The U.S. construction outlook is as bright as it seems.
By Nathan Fisher
In business, there is such a thing as a good problem to have. For those in the construction industry who feel like business is booming, it might be because they find themselves declining to bid on good projects, grappling with work/life balance or struggling to hire enough of the right staff. But is the current U.S. construction boom just a feeling, or is the outlook as strong as it seems? According to economic data and your peers in the construction industry, the answer for now is yes.
We have a variety of reasons to believe the U.S. construction outlook is likely to remain strong. Figure 1 summarizes the findings of the Fisher Investments research team when it comes to residential projects. According to the research, recessions tend to follow periods of declining residential construction. The blue line representing homes under construction has continued to rise since the end of the most recent recession, indicating positive growth for the industry.
While these broad trends are encouraging, that may be too macro for some to feel confident that a downturn isn’t just around the corner. A plausible place to look for early indicators of a housing construction downturn would be high-end luxury homes. “The past four years, have been the best four years of my thirty-year history as a builder, and I see no end in sight,” says Earnie Carrere, President/Owner of Carrere General Contractors Inc., a luxury homebuilder in Hobe Sound, Florida.
Carrere, who also remodels golf course club houses, says his pipeline looks good through 2019, but he also notes that “people cancel projects all the time.” That begs the question: How might you know when a downturn is eminent? In Carrere’s experience, “when anybody can stop whatever they were doing before and become a contractor, and when banks will lend to anybody, then you know the market is getting too hot.” However, that is not what he sees happening now. “Today, architects are inviting us to help develop budgets and construction schedules for projects that are well-funded, well-marketed, and properly planned,” he adds.
Fisher Investments’ research, summarized in Figure 2, suggests that U.S. non-residential construction likely also has room to run. Looking only at data from the U.S. Census Bureau (the blue line), it looks like there might be a downturn for non-residential construction, but that does not paint a complete picture. This data has a nine-month lag, but data collected by the architectural billing index (a survey of architectural professionals, represented by the grey line) shows architectural work is currently on a steady upturn.
But what about earlier indicators for non-residential construction work? “Land use planners are the canary in coal mine,” says Jodi Sommers, marketing and business development manager at Essex General Construction, a commercial general contractor with offices in Eugene and Portland, Oregon. “They do their work before the architects represented in the Architectural Billings Index, and can provide a clearer view of the construction outlook, farther into the future.”
When designers and planning professionals are busy, it’s indicative that there is going to be work ahead. “When my friend in land use planning is too busy to have lunch with me, I bet we have good construction projects for the next couple years,” Sommers adds.
The Regional Perspective
Those interviewed for this column agreed the U.S. construction market seems like it has legs to run, but potentially with regional differences. Project One Integrated Services provides a complete range of project management and owner representation services, mainly in Colorado. “Colorado is a great market, with a great climate, a diversified economy and a highly educated workforce,” says Mike Palumbo, Project One founder and board chairman. “There are 225 to 250 people moving to the state every day. That drives demand for infrastructure projects such as hospitals, water, roads and bridges.”
But in a growth environment, some commercial projects may not pencil out. “Margins are not always there because it╒s too expensive to build due to limited subcontractor capacity,” Palumbo adds. “The subcontractor community are either being selective and marking up the work, or in some cases they hire from outside the industry and train, which could lead to quality problems.”
Project One Founder and President Tristin Gleason says, “We have seen projects where workers get $100 extra cash at the end of the day, just for staying on the job,” demonstrating the need for labor. “We have to work harder to ‘sell’ projects to the contracting community to encourage qualified solicitation responses and to get good bid coverage.” A local market favoring contractors over owners could cause owners to choose projects in other regions that are less expensive. Still, both Palumbo and Gleason agreed that it seems like things will stay busy, at least for another year.
If you’re feeling strong about your prospects in the coming months and years, the good news according to this data is that you’re on the right track. That said, it’s important to continue paying attention to broader economic trends, as well as the insight of peers across the country, to confidently grow your business and prepare for the next downturn before it comes.
Nathan Fisher is managing director for Fisher Investments 401(k) Solutions.