about six months, the company likely won’t be seeing any new work until at least June of next year.

He says the company has already cut about 25-30 per cent of its workforce, with more cuts likely coming in the near future.

‘The industry goes in cycles, and we will just have to see what happens,’ he said.

Heber Arch of Arch & Godfrey, another of Cayman’s major contractors, confirmed most of his firm’s projects have been put on hold

‘The economic downturn has affected us severely, and I don’t really think there is any fast solution at present,’ he said.

Mr. Arch said it was not likely the government would be the place to look for a turnaround.

David Gibb of Hurlstone Ltd. said his firm had been directly impacted when one of the government projects it was supposed to work on was put on hold. However, he noted that while the global economic downturn has certainly had an impact on Cayman’s construction sector, other factors come into play as well.

He pointed out that Grand Cayman only has so many people and the demand for new construction is currently outweighed by the supply.

‘There are more roads, churches, schools, apartments, condos, office space now than ever, with no new people coming to this island,’ he said.

He said attention needs to be paid to how the population has changed over the past five years and how will it change over the next five, including birth rates for Caymanians.

‘We already see work permits decreasing, so where are the people going to come from to fill all of these spots and create demand for more work?’ he asked.

‘If the island stays where it is, there is no more need for roads, schools, churches, and so on,’ he said. ‘The only thing being built right now is homes.’

Mr. Gibb thinks it is important for government to get some of its planned infrastructure projects going.

‘The port needs to get built to keep people on this island active,’ he said. ‘If the work permit holders on this island leave, there is less money spent at the grocery stores, for example, and this will have a greater impact on this island. This current government has their work cut out for them in the long term.

‘Without tourism and the financial industry bringing more and more people, the construction industry will be halted.’

Mr. Gibb pointed out that the amount of competition was also playing a role in the problem.

‘There are too many companies on this island already doing the same things and the fighting will continue on bids, and people will end up lowering the margins they used to earn to get the jobs, decreasing there revenue, which means they have to cut costs, and permits will decrease.’

Wil Steward of the architecture and design firm Chalmers Gibbs said in his view, the tightening of lending practices and shortage of development capital are the largest factors affecting the industry at the moment.

‘Design services are near the top of our ‘food chain’ and the cycle of new projects currently being planned has dwindled to a new low,’ he said.

‘We saw a similar effect after the World Trade Center disaster, however recovery was evident within a year,’ he said. ‘Part of the problem with this recession is that it is without precedent in a global economy, so it is anyone’s guess how long it will last. This continuing uncertainty is a factor causing the conservatism in development financing.’

Mr. Steward said his firm has a backlog of resort, condo and commercial developments all sitting waiting for financing or tenant commitments.

‘Many have construction documents already prepared and permits in place,’ he said.

‘With many of the projects shelved in 2008, most will require renewal of permits to proceed, however this is typically the least of our worries.’

Mr. Steward said the Mandarin Resort was a good example of a major project on hold due to financing difficulties.

However, Mr. Steward noted as with any economic cycle, there are opportunities created.

‘This economy is perfect for a developer with cash reserves and long range plans,’ he said. ‘Money unfortunately makes our world go around and, conversely, the lack of it makes it slow down.’

Mr. Flowers observed that in the end, the development and construction sector ultimately depends on the overall economic success in Cayman.

‘Development not an industry that drives itself,’ he said. ‘Its success depends on demand. If the demand is there, then we have work.’