How sensing a downturn unleashed wild growth at Adolfson & Peterson Construction

Being a worry wart has paid off for Golden Valley-based Adolfson & Peterson Construction (AP).

Remembering the Great Recession, officials at Minnesota's third-largest commercial construction firm started worrying three years ago about the possibility for yet another recession.

"For three years, we thought another recession might hit. So we had been preparing [by] building up our [project] backlogs," said AP CEO Jeff Hansen. By the time the U.S. pandemic hit full force in March 2020, "we had the highest backlog in the company's history," he said.

That's unusual. While other big firms ensure their jobs mix is well diversified, "I have not heard a lot of other people developing long-term plans just in case a recession hits," said Dave Lyste, president of the Minnesota Construction Association.

Hansen's team scurried to win new jobs across all five states where AP operates: Minnesota, Colorado, Wyoming, Texas and Arizona. The hustle paid off.

Signed contracts jumped 30% to create a $1.3 billion backlog. That cushion helped as COVID ravaged the U.S. economy.

As COVID shut businesses, cities, concerts, ball games and much of public life, several AP clients delayed long-standing building projects. Others canceled jobs all together.

But thanks to extra hiring and aggressive bidding that padded the "to-do" list, Adolfson & Peterson retained enough business that revenue increased 25% in 2020 to $1.1 billion.

Hansen was pleased. "We don't want to be known as the organization that only grows when the economy is good."

The banner year coincides with AP's 75th anniversary and stemmed from several education, senior housing and health-care construction projects that marched ahead despite the pandemic.

With the exception of behemoths such as Ryan Companies and Mortenson, many other construction firms were not so lucky.

U.S. construction starts for factories, offices, warehouses, institutional and other non-residential buildings sunk 19% between May 2020 and May 2021, according to construction industry tracker Dodge Data & Analytics.

To avoid the same fate, AP Midwest President Brad Hendrickson said his company avoided recession-sensitive clients and focused on those with strong balance sheets in the years leading up to the pandemic. "We have a lot of work in our pipeline and we are chasing [more]," he said. "We have done a pretty good job of collecting work in this fiscal year."

AP Arizona saw a burst in medical building jobs, while AP Texas enjoyed a surge in office construction. Colorado experienced population gains from other states, prompting a flurry of bonding bills for several school construction projects that landed with AP.

In Minnesota, AP won 13 renovation and expansion projects in North St. Paul and other east metro school districts worth $254 million.

It recently won a job rebuilding an outdoor plaza at 3M's headquarters in Maplewood.

Many of its 600 workers are busy building Flagstone Presbyterian Homes residences in Eden Prairie; the 185-apartment Bower Residences in Edina; and a five-story parking garage that is part of a larger expansion project at West Lake Quarter (formerly Calhoun Towers) in south Minneapolis, Hendrickson said.

AP is also building a nursing home in Bemidji and continuing its work on Metro Transit's $117 million Minneapolis Bus Garage in north Minneapolis, where AP is building the 400,000-square-foot structure in conjunction with Knutson Construction.

The garage is expected to open next year after 30 months of construction.

Even so Adolfson & Peterson couldn't escape all of COVID's mayhem.

"Wood prices are four times what they were two years ago," Hansen conceded. "And now we are seeing that a $2 million [price quote]] for supplies is good for only two minutes. Suppliers no longer hold their [quoted] prices for 60 days and that has really caught everyone off guard."

The problem is radiating into the economy. "Over three months, I've seen project costs be up to 20% higher than they were a year ago," Hendrickson said. "We are building that into our projects."

Sometimes, jobs quoted before the pandemic hit — such as the Minneapolis bus garage —- can't be altered. Higher supply prices simply eat into profits.

Those reductions and delivery delays are pummeling construction firms nationwide.

"The nonresidential sector continues its modest recovery off the lows of last summer ... but higher material prices will result in longer lead times to groundbreaking and more temperate improvements in nonresidential starts," said Dodge Data & Analytics Chief Economist Richard Branch in a report last month.

During the second quarter of this year, lumber and copper prices jumped 60% from a year ago, according to David Smith, the head of Occupier Insights at Cushman & Wakefield Global Research.

Diesel fuel leapt 151%. Paint prices shot up due to delivery delays. And cement pricing, "which is historically not very volatile, has not changed much year over year, but is expected to hit growth rates above 4% later this year," Smith said.

He noted that general contractors absorbed price increases during the pandemic because they were "struggling" to win the few projects in the market. "But now that the economy is reopening, project opportunities are growing and causing contractors to pass the cost increases directly through to clients," which impacts developers, tenants and property investors, Smith said.

Even so, Hendrickson and Hansen and AP's board members expect a strong recovery across the sector.

"We believe there will be another construction surge," Hansen said, adding that delayed projects should reschedule. Interest rates are still low. And demand for new logistical centers and warehouses are hotter than ever as consumers demand more home deliveries.

New warehouse building projects are set for Dayton, Shakopee, Brooklyn Park, Inver Grove Heights and Burnsville.

"I think we will start to see things grow again into 2022. All the signs are pointing to [improvements] in the construction and development industries," Hansen said.

Lyste with the MCA agreed. "From everything we are seeing, I don't see another recession happening any time soon. There are so many construction projects out there right now."