The 'Energizer Bunny Economy' - How Long Can It Last?
It's not what people say but how they say it that conveys the full meaning of their words. A "gee whiz" tone emanated from the youthful demeanor of Robert Murray, vice president/economic affairs for the McGraw-Hill Construction Information Group, in describing the industry's current and foreseeable state of affairs.
The "Energizer Bunny economy" is how he labeled the industry's fortunes in a presentation to the 41st annual meeting of the Construction Writers Association in Washington last April 30 - the same day that I ended my term as 1998-99 president of the group. Murray was one of a half-dozen construction industry VIPs that graced our program that day, and he seemed excited to be the bearer of such good news.
Ever since a brief three-quarter recession in 1991, the construction economy has enjoyed a steady, surprisingly vigorous upward climb year after year, avoiding the boom and bust cycles that had characterized construction for as long as anyone could remember prior to now. Like the Energizer Bunny, it "keeps going and going." Murray's last F.W. Dodge forecast predicted a downturn in the year 2000. He has since revised it to 2001, if for no other reason than the belief that all good things must end at some point. But he didn't rule out the good times to keep going and going beyond that.
Here is what Murray had to say about various construction sectors.
Housing: Last year's single-family home building pace stunned everyone in the economic forecasting field. It was the strongest year since the late 1970s. This year's performance looks to be tailing off somewhat but is still expected to finish at a high level compared with years prior to 1998.
Multifamily housing is a different story. Unfavorable demographics has kept this sector at levels well below that of the mid-1980s, though on a generally upward trend throughout the 1990s. Murray doesn't expect to see a bona fide multifamily building boom for another three or four years.
Income Properties: The commercial construction market has been boosted by a number of huge entertainment-based retail projects, such as the $122 million Mall of Georgia outside of Atlanta, and 1.7 million-sq.-ft. Dolphin Mall in Miami (including 100,000 sq. ft. of theater space).
Construction economists are fascinated by this melding of shopping complexes with entertainment facilities, but they are wary of its staying power with the anticipated boom in Internet shopping. The entertainment portion might just be the thing to keep these complexes alive and thriving.
Offices: 1998 brought the long awaited resurrection of the office building market, which had been moribund since the overbuilding boom of the 1980s (43 percent of all U.S. office space was built during that decade). So far most building projects have been single-occupant buildings put up as corporate headquarters and the like. Murray believes there is room for further growth in this sector, seeing as that office vacancy rates around the country have dipped below the 10 percent mark for the first time in ages.
Institutional: Most categories of institutional building are going strong - in keeping with demographic expectations. A surprising upsurge has occurred in the religious building category. "Have baby boomers gotten religion?" Murray asked rhetorically.
Manufacturing: This is the one sector of our construction economy that is sluggish, owing primarily to weak overseas economies that have dampened U.S. exports. On the other hand, power plant construction looks promising as utility deregulation proceeds at the state level. This enables utility companies to plan for the future.
Hotels: This has been a heady market sector ever since 1991, but Murray has forecasted a 12 percent decline for 1999. If past experience is any indicator, this could be the start of a cyclical market decline lasting several years. However, past experience has not been an indicator in recent times.
Demographics Is DestinyAlso addressing the construction economy at the CWA meeting was Hoyt Lowder, senior vice president and director of the FMI consulting firm. He took a longer view in accordance with the "demographics is destiny" philosophy. "Demand drives construction,"
Lowder said, noting that demographically driven demand in the coming years is likely to provide a particular boost to some sectors looking beyond the year 2000. Health care facilities are, of course, primed to grow, as are retirement homes, pharmaceutical and biotech industries and, let's face it, funeral homes.
Lowder stunned most of us with his assertion that one out of nine workers worldwide is employed in some aspect of the broadly defined leisure/recreation/travel industry. He also noted that airport shops enjoy the largest sales per square foot in the retail business, which goes to show how harried and pressed for time is the modern American consumer.
Lowder blamed an oversupply of contractors on the fact that construction profit margins remain tight despite the booming market. FMI's calculations show that over the past couple of decades the number of contracting businesses has more than doubled to more than two million, while construction expenditures have risen only 10-15 percent in constant dollars during the same period.
Consolidation will gain speed, he predicted, and the "buzz words for the next decade will be service and renovation." Renovation now comprises 60 percent of the overall construction market and will continue to take precedence both because of demographic factors, and because of the public companies' taking hold in construction. Service work delivers higher margins at lower risk, said Lowder, and increases shareholder value.
He predicted that "the labor shortage is temporary." The marketplace will fill the gap with immigrants, women, people from the military and other nontraditional recruitment sources. Training expenditures will soar as the workers and supervisors in the field will be increasingly pressured to lower costs through increased productivity. Productivity in turn will be driven by technology gains, including robotics, electronic commerce, fully integrated financial/costing/estimating systems, laptop and palm top computers in the field, and project specific web sites.
Both Lowder and another CWA speaker, William Lawson of the General Services Administration (which oversees many federal building projects), took note of an emerging trend away from the "low-bid mentality" toward "best value construction."
Speaking on the GSA's program to foster "construction excellence," Lawson said that the one factor most likely to achieve best value was to "pick a contractor early in the design process," regardless of whether the project was a design-build contract per se. "Single-source responsibility is the coming trend," echoed Lowder.
Surety WoesMike Daugherty, executive vice president and chief marketing officer of CNA Surety, gave a candid but bleak assessment of his industry sector, which he claims has seen an 11-year downward spiral in prices and now pays out $1.11 for every $1 in premiums. "We are a mature industry with no growth pattern," he said. "Market consolidation is inevitable."
He drew attention to new subcontractor default insurance programs in the past few years that depart from traditional bonding arrangements and involve general contractors buying a policy to ensure subcontractor performance. Daugherty noted, however, that there are only 30 or 40 products like this currently in the market, and they are untested by legal precedents that ultimately answer questions of who owes what to whom when troubles arise on a project.