It’s been almost two years since I’ve seen any sign of normal construction around my home town. Over the last few weeks, I’ve seen a handful of sites being cleared, pads being prepared, steel going up.
Non-residential construction was off by 43% in 2011 in my home town of Kansas City. Total construction spending in 2010 had held fairly well by contract value due to a large federal contract that had been budgeted prior to the 2009 downturn. We also had several highway projects that were continuing to roll along as they were funded as multi-year projects.
What that means is the health of the construction economy was somewhat misleading. Driving around town was a much better indicator of the implosion of work. Several sites were laying dormant after their initial site work had been completed.
Finally, signs of regular commercial construction have begun to spring up. Let’s hope this is the beginning of a long uptrend.
You probably have noticed that economic forecasts are about as reliable as weather forecasts. Maybe even less so. With that said, I thought you might appreciate hearing the thoughts of a couple of sources I have.
The other day, an email arrived in my Inbox from the Associated Builders and Contractors. ABC’s chief economist Anirban Basu is predicting the construction economy’s recovery may be two years away. Non-residential construction recovery (e.g. commercial) may be even further out. He listed healthcare as one of the segments that should be growing in the next twelve months. He listed hospitals, health centers, and clinics as specific building types that should see action.
The ABC commercial building forecast is a little more pessimistic than what my real estate resources are forecasting. The commercial real estate world follows a predictable cycle which is basically circular. Occupancy rates bottom out when lease rates bottom out. Then the lease rates start to recover followed by occupancy rates. That eventually leads to construction of new buildings for office and retail use.
The good news? Lease rates are starting to recover.
Keep an eye on the employment numbers. They are the leading indicator of a recovery in commercial construction (and also have a significant impact on residential construction and the remodeling industry).
There is a direct connection between employment levels and commercial real estate occupancy. The commercial construction industry has suffered more from high unemployment than it has from tightened lending.
One of the most pleasurable parts of being an adviser to contractors is visiting with the field workers. Not only do they tell it like it is, they are ground zero for the industry. They’re in it for both a living and a lifestyle.
I had an interesting conversation with a field guy the other day. My gym decided it was time for a “freshen up”. New paint, TVs, ceiling tiles, lights, etc. The gym would be closed for 9 days while the work took place starting at 10:00 PM on a Friday night. Naturally, the contractors were allowed to start prepping Friday morning.
As I walked into the locker room, I ran right into the scaffold a drywaller was working on. He looked familiar and sure enough we had met a couple of years earlier on a large prison project. I asked him how things were going for his company – an outstanding union drywall sub that is well run.
He proceeded to tell me that when we last saw each other the company was keeping 225 field guys busy. Last fall (2009) they were down to the 18 senior foremen. Those 18 guys were the only field workers at the company. He felt fortunate to have remained fully employed the entire way. The company had since crept back up to about 25 field guys. Remember this is a very well run company, that enjoys a great reputation among GCs, that can perform both new construction and tenant renovation. Their work load had slipped 90%!
This is not a doom and gloom blog. Things are turning around. Just thought you might appreciate reading about the depth of destruction this recession has had on our industry. Even the best run companies took a huge hit and the impact was felt nowhere harder than on the front line.
Hope your world is considerably brighter than this company’s.
Ron & Guy