Braden Black CEO
It looked as if the Braves had committed one of the worst trade blunders in Major League history. But the minor leaguer turned into John Smoltz, who has won 215 games and saved 154, helped the Braves to division titles year after year, and is preparing his Hall of Fame induction speech.
More than 20 years later, the U.S. Census Bureau reports that nonresidential construction spending dropped again in September 2009, “an indication that this segment of the nation’s economy remains mired in its own recession,” according to Associated Builders and Contractors Chief Economist Anirban Basu, and leading many to wonder if the $787 billion American Recovery and Reinvestment Act package been a worthwhile investment.
Of course, the events are unrelated, and baseball may not have anything in common with national fiscal policy. But like that trade, it will require several years before we can judge whether the stimulus package should earn President Obama a Nobel Prize in economics or a place alongside Herbert Hoover in the financial hall of shame.
On the credit side of Obama’s ledger, the non-residential construction niches receiving direct investment from the stimulus package – notably bridges, dams and levees, wastewater facilities, civil and highway contractors – have awakened from recession-induced slumber over the last year. That the stimulus package is kicking in is undeniable. The interval between funding allocation and shovels hitting dirt is easing now that approved projects are getting underway and manifesting as actual construction put-in-place.
We saw when we entered the recession that construction is a lagging indicator. Our industry was among the last to feel the effects. Now that leading indicators such as stock prices, consumer spending and manufacturing orders are improving, the construction industry most likely is approaching the bottom of the trough. How long we remain skidding along the bottom, however, is difficult to tell. Eighteen to 24 months is the worst case estimate.
Part of the reason is that not enough niches, projects or contractors are members of the stimulus’s direct-benefit club. A majority of the funds so far are going to road contractors and infrastructure builders.
About 15 percent of the $787 billion in federal spending included in the act has been allocated. That’s about half of the “financial tourniquet” – the portion earmarked to stop the economic freefall. That means ARRA’s most dramatic impact already have been felt or will take effect in the first half of 2010. Getting shovel-ready infrastructure improvements rolling was supposed to be the centerpiece of the construction portion of the stimulus, creating jobs and improving transportation. But little of the allocation to the Federal Transit Authority has been spent, forcing northern states to mothball some projects for the winter. The government’s limited success in infusing stimulus money quickly into the economy and the inadequacy of the portion earmarked for infrastructure projects – those that would directly and immediate stimulate job growth and provide tangible results such as highway lanes and flood control facilities – has hamstrung the recovery.
On the bright side, according to AGC of America Chief Economist Ken Simonson, “State departments of transportation have generally done well at turning their stimulus allocations for highways into contracts.” Also, much of the stimulus’ first wave of construction funding was directed to road maintenance and resurfacing which, while not packing the profit punch of major highway construction jobs, offers revenue opportunities for smaller contractors who may not have been able to survive as well as their larger counterparts. The second wave in 2010 will target the megaprojects and should put greater numbers to work and keep them employed over the long haul.
With disbursal of American Recovery and Reinvestment Act funds, public works – especially transportation projects – will lead the charge in 2010. Most forecasts see a double-digit percentage increase as federal money “will broaden in scope, lifting not just highway construction but also environmental public works and several institutional structure types” according to McGraw-Hill’s Robert Murray.
The construction industry will see real long-term recovery only when privately funded construction investment regains its health. That will require the gross domestic product to gain steam, the credit markets to escape the vise, unemployment to abate, state tax revenues to increase and home foreclosures to decline. These constraints are showing signs of improvement, but we must brace ourselves for an extended U-shaped recovery, with the bottom extending at least through the second quarter of 2010.
America’s comeback won’t start until the construction industry heals itself, according to AGC Chief Executive Officer Steven Sandherr. “The problems facing the construction industry aren’t just devastating construction firms and construction workers. These problems are crippling our broader economy. That is because construction spending accounts for 8 percent of gross domestic product. Simply put, you can’t fix our economy until you fix the construction industry.”
Labels: Commercial, Construction Industry, Industrial
I’ve come to the conclusion that construction is a loony business. No, I’m not talking about building inspectors and union organizers. I mean the water bird that looks like a duck with a thyroid condition that forces it to run along the lake surface flapping its wings frantically to generate enough momentum to launch its bulky body airborne.
Like our feathered friend, the non-residential construction industry is destined to soar again once it gains the critical mass to overcome the excess baggage of tight credit, a tattered housing market, sluggish implementation of the federal stimulus program and crippling unemployment that have grounded the industry.
But my conversations with industry insiders and economists reveal that the recovery will not treat everyone in the non-residential construction industry equally. Builders in the Gulf Coast states will see light at the end of the tunnel fairly shortly compared with other regions. Most parts of Louisiana, Mississippi, Alabama and southeast Texas will benefit from oil and gas exploration and refinery projects, as well as heavy industrial expansion projects and military construction. The construction industry will lead Mississippi and Louisiana out of the recession, as manufacturers and others start in earnest to rebuild from hurricane Katrina. The region also is in the early stages of a population boom that is energizing residential construction. And because retail follows rooftops, the commercial construction sector soon will benefit. Texas’ business-friendly climate and reasonable housing prices also bode well for Lone Star contractors.
Other regions and states are well-positioned than others to take advantage of the recovery. In fact, a swath of states from the Gulf Coast to the Upper Plains seems ready to herald the industry’s comeback. A recent MSNBC report declares North Dakota, South Dakota Idaho, Montana, Nebraska, Missouri and Alaska as joining in the early recovery. I expect energy projects – and not just oil and gas – will keep these regions ahead of the nation’s emergence from the recession. Wind, solar and other renewable energy projects, as well as federal mandates to reduce emissions from fossil fuel plants will allow this sector to build on momentum it built up in 2009.
An analysis of Bureau of Labor Statistics data by the Associated General Contractors of America found that only eight metropolitan areas in the country increased their construction industry payrolls from August 2008 to August 2009. Six are in the “recovering” states identified in the MSNBC report.
Conversely, state taxes have been gutted on the West Coast and Rocky Mountain states, and seven of the 10 hardest-hit metro areas in terms of construction unemployment are in California, Arizona, Washington and Nevada.
It will take a few more quarters of the industry scraping its undercarriage as the recession bottoms out, but like the loon, the construction industry again will take wing.
The non-residential construction cycle lags the residential cycle. The housing market led us into this recession, and it will have to lead us out. Thankfully, that trend is emerging. McGraw-Hill Construction’s 2010 Construction Outlook sees a 30 percent increase in single-family home construction and a 14 percent jump in multifamily housing in 2010. That should slow the freefall we’re seeing in most sectors of the non-residential market and in many regions of the country.
Industrial construction will be a mixed bag in 2010. Unabsorbed could result in a slight decline in some parts of this niche. But other industrial owners who own the facilities they build and are not dependent on rental income or profit from short-term sales – energy producers and refiners and maintenance service providers for example – may continue to build capacity as they need it, without waiting for the housing market to fully recover. The stimulus package will contribute significantly of course, and I’ll discuss the American Recovery and Reinvestment Act next time.
Commercial construction is the fastest non-residential sector to jump on housing’s bandwagon. Jim Haughey of Reed Construction Data says that’s because, like housing, commercial is sensitive to the vagaries of short-term credit markets, and is quick to cut back development when occupancy and rental rates slip. Conversely, when houses start going up, 7-Elevens and Wal-Marts aren’t far behind; and rental markets strengthen, apartment builders are quick to respond. Still, any real improvement likely won’t manifest until the second half of 2010.
Institutional construction – led by the (relatively) booming healthcare and military markets – should also emerge (again, relatively) quickly from the recession.
In conclusion, forecasters expect non-residential construction to pick up steam significantly by the end of 2010 and reach cruising altitude in 2011. Financial, psychological and business cycle variances mean everyone in the industry will not recover at the same pace. But thankfully, many of these factors – subprime interest rates, better absorption of residential and commercial space, strong building supply exports and improved consumer and investor confidence, according to Reed Construction Data – already are paving the way for a smoother road ahead.
Labels: Commercial, Construction Industry, Industrial