The 50 States of Construction: How the IL market is thriving amid turmoil
Leopardo's Mark Yanik explores the factors contributing to — and ramifications of — the state's surprisingly strong construction industry.
Editor's note: This article is part of Construction Dive's 50 States of Construction series, in which we talk with industry leaders across the U.S. to discuss the business conditions in their market.
Illinois shouldn't be seeing such strong activity in its construction market. With state lawmakers deadlocked in their efforts to pass a budget for the second-consecutive year, Illinois facing the lowest credit rating of any state and the city of Chicago dealing with its own budget woes, it would make sense for developers to be wary of investing in the region.
But that isn't the case.
Construction is booming in the state, especially in Chicago, which currently has the second-highest number of tower cranes in operation in any U.S. city (behind Seattle). That surge in development is due largely to companies relocating to the Chicago area and bringing demand for new office and residential space with them, according to Mark Yanik, vice president of strategic business development for Leopardo Construction, one of Chicago's largest contractors.
Yanik, who previously worked for Parsons Brinckerhoff in Virginia and Balfour Beatty in London and Chicago, joined Leopardo in 2015. The general contractor brought in $450 million in revenue in its 2016 fiscal year and employs more than 400 people on projects in Chicago and across the U.S.
With his experience working in other markets, Yanik brings somewhat of an outsider's perspective to the current state of the industry in Illinois. His biggest takeaways on the market: It's overcoming the odds and seeing a surge in activity, but that kind of demand comes with its own set of challenges.
Construction Dive talked with Yanik about the construction climate in Illinois, as well as the biggest opportunities and obstacles facing firms operating there.
Editor's note: This interview has been edited and condensed.
How do you think the construction industry in Illinois differs from that of other states?
YANIK: The state of Illinois is really interesting. It is absolutely a tight-knit group, particularly in the commercial construction side. There are other markets that are difficult to break into, like New York or Boston or some markets in California. Chicago really is a relational-based place. That goes for a lot of the state of Illinois. Illinois is also interesting because of what a large part of the state [that] Chicago comprises. Illinois has just shy of 13 million people, and nearly 10 million of that is in or around the greater Chicago area. So it’s very difficult to look at Illinois without having Chicago as a pretty significant focal point with respect to construction.
What kinds of state regulations have a significant impact on your business?
YANIK: The biggest regulation would be the fact that we’re not a right-to-work state. We are union labor, which drives a significant amount of the way construction is done here. That being said, there is an increasing nonunion presence, particularly on smaller jobs and in the periphery of the greater Chicago area and increasing as you go out from there.
The big story of Illinois and one of the things that is unique about it at this point is that we have — it’s not a good thing — the largest budget deficit of any state in the U.S. We haven’t had an agreed-on budget for two years. That’s also led to the largest pension deficit and the lowest credit rating of any state in the U.S. Then you look at some of the challenges that Chicago’s facing. Chicago itself also has a very large budget deficit and high property taxes with respect to other major U.S. cities. What’s extremely interesting to me is that despite all of that, we’ve had an extremely impressive construction development boom over the past couple of years.
How would you say the current budget situation in the state affects public projects and lending?
YANIK: There’s no question that those are difficult to get through, especially major infrastructure projects. State budgets for funding that sort of thing are tight. The state of Illinois does have broadly enabling legislation for public-private partnerships, at least on the transportation infrastructure side. Because of that, there are other avenues to get that sort of investment. The state has undertaken public-private partnerships in the civil infrastructure side and transportation infrastructure side. If you look at something as basic as roads, with the weather and the climate up here and the fact that we’re dumping mountains of salt on our roads every single day, even that is significantly more upkeep than some other areas of the country.
You mentioned there is still strong investor interest despite all these challenges. Which sectors are seeing the most growth right now, and why do you think that is?
YANIK: Particularly in and around Chicago, we're seeing a lot of new high-rises going up. With respect to the sectors, where we’re seeing lots of movement is from the corporate side, particularly office as well as industrial. Chicago is surprisingly reasonable with respect to cost of living compared to other major U.S. cities. We’re seeing an influx of a lot of companies, particularly in the tech space. We’re attributing that to being in the middle of a trend. Five years ago, tech existed solely in a few hubs. Now, the talk is of it [moving] to even smaller cities 10 or 15 years down the road, simply because of cost of living. Chicago [currently] sits in the middle of that spectrum where there’s a very large, immediately accessible younger generation of skilled workers. It’s a city that a lot of people like to live in, and it’s somewhere that companies can come and basically set up shop for a much more reasonable price.
That being said, industrial in Chicago is going very strong, and we expect to continue seeing that. Healthcare is also one of the biggest drivers of construction growth in Chicago, but there is a lot of uncertainty there with respect to the new administration.
Are you experiencing a similar skilled-labor shortage that is being reported across the U.S.?
YANIK: We absolutely are seeing the skilled-labor shortage. Like everywhere else in the country, a significant portion of our skilled labor left the market between 2008 and 2011. The figures in and around Chicago were as high as 30% to 35%. A large portion of that labor didn’t return when the market started to come back. They either left altogether or transferred to different industries.
Construction is viewed as a less-attractive career path to the upcoming generation, so we’re certainly seeing it on the labor side. And on the professional side, it is extremely difficult to get your hands on a highly skilled project manager or senior project manager in and around Chicago. That’s less because those individuals left the labor force and more driven by the fact that there’s more construction going in and around Illinois, more than there has been in quite some time.
What are you doing to combat the labor problem and draw people to your company?
YANIK: We’re getting more active with universities. We’re also following the road map that our brethren in tech have laid for us in realizing that construction, which is rightfully construed as this conservative old-school industry where you show up at 8 a.m. and leave at 5 p.m., we’re shifting our model of the company to feel much more like one of the large tech companies that millennials are now joining. We are offering new benefits, our offices are more open plan, there are flexible work hours, people can work remotely. This is mind-blowing for a construction company: We have a refrigerator with free food in our office.
What’s drawing a lot of people to Chicago is this big migration where many major employers are moving from the suburbs. At this point, with the boom in millennials [entering the workforce], what we’re seeing in the projects we’re building are major employers coming back into the city. We’re seeing big companies: McDonald’s, Conagra, Kraft Heinz. And that’s what we as a company are doing as well. We’re in the process of identifying a new space within the city itself. For us, it’s about appealing to a younger generation to keep the lifeblood of our business.
Are there any other major challenges in the state impacting your business?
YANIK: One of the things we track, like everybody, is the Producer Price Index, the cost of materials. Every time I speak at an event, people ask what’s going on with materials and labor shooting up. Yes, there are constraints on labor causing [those costs] to rise fairly rapidly. But raw materials themselves aren’t shooting up as fast as a lot of our clients would perceive. Those are exhibiting steady and predictable growth. We’re able to build that in and and not blow away clients with unexpected costs there.
What we are seeing, though, because of what’s going on with so much construction and development in a number of key sectors, is a number of constraints on construction equipment or installed equipment. We’re seeing increased lead time and increased cost. For example in Chicago right now, getting an elevator — particularly a large one — is the greatest single lead time of any piece of equipment we could be putting in a building. That can significantly delay a project just because of how long it takes to get that lined up. There’s so much demand, and there aren’t that many providers of those relatively specialized pieces of equipment. Directly associated with that, power cranes are also very difficult to get your hands on. I don’t mean impossible. You’re just going to pay more, and it may take a little bit longer.
Do you predict this current construction cycle will soon start to see a downturn?
YANIK: We’ve definitely seen over the past two years an uptick that we don’t see as being sustainable over the longer-term, over three to four years. One interesting aspect of the new administration is there’s less certainty of people’s projections in general. A lot of the conversation right now is less based on unpredictable economic factors and more based on the fact that, interestingly enough, the fundamentals themselves do remain strong, which is surprising.
We’re seeing a lot more discipline than we saw in 2007 and 2008 as well. One of the most surprising things to me was [that] our company had a record year in [revenue] in fiscal 2016. In the first executive meeting after that, rather than pat ourselves on the back and say, 'We’ve had an amazing year' and 'What investments should we make and what should we do with all this profit,' the message I got from our ownership and executives was very much a timid, 'How long will this last? Let’s take a deeper dive into where the markets are headed.’ There’s a much healthier degree of restraint.
Overall, how do you see the current and future construction business climate in Illinois?
YANIK: We continue to be impressed that despite the fact that there are a number of temporary hurdles in front of everything, from the budget deficit to pension challenges, companies continue to invest in the area and continue to come here. That’s what’s keeping us in the right place in the market and keeping us in a space where construction continues to be attractive.