The general economy shows signs of improving, but the plunge in non-residential construction continues.
By: Mark L. Johnson
Mike Poellinger finishes a staff meeting in his office as mayor of La Crescent, Minn. He has no idea whether government stimulus money will be available this year, like last year, to fund city improvements and pay workers.
Business, too, is fraught with concerns. "We usually count on 25 to 30 percent of what we bid on, and we like our volume to be between $6 million and $10 million a year,” says Poellinger, president of Poellinger, Inc., La Crosse, Wis. "Last year we struggled to do $3 million. We bid on an all-time record of $40 million worth of projects—only to get less than 10 percent of the work.”
Life is not easy for mayors of small towns and owners of drywall contracting firms. "There’s very little work,” Poellinger says. "The work is competitive, and many projects are on hold.”
Economically speaking, we may be in far dire straits than most people imagine. "We have an environment of uncertainty coming off of one of the worst economic downturns since the Great Depression, if not the worst,” says Dr. Martin A. Regalia, senior vice president for economic and tax policy and chief economist at the United States Chamber of Commerce. "Business is saying, ‘Things aren’t good, but if I hold it together, maybe I can see if things get better. If I make a bet now, and things don’t get better, then I’m toast.’”
So, it’s wait-and-see time—wise for business, bad for the economy. No wonder total construction dropped 13 percent in 2009 and will drop 4 percent more in 2010. Everyone is sitting on the sidelines.
Of course, Poellinger operates in one of the toughest areas of the country right now, the Upper Midwest. And though government stimulus money has helped some Americans build their first homes, little money seems to be available to augment property values and incentivize major remodels. That’s true too on the commercial end, where worry over mortgage-backed securities exacerbates a glut of properties.
"While things might be looking up for the general economy, we’re just now starting to see the downturn in non-residential construction,” says Heather Jones, construction economist with FMI’s Research Services Group. "In fact, 2009 was quite a bit more positive than we expected. The downturn came at the end of the year and will push into 2010.”
Jones says single-family housing will pick up this year. But it will be late this year, and it will not reflect a jump in dollar volume, only starts. She says it would not be unreasonable to see a 20 percent increase in starts, but the square footage and dollar value per start will be down.
Regionally, the areas hit hardest in housing, California and Florida, will recover first. While Texas and the South remain barely above water, the Rustbelt and the Northeast are in tough shape.
On the construction sector level, lodging, office and commercial will be hit hard in 2010, declining 27 percent, 21 percent and 32 percent respectively on a current dollar basis over a year ago, according to FMI. Health care and education are less cyclical, but are expected to be flat. While transportation might be a bright spot, most of the work will be civil, focusing less on terminals and more on roads and railways.
Terri Kastner, technical consultant for the Northwest Wall & Ceiling Bureau in Seattle, says competition in the Pacific Northwest is fierce. He says that prior to 2009 drywall contractors could pick and choose projects. Bidding was limited to, say, five to six firms, who each submitted proposals with some added fluff or padding. Nowadays, contractors go against 15 to 16 competing firms for fewer projects—and smaller in scope.
"We don’t have the multi-million dollar drywall jobs that we had prior to 2009,” Kastner says. "And we won’t see those for many years to come.”
Here are some additional issues that lately have surfaced:
Some drywall contractors are losing work to general contractors. "We’ll bid low, and then they’ll elect to do the work themselves,” Poellinger says. "They’re trying to keep their carpenters who don’t ordinarily hang board or tape or finish. They take on renovation work, put their people out there and hire a painting contractor for the taping and finishing.”
Credit is tight with no sign of easing. "Developers may not have the dough to build,” says Jeff Burley, CEO and president of B&B Interior Systems Inc., a commercial contractor based in Fort Lauderdale, Fla. "They may not have the credit, but they’re trying to test the credit market, while they see what projects will cost.”
Commercial construction is weak due to tremendous excess capacity in retail space, office space and plant. Burley believes the glut in office space alone will take two and half years to work its way through the system.
In residential construction, more foreclosures will keep price increases at modest levels. That, in turn, will keep builders on the sidelines.
A fallout is expected in commercial mortgage-backed securities. "While not having pitched off into an abyss, it’s out there,” Regalia says. "We’ve seen some moderately successful new issues, but a lot is coming due that will have to be repackaged and resold back into these markets. It’s unclear whether the markets have become liquid enough to handle it.”
A few positive points can be made about the construction economy. In Kentucky, for example, $50,000 to $100,000 strip-mall renovations are reportedly available for the pickings—for non-union firms, that is, and for those that can afford to bid on them. In Florida, Burley sees commercial tenant improvement as the opportunity in the office building sector.
"People can afford to upgrade their buildings and redo their offices,” he says. "With bidding where it is, it’s a bargain.”
Push for Ideas
Some want to see more structured help directed to the construction industry, and offer ideas.
Poellinger notes a Minnesota program called "This Old House,” in reference to the PBS home renovation television show, which gave owners of homes older than 60 years a tax break. The idea was to limit property tax increases to no more than 10 percent a year for 10 years, but to allow the homeowner unlimited improvements on his home. So, an owner could add $100,000 in renovations to a $150,000 home, but the property taxes would jump only 10 percent a year—a great incentive indeed.
"From the auditor’s perspective, those houses went up a guaranteed 10 percent, and most went up every year for 10 years,” Poellinger says. "From our perspective, it was a great way to get some reinvestment.”
Poellinger says the industry could use such home reinvestment programs right about now. "We should discuss these programs as an industry,” he says. "We need to get involved.”
Yet, where can the industry find money to fund new programs? "The fed’s programs are starting to wind down. They’ll back out of the liquidity programs first, and eventually they’ll raise rates,” Regalia says. "All of that is likely to keep the momentum from building in the second half of the year. So, I think there’s a possibility for a double dip.”
Finally, there’s the question of determining what people want. Many people don’t have a sense of what to do next. "I can’t gauge the confidence the American people have in the administration,” Burley says. "Even though the American spirit wants to produce, build and create, they must have confidence in the government. But the government is starting to waiver on its policies. There’s a lot of distraction, and that distraction could be part of the holdback.”
"When the engine starts moving, people will jump on the train,” Burley says. "But if this ‘engine’ doesn’t get stoked up, then people will just sit back.”
But it’s precisely this wait-and-see attitude that continues to stifle development.
Mark L. Johnson is an industry writer and marketing communications consultant.