The Construction Economy
For those of you who have followed my posts over the years, “specifically since the 2008 depression that hit our industry,” you know that it has been hard for me to get excited about the slow recovery of our economy and more specifically the health of the commercial construction space. Well, that’s all over!
For the first time since 2009, the first two quarters of 2015 have punched through with 15 percent growth over the same time period last year, with all five main sectors of architectural construction showing positive gains, and the three commercial sectors show 20 percent plus increases over this time last year. Most importantly, the education sector has increased at a 4 percent pace. This is quite significant because it is the largest segment in the architectural space, representing 31 percent of construction spending. This, combined with the increasing number of healthcare related projects in design and currently under construction, is a sign that we have turned the corner. These projects just haven’t shown up as “put in place” in the Census Data as of yet, with this sector only showing 1 percent growth. What also makes these “put in place” statistics so impressive is that much of the contiguous United States was in a deep freeze for the first quarter or more of this year, bringing construction activity to a halt. Most of this growth has been made up over the last three months, even outpacing the Consensus Construction Forecast, published by the American Institute of Architects.
The Importance of Growth in the Education and Healthcare
In over thirty years as a building product manufacturer and market strategist, I’ve learned that most manufacturers’ revenues and the highest percentage of margin dollars come from the education and healthcare segments. In many cases, these segments contribute as much as 60 percent. These projects consume more and higher quality building products than their commercial cousins. Unlike commercial construction, where there is price pressure throughout the project cycle, most of these institutional structures are designed and built to educate and heal without a profit motive. As a result, product specifications are more likely to be followed, leading to much less price pressure and increased margins for building product manufacturers and their suppliers. This increase in educational renovation and new square footage is being driven by years of increasing K-12 enrollment. Many schools have relegated classes to temporary trailers and other spaces due to diminished discretionary municipal budgets caused by high unemployment. These schools are now finding the financial resources to expand classroom space. With our current unemployment rate of 5.3 percent, the growth in healthcare is similar to schools and baby boomers are reaching the age where they require more medical attention. This, combined with the passage of The Affordable Care Act, is driving more patients to hospitals and medical offices. There’s also a surge of new biotech research facility construction adjacent or connected to leading medical schools, adding the value in healthcare construction. This is all due to a greatly improved increase in available public and private funding.
Strengths, Weaknesses, Opportunities and Threats
If I were to perform a “SWOT analysis” on the present and future construction market landscape, it would be as follows:
- Strengths: With the unemployment rate deceasing to almost 5 percent, nonresidential and institutional construction is currently at its most robust pace since the 2008 downturn. At its current pace we could reach full recovery by the end of next year. The growth in U.S. employment has also led to the most positive gains in construction employment in the last eight years, with a current unemployment rate of 8 percent down from 23 percent in 2010.
- Weaknesses: At the current pace of U.S. construction growth there is a chance for full recovery in 2016. However, nonresidential and institutional construction spending is 25 percent below the peak of 2008, through the first six months of 2015. This is compared to a 37 percent deficiency at the end of 2014. With construction unemployment reaching as high as 23 percent in 2010, much of the available labor is no longer in the workforce. This is one of the largest problems facing contractors today: not enough skilled workers. This was a foreseen concern by the Associated General Contractors of America in the very early stages of the recession.
- Opportunities: This growth will work to decrease the competitive pricing pressure on construction products and services, because there’s more work to go around. With the current and future growth in the education and healthcare sectors, building product manufacturers should experience sharper increases in revenues and operating results. Lastly, it’s a trade worker’s market; these are jobs that pay well, with better-than-average benefits! In a time when college graduates are having a hard time finding work, the construction trades are starving for skilled workers.
- Threats: New project delivery methods such as Integrated Project Delivery and other direct contractor, owner, architect collaboration and shared risk methods are turning traditional “specification-centric” sales and marketing strategies into veritable relics. These delivery methods are here to stay and will only become more prevalent in our growing construction landscape. With more contractor-centric project processes, distributor, supplier and subcontractor loyalty strategies are as, if not more, important than specification-focused programs. For marketing executives, it’s going to require a more informed and intelligent balance than in the past.
There are other potential economic factors than could affect the post-2016 health of our industry, such as Chinese and European economies, and a long deflationary schism in the oil industry. AIA Chief Economist Kermit Baker explains these factors (and many others) in his paper.
Paper by Kermit Baker, PHD, Hon AIA, & Chief Economist for The American Institute of Architects: AIA http://www.aia.org/practicing/AIAB106916
As Director of Enterprise Marketing Solutions for The Blue Book Network, Doug Bevill specializes in consulting with manufacturers of building products on creating effective, actionable, and quantifiable custom marketing solutions by leveraging the power of The Blue Book Network. With over 100 years as an industry leader connecting people, products, projects and related services, The Blue Book’s extensive network of dealers, distributors, subcontractors, architects, engineers and facilities professionals is the most extensive in the industry.