Despite headwinds, construction having a ‘tremendous’ year

Building projects may not be as visible as they were a few years ago, with prominent projects at Jay Peak, the University of Vermont and the University of Vermont Medical Center going up. The most obvious construction projects today are those involving infrastructure for two reasons. One, the need to upgrade culverts, bridges, highways and other projects that have been undermined by the floods of July 2023 and August of 2023, as well as the more recent floods in July of 2024.

Two, many infrastructure projects were in response to the COVID-related recession and recovery, with much of that money coming from the federal government, especially the Biden administration’s infrastructure grants. The state still has nearly $2 billion in the bank earning significant interest, but that money is earmarked for many of these projects.

According to the state treasurer’s office, cash on hand (as of close of business 8/22) is: $1.886 billion; FY24 Interest Earned: $110,474,023.22; July FY25 Interest Earned: $9,269,237.57.)

Overall, construction projects are lined up for the next few years with money waiting.

Richard Wobby is the Executive Vice President of the Associated General Contractors of Vermont.

“We are having a tremendous season. We've had several tremendous seasons,” he said.

Still, the private projects and the for profit projects are having a difficult time because of the more recent inflation issues related to interest rates and the disruption in supply chain caused by the COVID-19 pandemic.

The vast CityCenter projects in South Burlington seem to have got in just under the wire. Some of those projects include institutionally backed housing by UVMMC and UVM. It will be difficult in the near future to build more like that.

Interest rates can stall projects because it makes it simply too expensive to obtain capital. The other pandemic issue is related to supply chain: Supply chain cost hikes and supply chain availability. This supply chain appears to be mostly worked out, though the costs are still relatively high from before the pandemic, but interest rates are still problematic. Even though the Federal Reserve Bank appears to be on the verge of a series of interest rate cuts.

Those rate cuts probably at 25 basis points (and perhaps 50 basis points or half a percent) probably will not significantly improve the situation for borrowers as much as the cut would provide confidence to the stock market and the broader impact on the economy. Mortgage lending could get a boost.

But for now, a couple of projects have been put on the back burner because of costs and interest rates.

Late in the spring, UVM canceled a $100 million housing project called Catamount Woods that would have housed about 540 undergraduate students. UVM blamed interest rates and workforce shortages.

UVM had worked out a deal with the City of Burlington to build the large dorm behind the DoubleTree Hotel in South Burlington. This would be just across the street from the main campus.

Another of those projects was the new hotel proposed for the Burlington International Airport.

DEW Construction was planning to build a hotel going back several years now on the entrance side beside the parking garage to the airport. The FAA, however decided that that would not work because of the location of radar and possibility that radar signals might be interrupted.

DEW then proposed building it on the exit side next to the parking garage. But then COVID hit. The trouble with workforce and eventually the supply chain and interest rates issues has put off the project for the foreseeable future.

DEW VP of Business Development Pete Kelley explained that: “When COVID started, that put a pause on the project for a period of time and then when we reengaged on the project, we were not able to capitalize on the lower interest rate environment and then lenders started to get a little skittish on lending to the hospitality industry coupled with the fact that that lenders don't really like the hospitality industry on leased land.”

DEW told VermontBiz that perhaps they would look at that project again if circumstances changed.

“if you've got rising materials costs and rising labor costs and interest rates that are high, there's a lot of headwind there,” Kelley said.

The supply chain issues have mostly settled down, said Kelley’s DEW colleague Matt Wheaton, Executive VP. Electric gear switches and elevators were a problem for a while, but they have sorted out those supply issues and found workarounds for other items as needed. The wood industry has also stabilized.

Workforce issues, to some extent, can also be worked-around, said Kelley.

“The bigger the project, the more appealing it is to bring people from afar to perform the work,” Kelley said.

“But there's more people leaving the construction industry in Vermont than are entering the construction industry. It's an aging industry. And so that's a factor when you're trying to build projects around here. There's no question.”

Still, Wheaton and Kelley said DEW has a robust catalogue of projects either in process or on the books. This includes the Bellows Free Academy Fairfax high school building, the Blake Hill Preserves building in Windsor and the UVM Medical Center Surgical Center in South Burlington.

DEW has projects across northern New England, with their headquarters in Williston and offices in West Lebanon (including projects at Dartmouth College) and Manchester, NH, and in Portland, Maine.

“For some of these bigger housing projects,” Wheaton said, “we could have upwards of 120 people on site every day at the peak.”

Kelley said regarding the housing crunch: “What are you seeing built right now? You're seeing market rate housing. It’s difficult to get the numbers to work, but it's right on the edge. And in some cases those can be built. You've got affordable housing projects that leverage tax credits and grants in order to make those numbers work. You're seeing more expensive housing being built because you know 700,000 and up, because that's the sector that builders can still make margin on. And so everything else is not profitable. And the numbers are underwater. So that's the challenge with workforce housing. And so how do we build workforce housing in masses? It needs some type of subsidy.”

Retrofits and smaller projects are still a significant part of their portfolio, the DEW VPs said.

Photo: Bellows Free Academy Fairfax. Photo courtesy DEW Construction

Across the construction industry, there is still all that backlog of work extending out several years now, as new infrastructure and a workforce shortage, both in the general contracting and subcontracting companies, have extended project lengths.

“In Vermont, strict permitting regulations add another layer of complexity, often delaying project timelines and increasing costs,” said Michael Biama, VP of Development and Property Management with ReArch Properties. “These factors make it difficult for developers to get jobs off the ground in an already high-cost environment. As a result, many developers are cautious about initiating new projects.” 

Several economic and regulatory challenges continue to impact commercial construction activity. Inflation and high interest rates have significantly increased borrowing costs, making financing new projects more expensive. This has also driven up overall construction costs, which are further exacerbated by supply chain disruptions and labor shortages.

The current environment requires careful planning and strategic decision-making to navigate these challenges effectively, Biama said.

While ReArch earlier this year completed the iconic OnLogic headquarters in South Burlington, as seen past the whale tails off I-89, current ReArch projects include: Reid Commons, St. Albans; Marsh House, Waterbury; and the Ilsley Public Library Renovation & Expansion, Middlebury.

Andrew Martin, CEO, Neagley Chase, South Burlington said: "In a nutshell, we're busy now with a healthy and exciting list of upcoming projects on deck. Our current work is focused in several sectors: affordable housing, manufacturing, and health care in Vermont and the Upper Connecticut River Valley."

"We've got several projects underway that involve significant changes and improvements to existing office space to entice employees to return to office settings. It's been interesting to watch companies invest in substantial upgrades that make the workplace more attractive and functional for modern-day workers. These are some fairly significant renovations to existing office space that are being leveraged as one way to attract employees back into the office, and recruit and retain workers.”

Another trend: "We are seeing an improvement in attracting youth in our industry, especially with a better awareness that a career in the construction industry may provide better opportunities than a four-year degree and associate debt. We have been successful in advancing our younger employees into increasingly more responsible roles and backing them as they advance with young employees eager to learn."

“In Vermont particularly, we have a backlog of deferred maintenance on our public schools rearing its head. It's an enormous issue. The question, of course, is how we'll pay for all the work that needs to be done. There are hundreds of millions of dollars of work needed in our public schools – if we can figure out the funding for it."

"Lake Champlain continues to take a beating with our aging wastewater facilities simply outdated and tired. We've done a number of wastewater upgrades in recent years and municipalities are aware there is more work to do. Again, the sticking point here is how we pay for it."

 

Affordable Housing

There are subtler forces at work for affordable housing, Martin said:

"An important client of ours facilitates the development of affordable housing for low-and-moderate income folks. Leveraging federal funds for these projects is key. One caveat of federal funding is the 'Build America, Buy America' Act that mandates if you're building something with federal money, you've got to use American-made materials like iron, steel, and mechanical systems. It is a great idea, but it is difficult to find things like heat pumps or air-handling units that are American-made.  Getting a waiver from the federal government can sometimes take up to a year, and we're seeing a delay in completing federally funded projects that must adhere to BABA or get waivers due to a lack of domestic capacity."

And there still could be an opportunity for office space conversion despite the obstacles, he said: “While it has already begun in major metro areas, we are just starting to see a conversion of empty office space, or similar facilities into residential housing here in Vermont. We are just starting to nibble around the edges of that, but it's a movement that's coming and something we need to figure out. I think there's a lot of promise and opportunity there."

Affordable housing projects are making progress.

On August 1, the Berlin community marked the groundbreaking of Fox Run. Co-owners and co-developers, Downstreet and Evernorth partnered to develop Fox Run Apartments which will provide essential housing for 30 low- and moderate-income households in Berlin.

“The communities of Central Vermont are in desperate need of more housing,” said Angie Harbin, Downstreet Executive Director. “Fox Run Apartments is a critical part of the solution that will provide safe, stable homes for families, workers for local employers, kids for local schools, and people for the local community.”

Fox Run Apartments is the creation of 30 affordable apartments ideally situated in the heart of the Berlin Commons New Town Center.

Photo: Groundbreaking of Fox Run Apartments. Courtesy photo

A total of $15.1 million from a mix of public and private sources was raised to cover the total development costs.  Housing New England (HNE) Funds provided the tax credit equity investment of $5.8 million for this project, which is administered by the Vermont Housing Finance Agency. The VHFA also provided $175,000 from the Vermont Housing Investment Fund. The Vermont Housing and Conservation Board contributed over $ 3.1 million, including over $2.5 million in American Rescue Plan Act (ARPA) funding and $1.4 million in HOME funds. Citizens Bank provided the construction loan.

The town of Berlin contributed $500,000 through the VT Community Development Program. Other sources of funds include NeighborWorks, Efficiency Vermont and Green Mountain Power. The VT State Housing Authority awarded 10 critically needed project-based housing subsidies to Fox Run Apartments.

Wiemann Lamphere Architects is the project architect. Neagley & Chase is the Construction Manager.  

Also in August, construction of 38 permanently affordable apartments, a new Veterans’ Center, and space for Burlington’s Community Justice Center began in downtown Burlington. The Howard Plant VFW Post 782 sold the building to the Champlain Housing Trust this past year. The old building was demolished.

 

Photo: Michael Monte, CEO of Champlain Housing Trust with Nancy Owens, Evernorth, Burlington's Mayor Emma  Mulvaney-Stanak and Senator Bernie Sanders to mark the beginning of construction of new  housing and services by nonprofit developers Champlain Housing Trust and Evernorth at South Winooski Avenue  property. CHT photos

Photo: Rendering of the Post Apartments. CHT photo

Post Apartments, when complete, will include 38 apartments, with nine set aside for people experiencing homelessness – five of which will be reserved for veterans. Champlain Housing Trust’s resident services team will support tenants and connect them to other resources in the community. Expected occupancy for the South Winooski Avenue building is the fall of 2025.

“More permanently affordable housing, like the 38 units in this project, is the ultimate solution to our homelessness challenges, and I’m thrilled to see this project get off the ground after years of planning and support for the nonprofit partners by the City,” said Burlington Mayor Emma Mulvaney-Stanak. “The inclusion of services here, including those provided by Burlington’s Community Justice Center, is another key component that advances the goals of my administration to improve community safety and make the City more affordable and inclusive.”

Post Apartments will include eight efficiencies, 26 one-bedroom apartments, and four with two-bedrooms. The VFW and Community Justice Center will occupy a combined 6,800 square feet of space. The building will also be fully-electric and there are plans for solar panels to be installed on the rooftop.

“Redeveloping a small site in the middle of Burlington doesn’t come without its challenges,” said Michael Monte, CHT’s CEO. “But the VFW Post 782 had a vision and determination that was contagious. They have been, and will be, a great partner – one that will result in a significant benefit for the community with this housing and services in our downtown.”

About $1.6 million in financing through the Brownfields program was dedicated to the site cleanup.

The redevelopment of the property was financed by more than 20 funding sources adding up to about $24 million (including the commercial space), with $1 million through U.S. Department of Housing and Urban Development Community Project support secured by Senator Sanders. The City allocated roughly $3 million from various local and federal funding sources, including a $1 million grant award from federal American Rescue Plan Act (ARPA) funds. NeighborWorks America made a $365,000 grant.

The VHCB awarded approximately $9 million from state and federal sources, including $6.9 million from ARPA-State Fiscal Recovery funds, $1.4 million from an appropriation through the State of Vermont’s budget, and $595,000 from the National Housing Trust Fund – a program originally sponsored by Senator Sanders. Federal Tax Credit Equity administered by the Vermont Housing Finance Agency (VHFA) and provided by Evernorth’s 481 Fund II contributed by TD Bank, totaled over $6.4 million, and Vermont’s Affordable Housing Tax Credit added another $463,500.

 

Slow Down, But Not Down

Regional President of Vermont & Massachusetts at NBT Bank Dan Werme is generally positive and said while some private developers have scaled back, he anticipates that could change:

“I would say Vermont is holding up well. I would say demand is down over the past 12 to 18 months. We're not seeing the volume that we did because I think higher interest rates combined with still high labor and construction costs kind of caused people to pause. They also think and hear the news that rates are going to come down too, right? So why jump into a deal now if rates are going to come down in the next, you know, three or six months?”

As for the bank, it’s not the boom time now that they saw after COVID, but, “We're still doing a decent amount of business.”

He said housing is still in significantly high demand and there’s a lot of demand for both residential houses and apartments, and those deals tend to be moving along more so than, say, for office and retail, while industrial/light manufacturing space is in more demand.

Matt Durkee, SVP, President of Commercial Banking and New England Regional President, Community Bank added: “The demand for industrial and warehouse space in Vermont has been relatively steady, driven by commerce growth and the need for regional distribution centers. However, Vermont's small market size means that large-scale industrial developments are less common than they are in larger states. There is still ongoing interest in this sector, particularly for spaces that support local businesses or serve as last-mile distribution points.

“There is a growing interest in multi-family housing due to Vermont's strong rental market and increasing demand for affordable housing options. Urban areas like Burlington have seen notable multi-family developments, though challenges related to zoning and local regulations can impact the pace and scale of these projects.

“Single-family homes and duplexes are in demand, particularly in suburban and rural areas,” Durkee said. “The high interest in secondary homes and remote working flexibility has increased demand for single-family properties outside of major cities. However, like multi-family development, there are constraints related to land availability and zoning.”

 

Act 250 Changes Should Help

New Act 250 rules should help housing development in downtown areas, though rural zoning development will remain tight.

The Department of Housing and Community Development and the Natural Resources Board have released the Act 250 Interim Exemption Map to help developers and investors create and improve housing that is more affordable.

This new interactive map is a planning tool and shows potential areas where housing may be built today without triggering Act 250 review. The interim Act 250 exemptions displayed on the Act 250 Interim Exemption Map will be in place until 2027 when the larger Act 181 reform begins to be implemented.

Act 250, Vermont's landmark land use and development law, will be modernized over the next five years as part of Act 181, which passed during the 2023/2024 legislative session. Before Act 181 takes full effect in 2027, the public will have opportunities to engage and shape its implementation.

“My team and I have focused on the urgent need to create housing faster and more affordably. While we need more lasting tools in the toolbox, these interim exemptions in Act 181 will help us do that,” said Governor Phil Scott. “Reforming Vermont's regulatory framework is an important part of our overall strategy to ensure that every Vermonter has a safe, affordable place to call home.”

These interim Act 250 exemption areas will allow the development of housing now in designated downtowns, villages, and other desirable areas that already have sufficient infrastructure as well as nearby jobs, amenities, schools, and transportation options.

 

Project Backlog

Meanwhile, PC Construction, based in South Burlington, is facing some of the same challenges the road builders are facing.

Matt Cooke, President & CEO said: “PC is experiencing the largest backlog in our history but the lengthened preconstruction process from project award to contract is becoming untenable. It is no secret that Vermont is a challenging state for development from well-intentioned land use regulations to heightened energy requirements. Making a project “pencil” is historically difficult, but even more so now with cost escalation, labor shortages and higher interest rates.

“Across the country in the construction industry, we are seeing a lack of craft resources which is compounded by the advanced age of our construction professionals. I think we have a great opportunity in Vermont to combat labor shortages. At PC, we are partnering with the ABC NH/VT on several craft training initiatives that we are hopeful will bring more people into the trades.”

PC is working on several major projects, Cooke said.

Photo: BETA production space. Photo courtesy PC Construction

“We are currently ramping up on the $23 million DoubleTree by Hilton Hotel Expansion project in South Burlington as well as a $136 million facility for a large manufacturing company across the lake in Plattsburgh. We are also in preconstruction for Killington Resort’s extensive redevelopment project and work is well underway on a facility expansion for Weidmann Electrical Technology in St. Johnsbury. We are also incredibly excited about the recent regional and national awards bestowed upon our work on BETA Technologies’ new manufacturing and assembly facility! Outside of Vermont, we have a backlog upwards of $2 billion.”

“Once the floodgates of project Notice to Proceeds open,” he said, “we are going to be busier than ever and remain that way for the next 7 to 10 years in Vermont alone.”

Overall, “While we are a water and wastewater construction industry leader in the South, we are excited to see the opportunities that come with the Infrastructure Investment and Jobs Act. We are ready to share our capabilities and expertise to help Vermont overcome its aging water and wastewater infrastructure challenges.”

Interest rates are a constant theme, and while the Fed appears set to cut rates, perhaps a series of rates, it could take time to work down to a robustly low level which drove the economy for 10 years before the pandemic.

The state could afford to have upwards of another 3000 or so construction workers to handle all the projects, AGC’s Wobby said.

On top of the current backlog, there is also an increasing need for things like school remediation. And, of course, there is the ongoing issue of a housing shortage. While many buyers are clamoring for single-family homes which are being developed at a slow pace, multi-family housing (mostly apartments) have been busily going up in Chittenden County.

Housing, of course, is affecting the workforce, as Vermont is relatively one of the most expensive places to live when the cost of buying is factored against the average household incomes.

ATTOM, a leading curator of real estate data, in August released its second quarter 2024 US Home Equity & Underwater Report, which shows that 49.2 percent of mortgaged residential properties in the United States were considered equity-rich in the second quarter.

Vermont again landed the top spot, with 83.5 percent of mortgaged homes were identified as equity-rich, meaning that the combined estimated amount of loan balances secured by those properties was no more than half of their estimated market values.

The portion of mortgaged homeowners in equity-rich territory during the second quarter of 2024 rose from 45.8 percent in the first quarter of 2024, matching a high point reached in the spring of last year.

While equity-rich levels improved, the report also revealed that the portion of home mortgages that were seriously underwater in the U.S. declined to 2.4 percent during the second quarter, or just one in 42. That was down from 2.7 percent in the prior quarter to the lowest level since at least 2019. Seriously underwater mortgages are those with combined estimated balances of loans secured by properties that are at least 25 percent more than those properties' estimated market values.

COVID drove demand for homes in Vermont, while, as noted, home building has not kept up, all of which influenced the natural supply and demand curve of those Vermont homeowners who have been in their residence for several years and built up significant equity. Homeowners who may want to move and have that equity stocked away, often can’t find a local place to buy because all properties homes have similarly inflated prices.

 

The Flood, Again

Of course, adding to all that is that so many of the contractors, especially the heavy industry contractors (“the heavies”) doing the infrastructure recovery work from the July 2023 and July 2024 floods.

The floods hit central Vermont, again, as well as the Northeast Kingdom. But the contracting people we talked to do not think this will put off general projects to any great extent. Projects that need to be done will get done even if slightly delayed, they said.

The one caveat to that is road projects, because asphalt cannot be laid down during cold weather, and therefore if the project isn’t done by sometime in November, it will have to wait until the spring thaw. And depending on the type of project, say a bridge or road, it can’t be left undone. The contractor might have to wait to even begin until next year.

AGC’s Wobby said: “What is most important and what is needed is to preserve safety within the state. That's a daily conversation as to moving resources and completing or working jobs on a schedule. We're working through it but it's difficult.”

Wobby said he is confident the work will get done, but it will put a strain on the timing and cash flow for the contractors.

“At this point in time there is probably, let's say, a three- to five-year backlog of actual work that's out there and probably the biggest challenge is because some of this is emergency or not planned work. Some of it is based on a FEMA or a federal reimbursement. There is a time lag in-between  the time you complete some of the emergency work and when you actually get paid for that emergency. So it's creating more of a cash flow problem for contractors than it is actually a work problem.”

The human resources are also strained, he said: “The secondary problem to that whole thing is we run an average of, you know, 15-16 thousand workers in the field during the construction season. With the present emergency status we could easily employ 18,000 people across the state and keep them going, but there's not that resource right now.”

The workforce issues do not have a clear end point, Wobby said.

“So that's where we're seeing the crunch and that's why you're going to see this recovery time extend again three to five years from now. We are going to spend some normal time trying to engineer this so it doesn't happen again. We did a very good job of reengineering some of the waterways, some of the infrastructure following Irene. And even from a year ago we are better off infrastructure-wise. But you can see the weak areas based on damage that wasn’t addressed following either Irene or the flood of a year ago, so it just keeps compounding.”

There is also some prioritizing that needs to be done, Wobby said, because some of the federal contracts and state building contracts and Agency of Transportation and Natural Resources  contracts have time limits attached to them. The new projects generated by the recent floods simply were not conceived of in May when this season’s contracts were issued.

“That's gonna be the tricky part,” he said.

“You know,” Wobby said, “I think we're all getting kind of tired of this flooding business and would like the rain to stop.”

Governor ,Scott, at his press conference in mid-August, echoed those remarks: “We're fortunate to have a number of quality contractors out there that have stepped up to assist (in storm recovery). I find it remarkable in some respects, being in the business for as long as I have, that they've been able to come forward and give us some relief and from all areas of Vermont. That other work still needs to be done. Life and safety obviously come first, but right now they seem to be managing the workload.’

Transportation Secretary Joe Flynn added: “Last year in 2023, we did have a few (regular) VTrans projects that we extended by about six weeks so that those contractors could break off and go help towns and we would have categorized those as lower profile, it doesn't mean they're not important, but there were projects that could be extended a little bit further into the fall. This year, we've not had to do that yet and I hope we don't have to do that. Let's hope that these storms give us a bit of a break here. There were contractors who rose to the occasion for storm repair that also had other crews working on VTrans projects, but we didn't have to pull them away.”

Going forward, Wobby said costs extend beyond just interest rates, wages and supply chain.

Adding to that he pointed to the double-digit costs to health insurance that were approved by the Green Mountain Care Board for Blue Cross Vermont (small group increase 22.8%) and MVP Healthcare (11.1%). Property taxers went up 20 percent this year also, he said.

And then is the funding for the highway and bridge projects. While the federal government covers typically 80 percent of the cost for highway projects, the state needs to cover the rest. If the state can’t cover its share, then it loses out on the federal aid.

For instance, the total transportation budget (including all aspects like the DMV and all sources of revenue) is about $875 million and the federal government will pay about $487 million, as long as the state can match its part of the obligation.

The largest single source is the gasoline tax and fees. There is also the Transportation Infrastructure Bond and things like car registrations. But there is also a new fee on electric vehicles so those roadway users will also chip in. Vehicles are also getting more fuel efficient and adding less to the gas tax.

“It’s a use tax,” he said, “and we should all pay our fair share.”

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