Our Economy: Finally Feast?

Ulf Wolf / December 2015

Ask Google about construction industry economics these days and you’re liable to come across headlines like: “Construction Employment Rises Despite Lackluster National Jobs Report,” “An Economic Recovery Finds Its Footing” and “Steady Construction Growth In The Forecast.”
    
In an announcement for the upcoming 2016 Dodge Outlook Conference, Robert Murray, chief economist and vice president, at Dodge Data & Analytics puts it this way, “The construction industry has moved towards a more broad-based expansion in recent years.”
    
Other experts and pundits seem to agree: Our industry has definitely turned the corner.
    
That’s all well and good, but how does the economy look at ground level? We turn to AWCI’s member contractors and others on the ground to find out.

Local Economy
Out of the gate, we wanted to know, “How would you describe the state of your local economy?”
    
Timothy Rogan, vice president at Houston Lath & Plaster in Texas, sums it up nicely: “Robust.”
    
Bret Young, sales manager at Marek Brothers Systems, Inc., also in Texas, elaborates, “Booming. Texas is busy and the resulting high demand for labor has seen the labor rates rise about 12 percent in the last two years.
    
Walter R. Scarborough, FCSI SCIP, architect at HALL | Building Information Group LLC in Texas, corroborates: “The economy in my area (North Texas) is doing well. There is a healthy amount of construction going on, especially multifamily projects. I think multifamily projects are a sign of a healthy economy. Being a speculative endeavor makes me think that the builders believe demand is high enough to risk such projects.”
    
Gabriel Castillo, estimator at Pillar Construction, Inc. in Virginia, makes this observation: “Today, according to project drawings, jobs that were in ‘conceptual design’ two years ago are now being brought up to ‘for construction.’ That’s a good sign.”
    
Howard Bernstein, president of Penn installations, Inc. in Pennsylvania, reports, “We are in a depressed part of the Rust Belt yet there seems to be a sense of optimism, albeit nothing like the rebound that friends in other parts of the country experience.”
    
Todd Lawrie, president of Delta Contracting Service, Inc. in Michigan, shares good news but with some concern: “Yes, there appears to be more work but this is being tempered by a shortage of skilled labor. It seems to me that while there is a slight uptick in construction volume, the previous five to six years have culled the herd, leaving us short.”
    
Greg Smith, chief estimator at Superior Wall Systems in Southern California, has all good news. “Our local economy is very good with many opportunities to secure new projects,” he says. “I haven’t seen it like this in quite some time, and it’s very encouraging.”
    
Moving up the coast to California’s Bay Area, Craig Daley, president of Daley’s Drywall & Taping, shares more good news, “The Bay Area is busy in all sectors—commercial, tenant improvements, residential, public works, hospital. We haven’t seen all cylinders firing like this for eight or nine years.”
    
John Kirk, owner of Kirk Builders, also in the Bay Area, concurs: “I have never seen the San Francisco construction economy as robust as this.”
    
On the other coast, Lee Zaretzky, president of Ronsco, Inc. in New York City, shares good news as well: “The New York City construction economy is very robust and stable.”
    
In Western New York, Kevin Biddle, president of Mader Construction Co., Inc. paints a similar picture: “Our local economy is in the middle of a three-year boom.”
    
But Giles Turgeon, president of Green Mountain Drywall Co., Inc., reports from Vermont that the “local economy is a little slow, but our problem is more that our surrounding states are worse off than we are because they are all here bidding work at zero margins, which is killing our work load.”
    
Brenda Reicks, managing partner at Tri-State Drywall, LLC in Sioux City, reports from Iowa, “Our local economy is good. We have plenty of new construction and remodeling projects in our area.”
    
Down in Mississippi, Mike Heering, president of F.L. Crane & Sons, Inc., reports, “We are doing OK in our market, which is most of the Southeast. There is a decent amount of work though not an overabundance, so we still have to pursue just about everything that is out there to log enough to keep us busy.”
    
From Ohio, Robert Sutton, estimator and project manager at Reitter Stucco and Supply, reports, “Our economy has seen just under 2 percent growth in the past year, after a slight decline in 2014. Construction is on the rise, and home sales and prices have increased considerably over the past couple of years. Also, now that Amazon Data Center, Brew Dog of Scotland, and numerous startups are making Central Ohio area their home, the near future for Columbus appears fairly bright.”
    
Chuck Taylor, director of business development at Englewood Construction, an Illinois general contractor reports, “Here in Chicago, things are busier today than they were in 2008, before the recession. There are more cranes in the air today than in 2007, when we had a crane shortage in Chicago. In fact, our economy is in such good shape right now that several GCs have relocated headquarters to the Chicago area. The problem we have today in the construction trades is shortage of manpower.”
    
And reporting from Rhode Island, Charles Antone, consultant at Building Enclosure Science, describes his area economy as steady and strong. “We have a good backlog already as a consultant,” he says, “and a good portion of it is new construction. Rental is booming here as well as in Boston. The rest is institutional.”
    
One contractor reported that his area’s economy was doing so well that he declined to go on record since that might attract unwelcome competitors surveying the country for booming markets.
    
There seems to be no question that the U.S. construction economy for most areas has now turned around fully and has reached—some even exceeded—pre-recession levels.

Trends
From a contractor’s standpoint, if you find yourself in a good economy, the next question of interest would be: Will this last, and what (if anything) can we do to make sure it does?

Uptrends. Says Rogan, “I think the Texas uptrend will continue through 2016, but I am a stucco guy, not a Wall Street economist. Mind you, the current low cost of oil has had some impact and some jobs, such as the huge Chevron project west of Houston, are now on hold.”
    
Young’s take is this: “We’ve been back up now for two years, and my guess is that Texas will remain up-trending through mid-2018. Part of our upturn is due to tax credits for major corporations as well as lower housing-costs compared to other states, which have seen some major corporations move here.”
    
Says Bernstein about Pennsylvania, “Like riding a wave, we can only focus on the present, knowing that we have little control over how long this may last—the last few years make it hard to be overly optimistic and tough to risk making additional hires.”
    
Lawrie’s view on Michigan is this: “I think the trend will continue, but unless availability of skilled labor keeps up with the jobs, this uptick will level out. What would help us maintain this trend is for the unions to take a realistic view of the future, rather than basing their negotiations on immediate conditions.”
    
Smith’s take on Southern California is that “this upturn has a few years of life in it, and maybe more if we can ride this momentum. There seem to be quite a few shovel-ready projects sitting on the shelves, and they are now being funded. There are also a lot of projects in the budgeting phase and an equal number out for bids, which also bodes well for the future.”
    
Daley in the Bay Area says, “Today, we are budgeting and bidding projects into 2017, even 2018. From all this activity we look to be busy for next three to five years.”
    
Kirk concurs, “The Bay Area will go from hot to hotter, driven by the tech boom.”
    
Zaretzky’s view on the New York City market is this: “This great economy will continue for at least another year at the current pace, beyond that it’s anybody’s guess. There are a lot of things in the pipeline, however, so I don’t see another downturn anytime soon.”
    
Biddle also feels optimistic, “Our Western New York market should remain strong for two or so more years and continue decent for a bit after that.”
    
Says Heering about the Southeast, “The trend is better than a year ago, but we would like to see it a little stronger. We saw a lot more work earlier in the year but it has begun to slow slightly, though still good.”
    
Sutton on Ohio: “Our economic outlook through 2018 promises to witness increases in almost every market except manufacturing, which continues a steady decline.”
    
GC Taylor says Chicago is “seeing tons of multifamily residential projects as well as condos turned into apartment buildings. As long as they don’t overbuild, I’m sure we can sustain this for some time, maybe even five to 10 years. It may be that financing will keep overbuilding in check; the banks, although they do have cash to lend, are not as free with it as before the crash. They are still looking for some pre-sold percentage for condos, for example.”
    
Says Antone about the Northeast, “Overall, the economy is still quite fragile, and fueled, I believe, by artificially low interest rates. We’ll see what happens when they start to rise again.”

Downtrends. If the economy is stagnant or down-trending, the question would be when things might change for the better, and what might bring that about.
    
Though not many areas reported a slow economy, Ken Fox, vice president at Delta United Specialties, Inc. in Tennessee, does see a stagnant economy. “There is not much on the horizon right now,” he says.
    
Turgeon takes a similar view on Vermont: “Our hope is that the economies of the surrounding states start picking up, at which point their contractors will stay at home and leave our jobs to us. I think that’s a ways out, though.”

Competition
Given an overall strong economy, how has that affected competition? Are there now enough jobs for all, or is there still a dogfight to land projects?
    
Says Rogan, “There is enough for all of us in Texas, and then some. We now focus on the work others cannot get to, and today we are charging a premium.”
    
Adds Young, “Plenty of work for all, but stupid people still bid stupid margins. Also, here in Texas, labor brokers seem to be flooding the market and stealing workers who then see no taxes taken out of their paychecks and feel they’re making more money. In reality, however, long-term they are hurting both themselves and the quality of work since a non-tax-withholding labor broker provides zero future or training for his 1099 employees.”
    
Says Bernstein about Pennsylvania, “Far less of a dogfight these days, with fewer bidders and less out-of-area competition. The dogfight has gone from 12 pit bulls to a few Dobermans with better chances, but still no walk in the park.”
    
Lawrie in Michigan says, “Today, we see a good volume of work, which allows us to be more selective about what we bid and do, as well what we charge.”
    
Smith says this about Southern California: “The competition has loosened up a little, and we are back to competing against just a handful of contractors as opposed to a couple years back where we had a dozen or more bidders vying for every single project. The margins are still a bit tight, but they will loosen up in time. I think companies are now getting back to their comfort zones on what type of projects they want to be bidding on again.”
    
Says Zaretzky about New York City, “There is still a lot of competition out there, and owners are still doing a lot of bid shopping. I’ve also found that there are still a few guys who are willing work for nothing, and they are not allowing the margins to grow to where they should be. How these guys do it and still survive is anybody’s guess. They cannot not make money forever, they will eventually go out of business.”
    
In Iowa, Reicks says, “There are enough commercial jobs locally to go around. Some of our major competitors are no longer even bidding projects because they already have enough work on contract.”
    
Says Heering about Mississippi, “There is still a lot of competition but not like three or four years ago. However, I still see one or two contractors who bid much lower than the rest of us, and there is nothing we can do about that. You just continue to hope that one day this will catch up with them.”
    
Sutton from Ohio observes, “Obviously, with a tight labor-market and increased opportunities, the competition factor has declined considerably. There should be enough work to go around. With commercial work we find that most of our competitors are in the same boat as us: Landing a job is easier than executing it at the moment. We’ll have to see how this plays out over the next 12 to 18 months though.”
    
As reported, in a busy market, the competition will lessen. Today, however, the bigger hurdle seems to be shortage of skilled labor.

Forecast
Now, given a robust economy today, how does tomorrow look?

Architects. The wise contractor will be in good touch with his local architects, for their workload will predict your workload in months and years to come. A good, reciprocal relationship with your local architects can provide you one of the best barometers when it comes to predicting future market-strength.
    
So, how busy are your local architects these days?
    
Says Scarborough, an architect himself, “From what I can tell, local (North Texas) architects are busy.”
    
Rogan observes, “Some Texas firms are busier than others with the big firms at the front. Their fees have returned to pre-Obama rates—a good sign.”
    
Young adds, tongue in cheek, “Our Texas architects are busy. In fact, they’re too busy to finish the drawings. Requests for bids these days are more like hints at what the client wants than detailed plans.”
    
Says Bernstein about Pennsylvania, “They’re like us, seeing more opportunities but still nervous.”
    
Lawrie says Michigan architects “seem to be enjoying a steady workload.”
    
Says Smith from Southern California, “With the amount of budgeting going on right now, I would say they are pretty busy as well.”
    
Shares Zaretzky about New York City, “They are busy, which bodes well for the future. However, the owners are not giving them enough time (and/or money) to produce complete plans. The owners no longer see the value of well-prepared and complete plans, and these days we see more and more incomplete packages, which in the long run will cost the owner more—but they don’t seem to understand this.”
    
In Tennessee, Fox says, “They are busy, but mostly on small things.”
    
Turgeon from Vermont reports that the local architects there are “not very busy, and it seems like the owners are still scared to part with their money, so the plans we do get are still pretty bad—that’s to say, incomplete.”
    
Reicks reports from Iowa that “local architects are busy working on plans for future projects.”
    
Heering on the Southeast, “Our local architects seem to be busy but not overwhelmed. It looks like they have a decent amount of backlog that will ensure that we have projects to bid in the future.”
    
Sutton says this about Ohio’s architects: “Currently, architects seem to be flourishing, and bidding opportunities are vastly greater than this time last year. Today, bid invitations come in so regularly that it’s difficult to stay on top of them. You don’t want to turn down a valid bid opportunity, but you can only squeeze so many bids into your calendar.”
    
Taylor has this to say about Chicago firms: “We always maintain great relationships with our local architects, and we’re constantly exchanging information, which allows us to stay on top of things. Chicago architects have seen tremendous growth over the past few years. The two- or three-man firms are now five or six, and the 40- or 50-man firms are now at 100-plus. This is a really great indicator.”
    
Says Antone from Rhode Island, “The architects we have relationships with are all flat out, even the bad ones—those who should not design buildings.”

Crystal Ball. When it comes to predicting local 2016 economies, all contractors who currently enjoy a robust market predicted that current workloads would maintain or increase. A few samples:
    
Says Biddle, “Our (Western New York State) economy will be booming in 2016.”
    
Reicks says, “Our (Ohio) economy will continue to grow in 2016.”
    
Daley about California’s Bay Area: “Our backlog for 2016 is already very good, giving us confidence going forward.”
    
And says Taylor about Chicago, “It’s looking great. We’re already backlogged for 2016, and we anticipate a 30 to 40 percent growth in revenues over 2015, which is running almost double 2014.”

Concerns
The biggest concern voiced for this article is a shortage of skilled labor. Most contractors see jobs aplenty and are now scrambling not to secure more of them but to hire competent crews to complete what’s already on the books.
    
Says Antone, “All contractors we work with have labor shortages. It seems to be a generational thing. Old-timers are leaving, and the younger generation is currently not attracted to the construction industry. The issues concerning immigrant laborers—who are more than willing to, and capable of work—needs to be resolved politically, and sooner rather than later.
    
Another concern is cash flow. Rogan puts it concisely: “I think GCs should be required to maintain sufficient liquid assets to pay their subs in 30 days or less.
    
“We pay our people every Thursday and suppliers when due, not when I can or when I am paid for a job. In effect, today we are giving the GCs (and owners) an interest-free loan until the owner decides to release his funds. By Texas law, he has up to one year to do so. New laws in Arizona and Missouri have changed that, and owners are now liable to pay contractors the highest interest allowed by law on amounts beyond 14 days.”

Bottom Line
Today, our industry is in better shape than it has been for years, and it looks to continue this way for the foreseeable future. If skilled labor issues can be resolved quickly and effectively, and if cash flow issues can be worked out with owners and GCs, there seems to be no reason why we can’t keep this going for another five or so years, at least.
    
Fingers crossed.

California-based Ulf Wolf is the senior writer at Words & Images.