Downturn Expansion

Downturn Expansion

While Kraft Construction is focused on leaner times, its executives are hungry for new projects

in Tampa and beyond. Its goal is nothing short of being the top construction company in the state.

construction by Jean Gruss | Editor/Lee-Collier

This was the headline in the latest issue of Kronicle, Kraft Construction Co.'s employee newsletter: Tightening Our Belts.

In the article that follows, Chairman and Chief Executive Officer Fred Pezeshkan exhorts employees to lower the company's costs. "We need to look for ways of saving money in this new economic climate," he writes. "This is no longer an option; it is a mandate from senior management."

When Pezeshkan issues an order, it would behoove employees to pay attention. The Iranian-born entrepreneur has transformed Naples-based Kraft into the top-ranked construction company based on the Gulf Coast in 2007 based on revenues of $559 million. When he joined the company in 1979, the firm had $3 million in annual revenues.

But cutting costs doesn't mean Kraft is becoming less aggressive. After all, Kraft didn't get into this position by being meek. "We're looking at expansion of our organization into Tampa and other parts of the state," Pezeshkan says. "In our business, you cannot be shortsighted."

Indeed, Pezeshkan lays out his vision for the company with this statement: "Our goal is to be the top construction company in the state of Florida."

Whether it gets there alone or with another firm may be open to question. Pezeshkan hints at a joint venture that may be announced as early as next month, though he won't disclose any details.

Kraft also is exploring new ventures, such as solar energy, that could help broaden its scope of work. The fact is, a substantial portion of Kraft's business was building high-rise condominiums during the boom and that's dried up.

In addition, many public projects such as school construction are likely to be delayed or scrapped as population growth slows and government revenues decline. Company revenues fell nearly 20% in 2007 compared with the previous year.

Targeting the I-4 corridor

Pezeshkan says his forecast is for the construction industry to start recovering in 2010, which is why he's planning now for the rebound. "We are not the stock market," he says, referring to rapid-fire traders. "We have to make investments and it might take two to three years."

Take Charlotte County, for example. Kraft opened an office there last year, but that's been one of the hardest-hit areas of the Gulf Coast. Building investment was down 69% there in May compared with the same month last year, according to the state's latest taxable-sales data.

But Kraft takes the long-term view that opening an office in Charlotte now and becoming a part of the social fabric of the county will pay off when that area's economy improves. Eventually, Pezeshkan says, "We will get our fair share of work."

With the slowdown affecting the southwest part of Florida more severely, Pezeshkan is looking to Tampa, Lakeland and Orlando where a large chunk of the state's population lives. "We are very positive about Sarasota north," he says. "It's a big metro area."

Tapping the sun

While many customers have slowed construction projects, there are still pockets of opportunity for commercial builders. Pezeshkan says street landscaping, utilities and roads are still relatively healthy areas and the company is putting renewed emphasis on landing more of those projects. While government-related work is slowing, universities are continuing to grow.

Health care is another area that seems somewhat immune from the economic downturn. In particular, Pezeshkan says assisted-living facilities continue to grow as the population ages.

Kraft is also exploring new businesses such as those relating to alternative energy. "Solar is one area that is new to us, but it's new for many people in Florida," Pezeshkan says. He hints that Kraft may expand into that business by partnering with a solar-energy company in a joint venture.

Joint ventures aren't new to Kraft. For example, the company teamed up with Suffolk Construction Co. of Boston on projects at Ave Maria University near Immokalee in eastern Collier County. Ave Maria is a new town that's being developed by Domino's Pizza founder Tom Monaghan and Barron Collier Cos.

Kraft is also emphasizing its special-projects division, which focuses on smaller renovations and developments. While Kraft aims for projects $50 million or larger, the average small project ranges from $1 million to $10 million. The special-projects division has been a blessing as the number of large projects has diminished and Pezeshkan says smaller projects are "equally profitable in today's market."

Competition is fierce for these smaller projects. Former employees of large construction companies in Naples and other areas of the Gulf Coast have created their own construction firms that seek out these projects, arguing that large builders often ignored little projects during the boom.

"I am not afraid of competition," Pezeshkan says. "Competition is healthy."

Meanwhile, larger competitors have entered Collier County in recent years to challenge companies like Kraft. "We have seen them come and go," Pezeshkan says, noting Kraft is celebrating its 40th anniversary this year. "We can compete against them any day."

Looking back, Pezeshkan says the big lessons of the boom and subsequent downturn is to grow in a controlled way and work with the most experienced clients. "There's an inherent risk of working with the first-time developer," Pezeshkan says.

Strong fundamentals

Pezeshkan's long-term views are upbeat. "I'm not worried because the fundamentals are strong," he says.

Florida is on the cusp of a retirement-led expansion by the Baby Boom generation, its tourism will continue to be strong and sun seekers will continue to move to the state. "Those fundamentals haven't changed," he says.

The current economic cycle isn't limited to Florida, but it has been felt more strongly along the Gulf Coast than in past downturns because of the overbuilding by national homebuilders.

Pezeshkan says the overbuilding in condos has been more pronounced on the east coast of Florida, however. He estimates that the condo market will come back sooner on the Gulf Coast than the east coast, perhaps by 2010.

Besides the need to reduce inventory, financing has to improve as well. Bankers who were loose with financing a few years ago are now unduly tight.

"Now we've gone to the other extreme," Pezeshkan says. Even with presales, it's difficult to obtain financing for residential towers. "It will take two to three years for this pendulum to come back to the center," he forecasts.

Until then, Pezeshkan is focused on keeping a lid on overhead and retaining top performers. Kraft reported 510 employees at the end of 2006 and 355 at the end of 2007. "People is all we have," he says. "We have to make sure we are lean to survive these times."

REVIEW SUMMARY

Company. Kraft Construction Co.

Industry. Commercial construction

Key. Broadening geography and skills can help builders manage through the downturn.