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Goodbye Building Slump? Construction Optimism Hits Five-Year High

Contractors Plan to Ramp Up Hiring and Equipment as Expected Demand for New Construction Reaches Highest Point Since 2009
January 22, 2014
While it can't yet be described as positively giddy, builders were palpably upbeat this week, predicting rising construction demand in virtually every segment of the non-residential market this year, according to an annual survey released by the Associated General Contractors of America (AGC).

While the survey of contractor sentiments reflects a mostly upbeat assessment by an industry staggered by five years of slow recovery from the Great Recession, a new set of worries emerged among respondents: growing worker shortages, rising materials and business costs, and the impact of new regulations and federal budget cuts.

The survey of more than 800 construction firms of all sizes was part of the AGC's 2014 Construction Industry Hiring and Business Outlook, which queried contractors about their hiring, equipment purchasing and business plans for the next 12 months.

"Contractors are more optimistic about 2014 than they have been in a long time, and should be a better year for the construction industry than any year since 2009," with many firms planning to boost payrolls, add new equipment and pursue new market opportunities, said AGC Chief Executive Stephen E. Sandherr.

Respondents were most bullish about prospects for private-sector development of new office, warehouse, manufacturing, retail and lodging properties. At least 40% of respondents expect those five building sectors to expand in 2014 over last year, while less than 20% expect a decline.

The gap between the optimists and pessimists is a strong 28% for the commercial office, manufacturing and retail/warehouse/lodging markets, and a solid 25% for the energy, hospital and higher education sectors.

Outlook Varies By Region


Results varied considerably by region. Sunbelt contractors expressing optimism for the prospects of seven of the 11 market sectors, with the strongest being private office and the combined segment of retail, warehouse and lodging.

Northeast contractors were the least optimistic, with declining activity expected in eight of the 11 categories. While the slower-recovering West and Midwest fell in the middle, prospects for manufacturing construction spiked in markets like Ohio and Michigan, while respondents were positive about office and warehouse development in Western markets such as booming Salt Lake City.

"With the auto manufacturers in a bit of resurgence, we’re seeing demand not just from the Big Three automakers, but from second- and third-tier suppliers. That filters down to commercial construction," said Vince DeLeonardis, president of Pontiac, MI-based George Auch Construction Co., one of several construction executives who provided insights at an AGC news briefing this week.

"We’re seeing redevelopment of abandoned auto manufacturing sites, with everything from film to research-and-development to mixed-use projects going into those sites."

In the public sector, builders are optimistic about demand for infrastructure improvement projects, most notably new water and sewer construction. The outlook for public buildings, schools, highways, and other transportation facilities remained mixed in the current era of public sector fiscal austerity.

More Money Available for Construction


Improving credit conditions appear to be one reason for the builders' optimistic assessment. Only 9% of firms report having a harder time getting bank loans, down from 13% in last year’s survey. And only 32% report customers’ projects were delayed or cancelled because of tight credit conditions, compared with 40% a year ago.

Not all data in this new year are coming up rosy for future construction activity. On Wednesday, a leading indicator hinted at something of an ominous sign for spending by builders later in 2014.

The Architecture Billings Index (ABI) posted its first consecutive months of decline since May and June of 2012 after rising steadily through most of 2013. The ABI registered 48.5 in December, down from 49.8 in November, according to the American Institute of Architects (AIA).

“What we thought last month was an isolated dip now bears closer examination to see what is causing the slowdown in demand for architectural services,” said AIA Chief Economist Kermit Baker.

Baker said some of the double-month decline can possibly be attributed to marketplace anxiety caused by fall federal government shutdown.

"But it will be important to see how business conditions fare through the first quarter of the new year when we no longer have end-of-the-year issues to deal with,” Baker said.

Employment is still a work in progress as well. Total construction employment increased by 122,000, or a just OK 2%, while construction spending rose by nearly 6% between November 2012 and November 2013. That said, the industry still employs 1.9 million fewer people than it did in 2006, and annual construction investment levels remain $200 billion below peak levels, Sandherr and AGC Chief Economist Ken Simonson said.

Also, the December employment report revealed the first negative job creation numbers for construction since May, likely as a result of poor weather in much of the nation in December and January, including this week's northeastern U.S. snowstorms.

However, 41% of firms that said they didn't cut or expand their job counts last year reported that they plan to start growing payrolls in 2014. Only 2% plan to start making layoffs, according to the AGC. The hiring will be moderate, with more than 85% reporting they plan to add 25 or fewer positions this year.

Industry job totals are likely to rise by 250,000 to 350,000 in 2014, and total construction spending, which increased only 5% in the first 11 months of 2013 from the same period a year earlier, will rise 8-10% this year, according to Simonson.

"December was an unexpectedly cold month and it did slow our progress. Several of our projects road and bridge reconstruction projects in the Denver metro area were shut down or slowed due to negative-degree temperatures," Antonio Ledezma of Commerce City, CO-based Jalisco International. The company entered December hoping to add 15 - 20 positions, or roughly 10% growth. "We’re hoping if the weather turns around we’re be able to fill positions," Ledezma said.

Jim O’Brien, owner of Bothar Construction, road builders based in Binghamton, NY, also said cold weather shut down hiring in December and January.

Simonson noted that, as firms continue to slowly expand their payrolls, they're likely to have a harder time finding enough skilled construction workers. About 62% reported having difficulty filling professional and craft worker positions this past year.

Utah, where all respondents plan to hire people this year after making no staff changes in 2013, is already seeing a labor shortage.

"The fear for us is, as more projects become available, where will the workers come from, and are they skilled," said Rob Moore, president and CEO of Salt Lake City-based Big D Corp.

Throughout Utah and the western U.S., an enormous amount of apartment and office construction is under way, Moore said.

Utah is also seeing a robust market in higher education, especially for laboratories and research, and large distribution facilities, along with a $1.8 billion project to improve Salt Lake City International Airport.

Even in markets like Salt Lake City, financing remains an issue, particularly for commercial developers, Moore said.

"The amount of equity required to support some very good projects by developers in Salt Lake City and across the West is still in the 30% range, even if developers have credit worthy leases pre-signed," he said.

Nearly half of the contractors surveyed expect competition to get tougher, perhaps explaining why 55% plan to pursue new projects beyond their traditional geographic markets this year.



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