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Kraus-Anderson ‘offensive strategy’ finds pockets of growth in commercial construction

A sketch of the FBI's Minneapolis Division's new five-story field office.
Courtesy of Kraus-Anderson Construction
A sketch of the FBI’s Minneapolis Division’s new five-story field office.

“It’s been a great breath of fresh air in otherwise troubling economic times.”

That’s how Alan A. Gerhardt, chief operating officer  at Kraus-Anderson described the last two months, a period when the Minneapolis-based construction company booked $372 million in new projects, extending into 2012. 

Kraus-Anderson’s revenue topped $800 million in 2006, but fell to $473 million last year, when the firm was ranked the 110th-largest construction firm in the United States, according to Engineering News Record.

The recent bookings represent nearly 80 percent of KA’s entire 2009 revenue and its largest two- month tally of business booked over the last two or three years, Gerhardt said. About 10 percent of the $372 million is related to federal stimulus funds, he noted.

The new business KA announced includes several projects:

  • Gundersen Lutheran Hospital, LaCrosse, Wis.  
  • Open Systems International, corporate headquarters, Medina
  • Gustavus Adolphus College, academic building, St. Peter  
  • GH Holdings First Avenue Development,  student housing serving the University of Minnesota,  Rochester,
  • Crow Creek Tribal School, K-12 school in Stephan, S.D.
  • Molasky Group of Companies’ new five-story field office for the FBI’s Minneapolis Division.

Gerhardt credits the firm’s resurgence to the “offensive strategy” it launched in late 2008 as the economy was tanking. “We certainly recognized we were headed into slightly uncharted waters,” he observed.

To prepare, the company consolidated offices and cut its employee count by nearly one-third, similar to other contractors in the area.

But the privately held firm resisted what he described as “a death spiral of size-to-fit.”

Instead, senior management began to “focus on what the new normal post-crisis environment would look like,” Gerhardt said. The firm’s market research and experience over the past several years led them to concentrate on projects in health care, education, government and senior housing.

“We believe those are the markets that will recede the least” during the recession, Gerhardt said.  “Health care and education [construction spending] will probably be flat near term” until credit conditions improve, he added. The COO also sees pent-up demand in senior housing and predicts “a big slug will come up through the pipeline.”

The 30-year KA veteran looks at three key indicators in calibrating a possible upturn in commercial construction:

• The stock market is off its post-crash bottom and fighting to come back.

• Gross domestic product (GDP) growth returned in Q3 of last year.

• And he’s “starting to see more positive trends” in employment as it edges back.

Gerhardt’s “best guess” is that we’ll have to wait until mid-2011 before we see a significant, measurable, long-term non-residential construction market rebound.

Gerhardt proudly pointed out that KA remained profitable throughout the downturn. The 113-year old firm’s conservative approach to real estate investment positioned it with a healthy balance sheet heading into the downturn.

In contrast to Minneapolis-based Opus Corp., which developed speculative retail and office real estate projects that subsequently drove three subsidiaries into bankruptcy and resulted in on-going litigation, KA took a more conservative approach during the real estate boom earlier in the decade.

Recalling that the company has survived recessions and a depression, Gerhardt  said: “We  probably have been criticized for our conservative approach to the market. We weren’t the ones to take large land positions or do speculative building over the last 70 years. We didn’t hop on the latest trends … Maybe that cost us a few missed opportunities, but we’re feeling pretty good today.”

Recent industry data suggest that commercial construction has a long way to go.

The value of nonresidential constructiondeclined 14 percent July to July but rose 5 percent year-to-date, according to Reed Construction Data, a division of Reed Elsevier.

“Heavy starts were the highest in six months with a surge in highway and bridge projects in the first month,” Reed’s chief economist, Jim Haughey, said. “There were sizable July gains for developer-financed retail, hotel and warehouse (but not office) projects, which signals that this cyclically sensitive sector may be recovering,” he said.

 “However, institutional building starts declined in July,” he added. “Federal stimulus funds cannot offset the collapse of state and local government finances.”

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