Economic Forecast for the 2011 Construction Industry: Outlook Good?
I recently had the pleasure to chat with Mr. Anirban Basu, Chief Economist for the Associated Builders and Contractors, Inc. (ABC) and Chairman & CEO of the economic and policy consulting firm, Sage Policy Group, Inc. Voted one of the region’s 20 most powerful business leaders in 2010 by The Baltimore Business Journal, Mr. Basu is a frequent contributor to many different media outlets, including writing a monthly article for Construction Executive magazine and producing the economic news report, Construction Economic Update. Most recently lecturing to construction professionals from throughout the Mid-Atlantic region at the ABC – Eastern Pennsylvania Chapter’s 2011 Construction Industry Symposium, I asked Mr. Basu to summarize his construction industry predictions for 2011 and beyond:
Jennifer Horn: First, some good news, please. Where are we now in terms of economic recovery, and what positive indicators are you seeing in the construction industry for 2011?
Anirban Basu: In terms of U.S. production, we are now more than one and a half years into the current economic recovery. This recovery has also been accompanied by a significant rally in financial markets in America and abroad. Correspondingly, some construction indicators, such as the architecture billings index, have begun to show signs of life.
Horn: If the recession is over, why aren’t things improving faster for the construction industry as a whole?
Basu: Construction tends to lag the U.S. economy in terms of recovery even under normal circumstances. But these are not normal circumstances since such a high proportion of the excessive investment and speculative activity during the previous growth cycle related to real estate. This in turn triggered a financial crisis of epic proportions, leaving construction vulnerable to a massive and in many cases ongoing downturn. For construction recovery to begin in earnest, the nation will need to add millions of additional jobs to bring down vacancy rates, spur demand and create greater confidence among prospective financiers.
Horn: Is the residential and commercial real estate foreclosure crisis over?
Basu: Neither the residential nor commercial real estate foreclosure crisis is over. There are still plenty of distressed properties and owners who are unable to make their payments. This year may be the peak year for residential foreclosures and commercial real estate weakness is likely to impact U.S. economic performance for several years to come.
Horn: When will banks open the spigot on financing?
Basu: Banks continue to make loans to people and organizations with high credit scores and demonstrated reliability. However, many financiers remain quite cautious with respect to people and organizations with checkered credit histories and/or with short credit histories. One suspects that this will change over time as certain bankers become increasingly aggressive in the search for financial market share, but for now lenders remain rather disciplined and that is unlikely to change substantially in 2011.
Horn: How has the Mid-Atlantic region fared as a whole compared with the rest of the nation?
Basu: In general, the Mid-Atlantic region has been a top performer. New York has bounced back nicely thanks to the performance of financial markets and growing profitability among many prominent banks. The Washington-Baltimore Corridor has also been a top performer, thanks largely to the ongoing expansion of federally-financed activities and the presence of a massive medical research sector. Philadelphia’s impressively diversified economy has also begun to rebound and Delaware’s business friendly environment continues to yield economic development dividends.
Horn: How do issues like Base Realignment and Closure (BRAC) and Cybersecurity in Maryland and Marcellus Shale in Pennsylvania shape their respective economic stories?
Basu: The most successful regions of the nation typically can point to a few sectors of the economy in which they are leaders. Maryland, for instance, is a leader in medical research, defense technologies, cybersecurity, government contracting, biotechnology and a handful of other sectors. The growing federal presence in cybersecurity and homeland security via BRAC simply bolsters Maryland’s already strong position, creating jobs, innovation and income in the process.
Pennsylvania, among other things, has been known since the nation’s early history as rich in natural resources, including agricultural products and coal. The latest gold rush relates to Marcellus Shale and the search for natural gas, which stands to impact the states economy for several decades to come.
Horn: Where is the work now? Also, what happened to all of the federal money that was supposed to stimulate the industry?
Basu: Much of the construction work today is in publicly-financed activities, including in the highway and street and conservation and development categories. Much of this work relates to the federal stimulus package passed in February 2009. However, much of that work is now ending and privately-financed activities do not yet appear set to recovery. An exception to this is the power industry, which appears increasingly well positioned to create new opportunities for contractors.
Horn: What continued economic precautions should the industry be taking in the current environment? In particular, what two pieces of advice would you give to the average supplier, subcontractor, or general contractor struggling to survive and, in the current environment, may not believe pundits who contend that the recession is over?
Basu: Industry leaders must continue to work relentlessly to contain costs. In most construction segments, there is still too much productive capacity, which means that there are too many bidders and that profit margins remain small. Therefore, those firms that fail to adequately contain costs will not be in a position to secure bids, which will eventually lead to exhausted backlog and potential failure. The fact that construction materials prices have been rising recently does not help in this regard. This means that construction firms must be particularly sensitive with respect to containing labor costs.
There are also plenty of opportunities to be proactive. One way is to take the time to understand public policy, as government seeks to alter the way in which construction services are delivered and the content of those services. This is particularly true with respect to green processes, technologies and materials – which government continues to support. Those contractors with demonstrated expertise in green construction stand to gain disproportionately in terms of market share going forward. This also stands for the general proposition that all construction firms should view themselves as technology companies, which implies a continuous appreciation for what it means to be at the cutting edge.
Horn: Why should the industry be optimistic about 2011 and beyond?
Basu: The industry should be optimistic because the market equilibrium is approaching. Many construction firms will falter in 2011, which means that survivors will be better able to secure market share and gain pricing power over time. Moreover, broader U.S. economic momentum has picked up substantially in recent months.