Construction Outlook

JOURNAL: ISSUE 4 - 2012

Construction industry expert Mark Sherwood.

Mark Sherwood, Senior Consultant, FMI Center for Strategic Leadership, highlighted the industry's macro-conditions, the prospects for near- and far-term growth in various construction categories, and broader trends that will impact BAC and shape the direction of the industry in the months ahead.

Sherwood projected that overall, across the three classes of construction – residential, non-residential (commercial, institutional, and industrial), and non-building (public works and power/utilities), construction activity will have posted "modest yet encouraging" gains for 2012, pointing the way to a similar scenario in 2013. Percentage gains in total construction put in place were 5% in 2012 with 7% expected this year. With notable increases in "residential and several institutional categories" and an uptick in "construction spending in every region of the country for the coming year," things are "moving in the right direction," according to Sherman. Despite this generally positive outlook, volatility and fluctuation continue to lurk in the shadows of growth, and while the recovery continues, it is likely to be "lumpy" even in high growth regions. Good news for BAC in particular is evidence that the green revolution is here to stay, as owners will continue to demand the efficiencies green building brings to keeping life-cycle costs down.

Among the strongest segments in 2012 were power and education. The weakest was lodging. In the coming year, total non-residential construction is expected to grow by 5%, driven by education, commercial and health care.

A closer look at the commercial sector shows signs of improvement in office construction (up 4% in 2012 with a 6% gain projected for 2013) and retail construction (up 5% in 2012 with an 8% gain projected for 2013), although retail's long-term future would be affected should consumers replace   'brick and mortar' shopping in favor of smartphone/online shopping.

In the institutional sector, a rise in health care construction will be modest in coming months due to uncertainties connected to health care reform, which will not be fully implemented until 2014. But in view of the country's aging population, experts are "bullish" on health-related building in coming years. Education construction is expected to grow at an annual rate of 5% through 2016, fueled by the rise in student population, overcrowding, and antiquated facilities. Gains have been more robust among higher education institutions that can draw on healthy endowments, but limited public resources have prevented many areas from replacing/renovating deteriorating K-12 schools to the extent that is necessary. As the economy rebounds, Sherwood predicts education activity will "get rolling again" in earnest.

Gains in residential are encouraging; Sherwood reported that the value of total residential construction put in place was expected to rise by 8% in 2012 with an annual growth rate of 11% on tap for 2013. Growth has been spurred by rising property values and lower mortgage rates. Also driving up percentages is multifamily housing, an emerging "bright light" (32% increase in 2012), which could continue for the next two years. Through 2013, improvements will still constitute the largest portion of residential spending.

In the non-building sector, waning revenues and political gridlock over government-financed construction have been the cause of recent "fatigue" in infrastructure activity. One category, however, that promises "to be strong for the long haul," said Sherman, is power/utilities. Growing emphasis on achieving energy independence from foreign producers has in turn, expanded exploration of domestic sources and with it, an increased demand for new housing and infrastructure to support it, presenting work opportunities for BAC members.

In reviewing construction's cyclical nature and comparing historic patterns of each low-high-low cycle of activity since 1966, Sherwood contends that the sluggish recovery of late is due in part to the length of the cycle immediately before this one, which was "much longer than normal, creating excesses in building stock inventory, [which] we are still burning through," he said.

The downturn has shaped other changes in the industry, from a heightened reliance on technology to accelerated industry consolidation to declining profit margins for general and multiple trade contractors that has fueled an unprecedented pursuit of productivity. This pressure-cooker environment will remain even after the industry sees steeper gains as part of the 'new normal' or Construction 2.0", along with a projected "war for talent" over craftworkers and supervisory personnel, all of which compel contractors and building trades unions to meet future challenges with strategic vision and flexibility. "The key is being willing to adapt and recognize that some past drivers of success no longer exist, and the more we understand and respond to the changes in the marketplace with positive new solutions, the more the outlook becomes very favorable and positive," said Sherwood.