’07 construction outlook

Commercial construction remains strong; demand for materials and workers pushes up costs

by Clair D. Urbain

Take a deep breath and keep working – hard. After a string of years of solid construction growth, analysts predict no slowdown and, in many cases, even more growth in commercial construction jobs.

An exclusive survey of Contractor Tools and Supplies readers confirms this trend, but also highlights tops concerns contractors have in the coming year.

Here’s how we see the 2007 market shaping up:

Business overview
Analysts agree that single-family residential construction will soften in 2006 and into 2007, but commercial construction will pick up, replacing residential work.

According to our readers who answered a recent survey, 80 percent indicated that business will increase five percent or more next year, with 25 percent saying that their business will grow by 20 percent in the next 12 months.

The softer residential building trend and the hotter commercial construction has an interesting effect on the market.

“The 2006 U. S. construction market amounts to $1.2 trillion; single- and multi-family residential construction accounts for just over $642 billion. That’s half of the construction market,” says Heather Jones, construction economist at FMI, a leading consultant group to commercial contractors and the construction industry.

“Our statistics show that as residential construction tails off, commercial projects will pick up the slack, resulting in 5 percent increase in total Put-in-Place construction in the U. S. in 2007.

“Our forecast is for an 8 percent increase in 2006 and a 9 percent increase in 2007 for nonresidential construction.”

Ed Sullivan, staff vice president and chief economist at the Portland Cement Association, sees an even brighter picture for nonresidential construction in 2007. He predicts a growth rate of 8.5 percent, up from 6.4 percent in 2006, but cautions to keep it in perspective.

“The non-residential market turned in 2005 after five years of decline. Despite the large gains in 2006, most markets may still be considered weak from a historical perspective,” he says.

Jones concurs. “Industrial/manufacturing construction is a good example. It has come alive again, but the numbers are deceiving. Compared with past years, it has grown 22 percent in 2005, 14 percent in 2006 and is projected to grow 12 percent in 2007. However, the percentages are driven by numbers resulting from extremely low volume in 2005. It will take solid growth through 2007 to get anywhere near the volume set in the ’90s. Much of this work is revamp/rehab work and for heavy industrial projects,” she says.

Money supply/interest rates
While the economy is chugging along, inflationary pressures have market watchers at the Federal Reserve Board concerned.

Ken Simonson, economist at the Associated General Contractors, says inflation in the general economy is 3 to 4 percent, but building materials costs have increased nearly 8 percent and transportation costs have gone up 16 percent.

This is spurring the Fed to increase prime interest rates, and the economy will see the prime lending rate touch 6 percent by year’s end. This will further dampen residential work, but commercial work will continue barring any unforeseen event, the economists predict.

The economists generally believe that inflationary fears will ease and business growth will slow enough by the second half of 2007. The Fed will ease up on interest rates to keep the fire cooking under the economy without it boiling over to feed inflation into 2008.

“The U.S. construction markets do not lose momentum with rising mortgage rates and a slowdown in housing. Growth in non-residential construction is a sign of a growing, strong economy,” says Sullivan.

Building materials availability/cost
Get used to higher prices for building materials. Experts across the country see strong world demand and increased shipping costs affecting supply and boosting costs for most building materials.

“Building material costs are increasing, but generally are leveling off. Look at this being a new plateau. I don’t see them coming down,” says Jones.

Cement availability continues to be an issue and will be a concern in 2007, says PCA’s Sullivan. “Cement consumption will grow in excess of 3 percent of the record consumption in 2005. Tight market conditions will continue as plants are operating at high rates, inventories are lean and our dependence on imports increases,” he says.

Lumber is one building supply that has tempered its price increases. “Prices have opened up some as a tariff on Canadian lumber was reduced, which has increased supply. Lumber prices have gone down in the near term and should stabilize through 2007,” Jones says.

AGC’s Simonson reports double-digit price increases in several building supplies, and that contractors and building owners should get used to it because it may level off, but won’t drop to past levels. “Get used to higher materials cost. The average Producer Price Index (PPI) for construction materials jumped 7.8 percent from June 2005 to June 2006. Material costs reached as high as 16 percent for highway construction. We’ve also seen increases as high as 87 percent for copper and brass mill shapes, 48 percent for asphalt, 40 percent for diesel fuel, 26 percent for gypsum products, 18 percent for plastic construction products and 15 percent for cement. A few of these increases will level off as the housing market cools, but most are tied to strong U.S. and world demand for materials and freight transportation.
“I think construction costs will keep outstripping the overall inflation rate. Budgets must allow for more inflation, for purchasing materials earlier and for sharing the risk and reward of price volatility,” Simonson says.

Jones says contractors must be more proactive. “Contractors are addressing price vulnerability by trying to establish price escalation clauses. They are also bidding materials separately or adding in a rate that protects margins,” she says.

Worker availability
All sectors of the construction industry are concerned about finding qualified labor as the market improves in 2007. The present workforce is getting older and enough replacement workers aren’t coming up through the ranks to meet coming work demand.

“Unemployment remains low, worker availability is low and labor rates are increasing. Some believe that as residential housing slows, it will free up more workers for non-residential and commercial work, but not all skills and trades are transferable. Due to this, the unemployment rate will rise to 4.9 percent in 2007,” says Jones.

The U. S. Department of Labor Bureau of Labor statistics report job opportunities in the construction field will remain strong. As demand increases and the labor supply stays the same, wage rates will increase, especially for more experienced workers who already are paid higher than average wages. Plumbers and electricians are two groups most affected by this trend, says Randy Giggard, manager of market information at FMI.

In fact, the concern for construction labor is so great in the hurricane-damaged Biloxi suburb of D’Iberville, Mississippi, town leaders are courting China-based construction companies to import Chinese construction workers to build shopping malls, condominiums and casinos. The city had a third of its real estate damaged by Hurricane Katrina.

Given the debate over immigration and American labor law constraints, this may be a difficult undertaking. But it is a sign the lengths that developers and others are considering to meet the looming labor shortage.

The firms, which propose to partner with private developers in the U.S., plan to use Chinese materials to avoid paying higher post-Katrina prices for American-purchased materials.

To a large extent, Hispanic workers continue to fill the gap for needed workers. Sources report that up to 45 percent of the workers for some nationally based construction firms are Hispanic.

However, growing sentiment to assure these workers are registered aliens could greatly affect worker availability and increase labor costs for contractors that rely on short-term or day laborers.

Information technology trends
Construction companies thrive on information exchange to get work done, but a sparse few have yet to leverage technology to help them communicate information across departments and to suppliers, engineers, architects and owners.

“Some builders are using wireless devices, but they are in no way in the mainstream of construction. Project management and estimation software is being adopted but there still isn’t widespread use of full software systems that can be used across a contractor’s organization. It’s just the tip of the iceberg. Mostly, only basic technology is being used, but should improve in the coming years,” says Jones.

“However, there is increased interest in Building Information Modeling (BIM), which has the potential to change the entire project delivery model. It could change the contractual structure of coordination, execution, commissioning, turnover and maintenance,” says Jones.

Attempts are underway to allow building software to exchange data freely. For example, the AGC is working with the National Institute of Building Sciences (NIBS) to develop AGCxml, a set of standard industry schemas for exchanging electronic data among architectural, engineering and construction software applications.

It hopes to develop a platform that will increase efficiency and collaboration among facility owners and design and construction professionals.

Emerging trends – Lean and Green
While Lean manufacturing concepts have become firmly rooted in other sectors of the U.S. economy, construction contractors struggle with adopting concepts that can make their processes more efficient.

Contractor Tools and Supplies readers have expressed interest in adopting Lean manufacturing concepts to construction operations.

With every story published about contractors who have put Lean initiatives in place, readers have contacted the magazine in search of more information. (See pages 18 and 19 in the printed version of this magazine.)

Green construction, where the design, engineering and building process aim to minimize waste and achieve for the greatest level of energy efficiency over the life of the building, is gaining attention in certain areas of the country.

“Green construction interest is increasing, mainly due to tax breaks and other incentives, but some are doing it because it’s socially responsible. It seems to be most popular in California, but it’s getting followers everywhere,” says Jones.

As interest in Green construction grows and more economic incentives are put in place to encourage it, greater emphasis will be made to further define the processes, products and power requirements of building that will receive the “Green” designation.

Regional outlook
“Regionally speaking, you can draw a horseshoe along the West Coast, across the southern U.S. and up to about Washington D.C. and encompass the most promising growth areas in the U.S.

“The Northeast and the Midwest markets are slower. The population continues to move to the coasts and more temperate weather, affecting building in Northern and Midwestern states. The majority of growth has been in California, Texas and Florida. The Las Vegas area has been a bright spot for construction, but there have been rumors of some slowdown in that area as well,” Jones says.

One would expect extensive building in hurricane-hit areas of the country, but not much rebuilding has registered on Put-in-Place construction statistics. For example, demolition and power line rebuilding are not included in these statistics, but make up the majority of the work completed in the last year.

“Some expect that half of the hurricane evacuees won’t come back to devastated areas, and two large manufacturers have left the New Orleans area. The designs and plans are in place, but only a few have started. More Put-in-Place construction will lure people back to the area,” says Jones.

Published in the September/October 2006 issue of Contractor Tools and Supplies magazine.

back to top

Add it up! Nearly 81 percent of respondents expect work volume will increase in the next 12 months. More than half (53 percent) report work volume will increase 10 percent or more.

Source: May 2006 Contractor Tools and Supplies reader survey. Total greater than 100 percent due to rounding.

What concerns contractors most
What issues concern our readers most? We asked them, and following is the ranking of business challenges based on reader responses to a survey conducted in May, 2006.

Readers were asked to rank each item on a scale of one to four on how the following challenges are affecting their businesses.

Responses were tallied to come up with the following issue ranking.

Business challenges
 1. Raw material costs
 2. Fuel/energy costs
 3. Raw material
      availability
 4. Worker safety
 5. Accurate estimating
 6. On-time project
      delivery
 7. Insurance costs
 8. Finding qualified labor
 9. Job waste
10. Interest rates
11. Labor costs
12. Subcontractor
      performance
13. Building code
      changes
14. Bonding ability
15. Big-box chains
      acquiring distributors
16. Contractor
      mergers/acquisitions