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. about the business conditions in their market.
Construction companies that are knowledgeable about local conditions can leverage that advantage over competitors, especially in hot markets.
Bozzuto Construction — a division of Bozzuto Group based in Greenbelt, MD — emphasizes its regional expertise as a key differentiator in the strong multifamily and mixed-use markets of the greater Baltimore area and Washington, DC, suburbs. Bozzuto Construction, which also operates in Pennsylvania and Northern Virginia, opened in 1988 and pulls in annual average revenue of $400 million.
From knowing which local regulations can have the greatest business impact, to which subcontractors can take on certain projects, to which universities produce the highest-quality construction graduates, Bozzuto is fully tapped in to the Maryland market — and it has used that to its advantage.
Construction Dive spoke with Mike Schlegel, president of Bozzuto Construction, about the labor, demand and regulatory conditions impacting the Maryland construction industry.
Editor's note: This interview has been edited and condensed.
How would you describe current demand in the Maryland market?
SCHLEGEL: From a construction perspective, it’s high. In the past 24 months, there have been, at times, more projects available to look at than we had the capacity to take a look at. We have tended to focus on projects that have a high probability of starting and [that have] a prior relationship with the owner versus those that are more one-off. We’ve been able to be a little bit selective. We still scrap for every deal we get, but it’s been a good market.
Why is the multifamily sector so strong?
SCHLEGEL: It’s been strong for a while, and it's driven by a number of factors. The price of homeownership is high in these markets. The luster of owning a home has dulled a bit since the recession, and that [may not be] everybody’s dream and goal, at least not until later in life. That’s coupled with the age of marriage and first child being delayed. All those things are triggers for folks to move into a single-family home that they own. That, along with markets like Baltimore and Washington becoming even greater places to live, has boosted the multifamily sector.
Which regions are seeing the most activity?
SCHLEGEL: The cities are still the places to be. For instance, in downtown Baltimore, the neighborhoods are expanding. Today in Baltimore there is [significant activity in] Federal Hill, Canton, Riverside and Harbor East. With that comes restaurants and bars and retail. More begets more. In Baltimore, we have about 1,000 units under construction. I remember a time when Baltimore didn’t even have 1,000 units under construction by all contractors combined.
Are you concerned about the risk of overbuilding in the area?
SCHLEGEL: We’re certainly worried about a bit of an overbuild, but we think that it’s temporary. Rents are continuing to rise, and vacancies have increased a little bit in the Baltimore and Maryland markets, but it’s not been an unhealthy amount. It’s not something we’re overly concerned about.
Do you predict any kind of looming slowdown in the multifamily sector?
SCHLEGEL: We are concerned about that, and there are probably more units being built and delivered than the market could sustain forever. But that doesn’t bother us much because it tends to weed out the out-of-towners that have come into the markets and are probably part of the problem in terms of driving up land prices and maybe even rents. They will tend to disappear pretty quickly when rents decline just a little bit or occupancies decline a little bit, or equity becomes a little less interested. In fact, during the 2008–2009 recession is when our development company got very active with respect to tying up deals because there was more available land to be bought that maybe was controlled by somebody else who was no longer around.
What advantage does your local focus give you over those 'out-of-towners'?
SCHLEGEL: Using Bethesda as an example, we know — because a number of us in the company live in Bethesda — that the West side of Wisconsin Avenue is more valuable than the East side. And it’s just one block apart. It’s that block-by-block knowledge we have of the market that gives us an extreme advantage over someone coming in from out of town and trying to figure out the market. That would apply to Baltimore as well. The principals of this company live in Baltimore, and they know every city block in the downtown area.
Are there any state or local regulations that have a significant impact on your business?
SCHLEGEL: In Washington and in Baltimore, there are socioeconomic requirements. For instance, if a project has public funding, both cities require 35% participation rates from local businesses. That can be difficult to solve because those businesses may not exist inside the city limits. It’s more difficult on larger projects than on smaller projects, and that can impact the price. This requirement is not foreign to us at all. We try to attract local and small businesses to come work with us. We already know a lot of them, so we try to figure out who fits for that particular project.
Is Bozzuto experiencing difficulty finding qualified employees to join the company?
SCHLEGEL: Yes, we have seen a very tight labor market. It’s more about finding qualified individuals who can come into our company and hit the ground running. Our strong preference is to hire straight out of school, and then promote from within. We like for about two-thirds of our promotions to come from within and one-third to be external hires. Those external hires are the ones we’ve struggled with most recently. It’s a very hot market right now in a lot of different segments of construction, so we’re all competing from the same pool of people.
The state of Maryland does not produce anywhere near the number of construction candidates from the university programs that are needed. It’s painfully low and is a fraction of what is actually hired by these companies. It’s something the state is starting to look at. We tend to do most of our hiring from Virginia Tech and Penn State, so we’re going out of state to look for college graduates.
How is the worker shortage impacting skilled labor and subcontractors?
SCHLEGEL: Subcontractors, particularly those that do mixed-use, are putting in about 240% of the work that was put in place in 2011. They’re probably a little bit more difficult to scale than maybe even a general contractor because they need equipment and skilled labor that may not exist. They’ve been really struggling more than we have in terms of finding great skilled labor. It’s pushing up their price. We’ve seen a ton of escalation in cost to us in the past few years. It's been running in the 10% per year range for a couple years now. I can’t say that I blame them for trying to recover a bit from the suffering that took place during the recession.
Within the sectors that Bozzuto specializes in, which are you most excited about?
SCHLEGEL: We love mixed-use. Those projects tend to be more complicated, more urban, more interesting and more difficult to build. What is great about mixed-use is that the retail that often goes in the ground floor is the amenity or part of the amenities that we offer to the residents that live there. The entire project can really enhance the neighborhood and make it a better place to be.
Are there any other elements of the Maryland construction industry that set it apart?
SCHLEGEL: We’re lucky in that we do have a strong workforce here. While I may complain a little bit about our subcontractor community being overworked and over-streteched and prices going up, the reality is that we have those subs here. We have very qualified and sophisticated subcontractors in the Baltimore and DC markets that allow us to build the number of units that we have. I learned a valuable lesson when I was trying to build a project in southwest Virginia — I thought it might actually cost less. But it cost more because the subcontractors did not exist in that market.