Risky Business

Building industry finds comfort on the razor’s edge

By Sean Ryan

Rod Engel is dancing on the edge.

A principal with Legacy Real Estate Partners LLC in Deerfield, Ill., Engel is planning what could be the first new development in Milwaukee’s Park East area. He’s willing to put money on the line to build a condo project on a corner that faces a shuttered tannery with bricks that look like they’re rusting. To the west of the development, gulls peck at the dust covering a huddle of barren blocks or circle the crumbling Pabst Brewery that overlooks the area.

The tannery and blocks of baked clay are slated for redevelopment, but nothing’s certain in real estate. Just ask the development team that saw a $317 million plan to redevelop the Pabst Brewery go up in smoke because nine people on Milwaukee’s Common Council in July rejected the project financing.

Surrounded with a lot of potential but little certainty, Engel said he has as much confidence in his project as caution allows.

“You never want to be overconfident,” he said. “In this business, as in any, maybe more so, there are things that can happen that are beyond anyone’s control.”

Legacy’s development is a chancy proposal — every project is — in an industry that accepts risk as a fact of life.

Legacy Real Estate Partners is planning a 33-unit condominium building in the Park East corridor in Milwaukee. Rod Engel, a principal with Legacy, says the firm is taking a calculated risk in developing the project. Rendering courtesy of AG Architecture Inc.

It takes a special kind of person to go for this line of work, said Jonathan Dehlinger, president of Vernon Roche Hodgson Inc., a business psychology firm in Milwaukee. He calls builders America’s last cowboys because, in his experience, they are aggressive and self-reliant lone riders with an independence matched only by a feeling of responsibility for their fellow workers and family. Builders think about tangible things and take satisfaction from seeing their labor displayed in a building, he said. Forget about philosophy.

“They like being in charge and being in control,” he said. “They like to create and make something that’s tangible, which is why most people, when you put them in an office, will go crazy.”

Larry Michael, surety producer for The Brehmer Agency in Butler, said builders are America’s last great entrepreneurs. He wondered who else would take so many risks with so little certainty

“We wouldn’t have construction in this country, there wouldn’t be any, without these entrepreneurs,” Michael said. “There is not one other industry that will tell a client a price before they know what the costs are. You can do what they call estimating, but that is what it is. You could even call it guesstimating.”

Steve Resset, a senior estimator in M. A. Mortenson Co.’s Brookfield office, agreed with Michael. Mortenson, on private contracts, usually sets a guaranteed maximum price when about 90 percent of the design for a project is complete. To do this, Resset uses a database of costs and a rundown of past projects, but that doesn’t change the fact that his job is based on speculation.

“You are constantly trying to look into a crystal ball based on past experiences,” he said.

Construction people, Resset included, treat risk like background noise. He said the numbers he crunches for Mortenson are so large that he’s got to remind himself that the figures represent actual money. But even with real money on the line, he said he can’t be fazed by the prospect of failure.

Maja Jurisic, regional medical director for Consentra, says construction workers are among her best patients. They want to return to work, and they tend to recover faster. Photo by Sean Ryan

“You have got to take a step back and say, ‘Wow, these are multimillions of dollars that we’re dealing with here,’” he said. “The risk is always there, and it’s just something you work with.”

Developers work with it every day. Market studies and feasibility reports add some security, but projects are unpredictable, said Mark Irgens, president and managing member of Milwaukee-based Irgens Development Partners LLC.

Worst-case scenarios can turn into reality in any number of ways on any project. There could be con-taminants in the ground, the local government might not like the design, or the Federal Reserve could throw off condo sales by upping interest rates.

Irgens likened the layers of risk to an onion. Preplanning and feasibility studies peel the layers of hazard away. Identifying potential surprises before the fact won’t make them go away, but it makes them easier to deal with.

“Once you understand what your risk is, you can really mitigate the unknowns,” Irgens said. “There’s a certain point where we say we understand what the downside is, and we charge forward.”

That’s exactly what Engel is doing with his Park East development. Engel, who was a varsity long-distance runner, said both joggers and developers must resist the urge to speed up when they succeed or drop off when times are tough.

“There will be ups and downs,” he said. “When you are on an up, you don’t want to be overconfident. When you are down, you don’t want to be overcome.”

Gene Guszkowski, president of Wauwatosa-based AG Architecture Inc., which designed Engel’s Park East condos, said he takes his share of risks, but not as many as a developer. For the Park East project, AG studied Legacy Real Estate’s market reports to determine a size and style that would fit the area.

“We really struggled with the question of: Should we make it bigger?” Guszkowski said. “Should we dig a deeper hole to create more parking? What it really came down to was what could we afford to put in the marketplace that would sell quickly?”

Guszkowski, like Engel, thinks the project in the Park East is a good bet since the area is poised to explode with developments.

Jonathan Dehlinger, a business psychologist and president of Vernon Roche Hodgson Inc., says builders are like cowboys. Dehlinger said builders are strong, self-reliant and don’t spend their time contemplating philosophy. Photo by Sean Ryan

“For us, it’s the opportunity to do what we hope is a signature building,” Gusz-kowski said. “Opportunities like the Park East for our firm are exhilarating. They’re so different from what we typically do. Everybody’s excited about it.”

As projects transition from concept to concrete, the risks shift from financial to physical. People have to build the buildings, and they have to face the hazards that come with the job.

“They don’t really talk about it,” Dehlinger said. “It’s almost like whistling past the graveyard. There is a risk there, and they know that. But in most cases, they’re dancing right up to it and, most of the time, they’re successful.”

And if people working in the trades do get injured, it’s not necessarily the pain that makes them wince, said Maja Jurisic, regional medical director in Milwaukee for Consentra, the nation’s largest occupational health-care provider. Jurisic said fear appears in a builder’s eye at the prospect of a debilitating injury that could force retirement from construction.

“It is a fear of a loss of income and the ability to support their family,” Jurisic said. “They’re basically tough, macho guys who want to make as much money as they can because they know their bodies won’t last forever.”

The same can’t be said of apprentices when they first join the trades, said Mike Grimslid, apprenticeship coordinator for Ironworkers Local 383 in Madison. The coping mechanism for the job’s risks only comes with time and experience.

“I don’t think risk-taker is the word,” Grimslid said. “I think they accept the risks they can’t get rid of. After a few years, it becomes a habit.

“If you don’t really want to do this, you might be mentally tough, but you can’t keep on doing it year after year after year.”