Construction Outlook through GC Eyes

Ulf Wolf / November 2017

In a recent article, the American Institute of Architects Consensus Construction Forecast panel revised its earlier, more optimistic forecast, stating among other things: “Construction spending so far in 2017 has been fairly disappointing. Commercial/Industrial construction spending has increased just under 7 percent through the first five months of the year relative to the same period in 2016, as compared to over 10 percent growth for 2016 overall. While some slowdown was anticipated for 2017, it was expected to be offset by acceleration in the institutional sector. However, year-to-date growth in spending for institutional buildings is at only 3 percent, up from the 1.6 percent of 2016 but well below expectations when the year began.
    
“As a result, the panel is predicting slower growth for the construction industry for the remainder of 2017 and through 2018.”
    
This invites a question: Do general contractors, who should have a strong feel for the lay of this land, agree with this forecast? We surveyed a number of GCs throughout the country on this and other relevant points, and also contrasted their views with input from AWCI member subcontractors.
    
Ariana Marsiglia, project manager at Alain Hirsch Construction Corp. in California, weighs in on the initial question with a view that reflects the general GC mood: “For us, I wouldn’t say that at all. We have seen new-project bid requests grow steadily, and we are expecting more toward the end of the year; that should start off 2018 on a right note.”

New Administration
Seven months into the new administration, how do GCs view the current construction climate, and how do they view the future, both short- and long-term?
    
Reports Josh Corna, president of Corna Kokosing, an Ohio GC, “In Central Ohio, the market is still strong. Lots of both residential and mixed-use work and more in the pipeline.”
    
Marsiglia’s view is that “it takes a year or two for government changes to affect construction.”
    
Mike Espeset, president of Story Construction in Iowa, agrees. “There is always a two-or-so year lag on policy influencing the construction industry,” he says, “so I don’t think that we’ll see this administration’s impact on construction for a while. And here in the Midwest, we’re as busy now as we were at the end of the old administration.”
    
Says Chuck Taylor, director of operations at Englewood Construction in Illinois, “We saw a large uptick in new construction even before the new administration, and with a pro-business leader, our developer clients have confidence in the industry.”
    
A nationwide GC concurs: “We had momentum going into the new administration and it hasn’t let up. The market is still hot in the short-term, and we see an impressive number of projects in the planning stages three to five years out.”
    
Barry Fries, chief executive officer of BR Fries & Associates, LLC in New York, sees things this way: “The only change I’ve seen is in residential, which seems to be slowing. However, I don’t think this has anything to do with the administration. Our industry goes through cycles, and this is what’s happing with residential.
    
“My portion of the industry (institutional) remains very strong in New York City, and I don’t see the administration dampening that. The long-term future is always hard to gauge, but I think that irrespective of politics, we’ll see a slowdown in 2019 or 2020—just a gut feeling.”
    
A Maryland GC concurs: “The future looks busy. Private development continues to pace ahead of market capacity while federal expenditures continue, albeit at a slower pace than in previous years. But the effects of the hurricanes in Houston and Florida will certainly drain materials and manpower.”
    
A Northeast GC says, “We view the current climate as uncertain. The long term has improvement potential if some of the new administration’s business-friendly and infrastructure policies are enacted.”
    
Reports Bryan Kent, project executive at DPR Construction in Texas, “We’re pretty much sheltered from Washington here in Texas, and I’ve seen no administration effects yet. We have lots of work with more in the pipeline, and with this much work on both near and far horizons, I don’t see policy changes impacting us for at least a couple of years, if at all.”
    
Says Tim Estes, president of Estes & Gallup, Inc., a New Hampshire general contractor, “It is difficult to assess the future under the new administration. Although we have a substantial amount of work currently under contract, the majority of it was secured in 2016. I was optimistic that possible regulation changes would free up funds and spur new projects. To date, however, I have not seen that happen, and I don’t see any sign that it will.
    
“Also, the impacts from Hurricanes Harvey and Irma will most likely cause material price increases or delays, which certainly won’t help.”
    
Adds John Healy, project manager at Rossi Builders, Inc. in California, “So far, the San Francisco construction climate has not been affected by the new administration. Of course, that being said, San Francisco is a place unto its own.”

The Subcontractor View
Richard L. Ostrom, president of RAM Acoustical Corporation in Pennsylvania, shares, “The construction climate in Western Pennsylvania is strong and will be for at least two years. Also, I believe that Trump will keep our market strong, as long as we get tax reform.”
    
Lee Zaretzky, owner of Ronsco, Inc. in New York, concurs. “The New York City construction climate is extremely optimistic,” he says. “Also, New York is seeing great zoning changes open up a lot of mid-town Manhattan to new projects. There’s also new work on airports, train stations and bridges.”
    
Observes Robert Aird, president of Robert A. Aird, Inc. in Maryland, “Seems construction and much of our lives have become background chatter to the political scene these days. But construction itself is booming—so much so that there is legitimate concern that companies that, if they take on too much work, coupled with the ubiquitous labor shortage, will find themselves overwhelmed and unable to perform and maybe crash.”

Immigration Policy
Immigration policy is up in the air, but how is it affecting GCs and their projects?
    
Corna says his company is not affected by the current immigration situation, but they are “impacted by an overall shortage of skilled tradespeople and professional staff.”
    
Marsiglia also says immigration is not an issue, “but it might in the future, especially for some of our non-union vendors.”
    
Espeset says his company and projects are affected indirectly. “I think there will be impact as our industry depletes, as baby boomers retire at an alarming rate without young replacements,” says Espeset. “That’s across the board today. As I see it, clear immigration policy would help relieve that pressure. We also need to grow more skilled at recruiting.
    
“And then there are the kitchen conversations: construction parents pointing out to their children that construction is a noble profession, and that the pride you can experience by helping to build something is both rare and valuable.”
    
Reports Taylor, “We don’t experience immigration issues as much as we see an overall lack of experienced tradespeople.”
    
Observes the nationwide GC, “Quality labor is in short supply right now, but that could be caused by several factors. One is that a lot of the workforce left the industry during the recent recession and has been reluctant to return as the market heated up again.
    
“Also, I see a major percentage of young adults entering the workforce today choosing professions other than construction. Schools need to bring back vocational curricula to create opportunities at all levels, since everyone can’t be a brain surgeon or computer scientist.”
    
Adds the Maryland GC, “Current immigration policy has little effect on the larger contractors that utilize E-verify, although it does affect the small-homebuilding community.”
    
Offers the Northeast GC, “From a workforce perspective, our region hasn’t tapped the immigrant workforce in the past, so I don’t think a change in policy will have a short-term impact on our projects. However, I think it will in the long term as the general construction trade labor shortages hit our region. Also, I believe that on a macro level, curbing immigration will have a negative impact on the country’s economic growth, which will hurt our industry.”
    
Reports Kent, “We haven’t seen any effects. We are seeing a lot of work, and everybody is spread thin. Since subs can now pick and choose, we’re getting fewer subs bidding these days and, by necessity, one of our main screening criteria has become to make sure that the subs are not biting off more than they can chew, and can in fact deliver.”
    
“As a general statement,” observes Estes, “we rarely see immigrant workers as a substantial labor resource in our area. However, with unemployment below 2 percent and a shortage of skilled tradespeople, I would welcome new, skilled labor resources from any sector.”
    
Healy’s projects also are not affected, but “I’ve heard that Immigration and Customs Enforcement are impacting some subs,” he says. “Whether this is a direct effect of the current immigration policy, I don’t know, but I am sure it’s on people’s mind a lot more than it was, say, a few years ago.”

The Subcontractor View
Ostrom and Zaretzky run union companies that are not affected, but Aird is feeling the pinch.
    
“We’ve had a labor shortage for years,” Aird says. “Visit most any restaurant, of any type, and the kitchen staff is likely Hispanics; same with the landscape, hotel and construction industries. Our president has put the fear of the Lord in the minds of many immigrants—legal and otherwise—that they’ll be deported.
    
“Bottom line is that we need them and they need us, and the cultural diversity they bring makes us better. We’ve always been the mixing bowl, and it has served the country well.”

Immigration Solution
What would be the ideal immigration solution?
    
Corna says it’s a difficult question, but he thinks “those who are here and do not have criminal records should be allowed to stay. It would be unreasonable and damaging to lots of industries if everyone was forced to leave.”
    
Marsiglia elaborates: “I’ve had quite a number of conversations about this with my father, who was once a legal immigrant from Israel. Our solution is quite simple. For immigrants who have time to plan, our government needs to provide more resources in countries outside the United States that will walk people through the immigration process so they can enter the country legally.
    
“For immigrants who do not have time to plan, those fleeing their home country for any reason, they should be held for a period in the United States while background and health checks are conducted. The cost of this would be rationed from their paychecks until they have paid back the country. This way, existing tax-paying citizens are not burdened with this expense, and the new legal immigrants will contribute to the country they have fled to.
    
“As for existing illegal immigrants, they should only be penalized for not reporting to the government within a certain number of days from the effective date of the policy. If they report voluntarily, they should be given the opportunity to repay their debt to society by doing community services, paying taxes, donating to charities, etc. This amount should be based on how long they have been illegally in the country. They will then go through the legal process to become citizens.
    
“If they do not report voluntarily but are discovered later, they should be treated as any other criminal with jail time and such. I don’t think deportation is the solution.”
    
Espeset says, “I don’t think that opening the gates is the right answer, but neither are significant restrictions, which will starve us not only of manpower in the construction and agricultural industries, but also in the high-tech areas. We need both manpower and brainpower from immigration.”
    
Fries believes there should be a path to citizenship. “To think that our economy would thrive without immigrants is foolish and a gross misjudgment,” he says, “because when it comes to agricultural, landscaping, restaurants, etc., a huge percentage of those fields is serviced by Hispanics, and these are jobs that our average U.S. citizen does not want to deal with. If we drive all undocumented aliens out of the country, we will in effect pull the plug on the economy. We would devastate it.”
    
Suggests Healy, “I spent a full year in Australia years ago. I liked what Australia does with its one-year working visas, which allow people to get a job (legally) in any industry. If the employer likes you and wants you to stay, you can applying for an extension.”

The Subcontractor View
Says Zaretzky, “Provide a legal pathway to good, tax-paying citizens. To stay here, my grandfather, who immigrated, learned the language and pledged allegiance both to the country and our culture. That’s as good a model as any.”
    
Adds Aird, “First, don’t believe that someone with a different appearance or accent is a threat to your well-being or job. The economy needs workers. The impending retirement of the baby boomers has already bled many workers from the economy, and the birth rate is down in this country. I don’t have the answer, but treating people with respect has to be a component of whatever we do.”

GC–Sub Relationship
How are GC-subcontractor relationships holding up?
    
Corna says these relationships are fine, “but we have a shortage of bidders on most projects. Also, most subs are busy, and the shortage of labor is impacting everyone negatively, which does create tension in our relationships at times.”
    
Marsiglia is “well aware of the fact that our company wouldn’t exist without our subs’ commitment to quality work, and we put a quite a bit of effort into making sure that our subcontractors are taken care of.”
    
Espeset reports that things are going well with their subs. “We have always depended on one another,” he says, “and today more than ever. Our relationships are very strong.”
    
Observes Taylor, “The subs are so busy right now in every market nationally that they are not only setting the pricing but, in many ways, are driving the schedule. While our clients are still demanding the best prices possible, we have to convince them to allow us to partner with subs who have a proven track record on production and quality. They are often not the cheapest.”
    
The nationwide GC reports, “Our relationships are holding up but are strained at times when the subcontractors don’t meet the demands of the projects. This relationship is heavily tied to performance, and given the strain on the market (many projects, labor shortage), subs are often over-extended. Owners still want three to five numbers from each trade, so GCs are forced to put pressure on subs to price their work even if they are in over their heads. Today, part of our prequal process is to verify the subs’ workload and capacity to see if they are capable and have the resources to take on the work.”
    
Fries says that from his perspective, GC-sub relationships are “stronger than ever. It is very clear to me, as a GC and construction manager, that I am nothing without my subcontractor base. We need to partner each step of the way, and each of us must have a clean shot at making a profit. It’s a very symbiotic relationship.”
    
Kent observes, “We’re good. There’s tons of work out there, and we are now at a point where we are able to select the subs who are right for the job, not just by the low number. That’s a great foundation for good relationships.”
    
While the GCs in the Northeast and Southern California also report good relationships with their subs, the Maryland GC observes that the relationships are “a bit strained.” Why? “Both the subcontracting and GC markets are oversaturated with work,” he says, “and the void created in the labor market by the 2008 recession is creating a skilled-labor shortage. Subs are suffering and, as a result, so are GCs.”
    
Estes says, “We focus on our sub relationships. We’re in a profession that only succeeds when we have competent labor staffing for all trades, making the GC-sub relationship more critical today than ever.
    
“Unfortunately, at this time, there is simply more work than there are people to do it. Each day is a battle to ensure projects are staffed appropriately by the subs. There is a delicate balance between understanding that yours is not the only project the sub is contracted to do, and your need to deliver your project in a timely and cost-effective way to the owner.”
    
Healy says, “We’re doing great. GC-sub relationships are often down to how you handle situations personally. We will always have issues—after all, we’re in construction.”

The Subcontractor View
Ostrom reports, “We have very few issues, but then again, we only deal with strong and reputable firms.”
    
Aird says, “Sad to say, we’re very selective about what GCs/CMs we work for. Yes, there are still ethical and well-managed GCs/CMs out there, but they’re in the minority. These days, we’re working hard to avoid GCs/CMs altogether and prefer to work directly for owners, architects, property managers and third-party engineering firms.”

How Will It End?
Business is cyclical, and it is unlikely that the ups will stay up.
    
Says Espeset, “I think we’re in for a rough ride while all the baby boomers retire and until the millennials invade the system by sheer numbers. I think things will settle down once they become the dominant segment of the workforce.”
    
Says the nationwide GC, “I’ve been in the business for 36 years and have gone through at least three cycles of ups and downs. We are at one of the highest peaks I’ve seen. I just hope there’s not a sharp drop when things cool off.”
    
Adds Aird, “The labor shortage threatens to saddle the country with substandard construction that will cost us dearly. Also, I see too much animosity and conflict in construction. The current divisiveness in our country is in too much evidence on the sites with companies and individuals working against one another rather than cooperating. A GC/CM who can foster a climate of cooperation and fair treatment on a job site has the best chance of producing a high-quality building on time and on budget.”

California-based Ulf Wolf is the Senior Writer at Words & Images.