Construction industry trends: Part 1

By Maureen Aylward

With housing construction in the US taking another slide, we went out and asked our Zintro experts if there are areas in construction that are seeing growth and how businesses are coping with the latest downturn.

James McConnell, a lawyer in public and private construction contracting, says that the drop in housing starts and single family home construction does not mean the end of business for general contractors and trade contractors in the housing sector. “Although construction of new single family homes and new multi-family condominiums will remain depressed for a long time due to the tight lending situation and uncertainty over the long-term future of the home mortgage interest income tax deduction, people will still need places to live,” he says. “I think that we will see attention turn toward several Obama administration initiatives, such as rehabs of existing buildings to increase energy efficiency and government funded infrastructure in the highway, energy generation and transmission, and public housing sectors of the construction industry.”

McConnell says that businesses that formerly concentrated on single family and multi-family residential construction will need these government funded construction projects, especially if they are equipped to qualify as woman-owned or minority-owned businesses because of the available bid preferences. “There is already an upturn in the number of contractors seeking surety bonding so they will be in a position to bid on government work,” says McConnell. “Contractors poised to bid on work under Obama’s Better Buildings Initiative or projects funded by the Infrastructure Bank proposed in Senator Kerry’s BUILD Act will be the first to see their business expand during the fall and winter.”

Steven Epcar, a real estate consultant, says that while for-sale housing construction continues to be challenging, the multi-family rental side has more than made up for the lag that took place during the previous two to three years. “The construction industry will see significant growth in labor and materials over the next three to five years as supply catches up with the demand for rental housing,” he says. “Primary markets across the country will enjoy tremendous rental housing construction booms and this activity will generate construction in tertiary markets as renters attempt to reduce their housing costs. In addition, there is increased construction activity in student housing projects and, to a lesser degree, retail projects in many U.S. markets.”

Rob Lewis, a construction equipment expert, thinks the construction industry as a whole is going to stay flat, if not slightly decline. While it’s hard to get an accurate number, Lewis estimates that the residential construction sector has declined more than 80 percent. By comparison, the industry would need to see increases of more than 250 percent to get back to half of where it was in 2007.

“Commercial construction has dropped off over 70 percent since 2007, but this sector, according to S&P, is looking up from the bottom of the slope. It is not expected that the increases will be significant, but assuming that unemployment and institutional lending stabilize, I think we could see double digit growth in 2012,” says Lewis.

Industrial and utility construction is seeing positive gains, and was only moderately affected by the recession. According to Water Utility Infrastructure Management, the utility industry as a whole has seen double digit increases in the past two years and looks to see significant gain in 2011 and 2012.

Lewis says that infrastructure construction is starting to taper off as the last of the federal stimulus jobs are coming to fruition and there is no significant work in the pipeline. “Most of this work went to the largest contractors that were in a position to secure bonding, which left the smaller contractors scrambling to sub-contract for pennies on the dollar, many taking losses just to get the work,” Lewis says.

“In my experience working with contractors throughout this recession, I have seen more than a third of my longtime clients go out of business. Approximately 10 percent have simply stopped bidding on jobs while waiting it out because they refuse to work for a loss,” notes Lewis. He says that competitive bidding from local and out-of-state contractors have eliminated profit from nearly all bid related jobs. The remaining contractors are split; some see a brighter 2012 and have increased bidding opportunities while others think the rut will last for another three to five years with no positive increases. “I believe it’s a mix of the two. Bidders taking losses are only delaying the inevitable closure, and those companies whose reputation and financial responsibility have remained intact will begin to see brighter days in 2012,” predicts Lewis.

Brooks Clark, a real estate finance attorney, says construction is growing in commercial and multi-family units in primary markets such as New York City, San Francisco, Boston and Washington, DC. “In these areas, most lending is to complete previously stalled projects. Commercial construction is also stronger where the property is pre-leased to an investment grade tenant under a credit tenant NNN lease,” explains Clark. “Other types of construction, particularly ‘spec’ construction, are being placed on hold or not being finished unless there is compelling story dependent on local market conditions.”

By Maureen Aylward

What do you think?

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