Taking costs out of a business can be deceptively easy to do — at least initially. Cutting low-hanging fruit such as providing coffee in break rooms, consulting services, laying off temporary employees or removing a layer of management can result in considerable savings. However, these savings are often not sustainable. Slowly but surely, decisions will be made by front line employees and managers alike that add costs back into the business. Within short order, many companies find themselves back in the exact same place they were before the costs were cut; only now employee morale has suffered and there is a general resistance or apathy to cost cutting throughout the organization.
Two central cost trends remained consistent in January compared to one year ago. Low energy prices and a sluggish global economy continue to push down the prices of many building products and materials while, at the same time, scarcity of skilled workers in key trades pushes labor costs higher. The net effect of these opposing forces has been that finished construction costs are increasing at a pace that is slightly higher than overall producer inflation and slightly lower than in 2015.
Evidence of the former trend came in the February 17 report on January’s inflation from the Bureau of Labor Statistics (BLS). The producer price index (PPI) for inputs to construction fell 0.4 percent for the month and 2.7 percent from January 2015. The PPI for all goods used in construction fell 0.6 percent and 2.7 percent. A sub-index for energy declined 9.0 percent from December and 21 percent year-over-year. The BLS report also covered inflation for final demand, which includes goods, services and five types of nonresidential buildings that BLS says make up 34 percent of total construction. The PPI for final demand construction decreased 0.3 percent for January and increased 1.2 percent for the full year. That compares to a year-over-year hike of 1.8 percent from January 2014 to 2015.
Significant 12-month price changes in the costs of materials important to construction include a 35 percent drop in the price of diesel fuel, a 19 percent decline in steel mill product and copper and brass mill shape prices, an 18 percent decrease in aluminum mill shapes, and a 12 percent drop in lumber and plywood prices. Among the few costlier materials, cement rose 5.6 percent and flat glass 5.9 percent over the previous January.
Year-to-year changes in labor costs varied significantly by trade and were reflective of the relative supply of skilled craft workers. Costs declined two percent for plumbing contractors, but increased 1.2 percent for roofing contractors, 3.7 percent for concrete contractors and 5.4 percent for electrical contractors. According to the chief economist for the Associated General Contractors (AGC), Kenneth Simonson, the large increases in concrete and electrical subcontractors’ rates are consistent with the September 2015 AGC Workforce Survey, in which 63 percent of respondents said their firms were having trouble filling positions for concrete workers and 60 percent for electricians.
Procurement professionals seem to have factored the trends in construction costs into their plans for 2016. Consultancy IHS and the Procurement Executives Group (PEG) reported on February 24 that the current IHS PEG Engineering and Construction Cost Index fell to 41.3 at year’s end, down from 43.3 in November. A reading lower than 50 represents a downward pricing trend. The headline index has been below the neutral mark for 14 months. The current materials/equipment price index fell from 39.6 in January to 36.9 in February, which is the lowest mark in the fur-year-old survey’s existence.
Lower gross domestic product and a shaky global economy have not yet put a damper on employment. February’s job growth was 242,000, stronger than January and slightly better than expected. Within the Bureau of Labor Statistics’ March 4 report were several bits of encouraging data for the economic outlook. Unemployment held steady at 4.9 percent, an indication that more job seekers were entering the market. Along those same lines, the workforce participation rate climbed to 62.9 percent and the broadest measure of unemployment – the U6 rate – fell to 9.7%. Private payrolls swelled by 245,000 jobs and private payroll wages grew more than 2.5 percent year-over-year. Within the employment sectors, construction employment grew at the highest rate, more than doubling the rate of total non-farm job growth.
Construction data and sentiment appear to be moving in diverging directions after the first two months of 2016. Government data released on March 1 estimated that total construction spending in January 2016 was $1,140.8 billion, and increase of 1.5 percent compared to the upwardly revised $1,123.5 billion total in December. January’s volume was ten percent higher than the previous January. The report, which also showed permits for construction trending higher than starts, supports the forecast from most construction economists of growth between five and ten percent for the full year. Public construction spending grew 4.5 percent over December, a continuation of a much stronger upward trend, while private investment was up modestly. The data portrays a market that may reflect the sentiment of mid-2015, however, as corporate profits, business investment forecasts and other economic metrics are less robust than construction.
The government’s report on the housing market two weeks earlier showed continued strength, with construction of multi-family remaining in an upward trend. But, in the context of data on new and existing home sales and builders’ sentiment, it’s also clear that the uncertainty about the economy is sapping momentum.
On February 17, the Census Bureau reported that total housing starts rose 1.8 percent from January 2015 to January 2016 despite a 3.8 percent decline from December to January and a 2.8 percent drop the month before. Single-family starts increased 3.5 percent but multi-family starts fell 3.8 percent. Building permits, however, rose 14 percent year-over-year, with single-family permits up 9.6 percent and multi-family permits increasing by18 percent. There were permits for more than 90,000 more multifamily units in January than starts, suggesting more projects may begin soon.
Also on February 17, the American Institute of Architects reported that the January Architectural Billings Index (ABI) slipped to 49.6, down from 51.3 in December. While barely negative – a reading below 50 merely indicates that more architects reported a decline in billings than an increase – the January decline is the third dip below 50 in the past six surveys. New project inquiries also fell significantly in January, although remaining positive at 50.3, a level that was ten points below the December reading.
To the extent that inquiries indicate the future billings, January’s survey raises concerns because the 12-month trend in inquiries has turned slightly downward. If the declining trend continues, it will lead to declining billings and eventually, declining construction activity. The modest downward dip in inquiries trending may also just reflect the growing slowdown in planning of multi-family and lodging development.
The hotel construction market continues to thrive but investor concern about overbuilding appears to be rising. According to data tracked by industry resource STR Inc., hotel occupancy rates hit an all-time high of 66 percent in 2015 and revenues and room rates climbed near record levels. Construction of hotels soared 31 percent in 2015 but slowed by 1.2 percent in the second half of the year. Hotel stocks, meanwhile, have been hit by investor selling. While strong performance is an incentive to develop more rooms, lenders are showing a diminished appetite for hotel deals, meaning developers proceeding with projects will see higher lending costs. STR nonetheless expects growth in room inventory in line with the industry’s 1.9 percent rate in both 2016 and 2017.
Concern about multi-family development is also rising, although several of the major financing conduits for apartment projects have added to their allocations for multi-family deals again in 2016. Analyses of the housing markets defy conventional or historical trends. For example, while the multi-family market has been seen as booming since the beginning of the recovery in 2010, the volume of actual starts only rose above the 50-year average of 359,000 units in 2015. Moreover, the peak of two earlier boom cycles – in 1985 and 1972 – reached 576,000 units and 902,000 units respectively. Construction of multi-family units appears to be peaking in early 2016 at somewhere above 425,000 units, but a slowdown below the average is more likely for the full year.
Even more inexplicable is the protracted sluggishness in the single-family market. Starts in this category of housing peaked in 1972, 1978 and again in 2005, when 2.068 million units were started. In the 48 years prior to 2005, the average number of single-family units started was above 1,546 units. Construction dropped off dramatically from 2006 to 2009, when only 554,000 single-family houses were started. The overextension of mortgages during the housing bubble created an excess inventory that had to be sold prior to the resurgence of new construction. By all measures that overhanging inventory has been absorbed for two years or more, yet new construction only recovered to the one million-unit level in 2014 and the average number of starts in the intervening eight years has been 809,400.
There have been a number of explanations for the housing market performance since the mortgage crisis: tight credit, enormous foreclosure inventory, low household formation, shifting housing preferences, changing social demands of the Millennial generation and the urbanization of the retiring Baby Boomers. All of these trends could have had minor and/or short-term impacts on housing activity, but the magnitude of the decline goes well beyond such influences. Even if any or all of these trends could have depressed demand for single-family homes, the reality is that a proportional boom in apartments has not occurred. New construction of single-family homes has slightly greater than half the 50-year average over the past eight years, but new construction of apartments remained below the 50-year average for seven of those eight years.
One possible explanation for the protracted decline in starts is that the overhang of excess and troubled inventory was much greater than estimated. Still, the number of units built from 2008-2015 was almost 5.9 million units than the average for half a century prior. The more likely explanation for the state of housing construction is that the severity of the Great Recession allowed for an extended deferral of household formation for an unusual number of Americans. That suggests pent-up demand that should drive another housing boom within a few years, regardless of the economic conditions.
Dodd Frank regulatory burdens have limited mortgage lending well past the time that lenders were anxious to renew higher volumes. Subdivision development also suffered from the effects of the recession and the heightened oversight that doing land acquisition and development loans would bring. There is no measure of the level to which these issues have suppressed construction but the data suggests that demand cannot be held back much longer.
Demand for commercial construction, on the other hand, has been less constrained by factors other than economic health. After suffering losses in value in excess of 50 percent following the financial crisis, commercial property values have recovered completely, reaching record levels per square foot in many markets and categories. As would be expected, commercial real estate saw steady gains in occupancy as employment gained strength. Stronger performance and property values allowed the large number of commercial loans written during the frothy days of 2005 to 2007 to refinance as they matured five and ten years after origination.
The closer correlation to the overall economy means that commercial development is getting long in the tooth as the economy is in 2016. In addition to the dynamics of the apartment and hospitality segments, growth in retail and industrial development is also slowing. The office market is seeing above-average levels of construction in the first quarter of 2016, with demand still outstripping supply in a number of U.S. cities – including Tampa, Raleigh, Atlanta, Miami, San Diego, Phoenix, Washington DC and Pittsburgh. Development in some of the hot spots in the U.S. – Houston, Dallas, San Francisco, Seattle and San Jose for example – remains very active, but evidence is growing that the party is winding down in those cities.
Integra Realty Resources (IRR) looked at the commercial real estate property types in its 2016 Viewpoint report. One of its evaluations looks at the major U.S. markets and judges where those cities are in the lifecycle of recession to recovery to expansion and oversupply. Its findings concluded:
- Nearly half the office markets are still in expansion mode, with 41 percent more than two years away from supply/demand balance.
- All multi-family markets except one (Jackson MI) were in expansion, with 83 percent of suburban and 70 percent of urban markets in balance.
- Retail markets were still in an expansion phase, with 63 percent of the cities recovering or expanding. The central and western regions of the country had more cities in recovery than other regions.
- Expansion was still underway in 46 of 61 industrial markets, with no markets in the oversupply phase.
Like multi-family, most hospitality markets were expanding, with 75 percent in that phase. IRR forecasts that hospitality will begin to decline in 2017.
The consensus forecast from these commercial real estate observers, along with the economists for Dodge Data & Analytics and Construction Market Data, is that commercial construction should see another five-to-seven percent more growth in 2016. Even if a softer economy dampens demand earlier than expected, investors will continue to push supply higher. Yield from other investment vehicles simply won’t offer sufficient risk-adjusted returns and pressure to place cash in real estate will encourage development, even if demand for the space isn’t as robust.
Public construction has begun to emerge from an extended funk. Spending on public construction rose again in 2015, following an uptick in 2014. Long-term demographic trends are still unsupportive of revenues, at least until the next generation makes its move into home ownership, but the improved economy and labor market have given a boost to sales and income taxes that support state and local construction. And at the federal level, the long-overdue highway bill – known as FAST Act – will provide a reliable funding stream for repairs to highways and bridges through 2020.
In addition to the surface transportation funding, federal construction spending will also be driven by the extended period of deferred spending on government facilities that followed the expiration of the American Recovery and Reinvestment Act of 2009. Spending by the General Services Administration has increased during the past two years and more projects are in the pipeline to address obsolescence and space needs at federal offices and courthouses.
Beyond 2016, forecasts of greater public construction are built upon the assumption of continued economic growth of more than two percent, an assumption that looks less certain than it did six months ago. Political ideology battles will likely have a bigger impact on public construction than economic expansion, however. The growth of government debt and pension obligations have choked out room for capital spending without increasing revenues, which is at the heart of most ideological debates between the two major parties. There is inevitability to the ravages of time on the built environment, so maintenance and repairs cannot be deferred indefinitely.
One glimmer of hope on the revenue piece of the equation is the public response to referendum. The sample size is very limited but voters in a number of states have approved borrowing or revenue increases to support needed construction. In California, where referendum is the rule for major public bond programs, voters have said yes to as many as 80 percent of the projects on the ballot in recent years. That suggests that while Americans may be split on the concept of higher taxes, fees or debt, they are generally agreeable to such measures in practice in their own backyards.
Financial conditions for contractors continued to improve in 2015, making the year another healthy and profitable one for the surety industry; however, some significant individual losses, coupled with significant changes among the insurers is making the outlook for 2016 more dynamic than in recent years. Even with public construction making a comeback from almost a decade of under investment, buyers of surety bonds will be in the driver’s seat. That’s good news for contractors looking to add capacity or improve conditions but it’s worth noting that the construction industry has rarely benefited from a soft surety market in the long run.
Based on premiums and losses recorded through September 30, 2015, the total loss ratio for all surety companies is forecast to be around 17.5 percent for the full year. That’s the seventh year in the past ten that the industry’s loss ratio was below 20 percent. The benchmark for profitability is 25 percent so sureties should have prospered again in 2015.
“In January my partners and I jump on a plane or hop in a car and visit every one of the insurers we represent. We go see the decision-makers, the policy-makers, even though they may have an office in Pittsburgh,” notes Brian Jeffe, managing partner of surety bonds for agent Seubert Inc. “For the third year in a row the surety industry did well in 2015. [Surety] mirrors the construction industry. 2014 was better than 2015 and 2016 should be better than 2015. Losses are still well below 25 percent.”
Much of the credit for the strong loss ratio performance goes to simple market improvements over the past five years. As volume has returned, contractors were able to land profitable work that enabled them to work through any weak projects with fewer defaults. Surety underwriters obviously deserve a share of the credit. Proactive during the wrenching downturn in 2009 and 2010, sureties avoided repeating many of the mistakes that plagued the industry during the 2002-2004 recovery. It also helped the insurance business in general that the years since the Great Recession have seen far fewer major disasters like those that occurred between 2001 and 2005.
The need to recover from losses like 9/11 and Hurricane Katrina pushed sales ahead of prudence. That was reflected in high premium growth, which spilled over into surety premiums and surety underwriting standards. By comparison, 2015 premiums were roughly $4.5 billion, down almost 20 percent from the heyday, and up about two percent from 2014. That means there is still plenty of excess capacity and room for growing premiums. Conditions in the general property and casualty insurance market are even softer, with even more appetite for premiums. That has made for a buyer’s market.
“I’ve seen a couple of deals come through that surprised me in terms of rate and capacity, especially capacity,” observes Jeff Ream, executive vice president for Willis of Pennsylvania. “The property and casualty market is relatively soft.”
Still, few surety agents expect to see pressure for revenue impact underwriting. More to the point, the expected conditions for contractors should allow for growth even with the same underwriting standards.
“No one panicking to where they feel like they have to write everything,” says Jeffe, pointing out that being in Pittsburgh is an attraction at the moment. “Sureties are coming to us, wanting to take advantage of a good construction market. They like Pittsburgh because sureties have seen very few big losses here over the years.”
Although the industry is profitable overall and the outlook for publicly-bid work is positive, problems with several major insurers and consolidation among top insurers have caused turmoil among the sureties. There appears to be a yin and yang for every issue facing the industry but in general, surety bonding will be less predictable in 2016.
Among the factors impacting surety bonding is the continued fallout from a number of very large losses experienced in 2014 and 2015 from contracts awarded in 2010 and 2011. These losses caused the departure of XL Insurance from the surety market, taking with it $1 billion in capacity. Another of the industry’s bigger players, Zurich North America, experienced large write downs in surety and losses in it Subguard subcontractor default insurance (SDI) product that have changed its approach to the marketplace. In fact, the competitive dynamics of the insurance companies are having a bigger impact on the surety market than the usual concerns about construction volume and contractor finances.
In the case of the SDI market, increased competition in recent years pushed the threshold lower for the size of contractors for which the SDI product made sense. SDI is purchased by the general contractor in lieu of having the project’s subcontractors bonded individually. In the event of a subcontractor default, the general contractor files a claim with the SDI insurer, which then subrogates the claim to the subcontractor’s insurance. The advantage of default insurance over a bond is that the contractor has access to the cash to complete the work without the delays of defending the bond claim.
SDI was originally aimed at companies doing $750 million or more, but SDI market competition created opportunities for pricing that worked for companies with annual volumes of $200 million to $300 million. SDI competition broadened the base of contractors who get feasibly get coverage and increased the opportunity for default. Moreover, the kinds of prequalification that general contractors applied to subs were different from the financial prequalification that an insurer would do. Contractors focus on performance and experience; sureties focus on balance sheet and financial benchmarks that would produce different red flags. As a result, claims rose.
As market leader, Zurich was hardest hit and has taken steps back to revise the product by changing the coverage, capping the limit on any loss. They are re-launching Subguard and going through a transition in the market.
Subcontractor default insurance is still attractive to general contractors, who can also profit by pocketing reserves for claim deductibles if they manage risk well. Jim Bly, managing director for Alliant Construction Services Group, says that Zurich’s problems haven’t diminished the demand for SDI.
“The good news is that there’s a new SDI coming into the market through a [managing general underwriter] from California called Cove and Lloyd’s is going to be the carrier,” he explains. “They are coming into the market to fill the void or some of the void for business that Zurich couldn’t renew or had problems with.”
As the market leader, Zurich’s problems were having a significant ripple effect throughout the SDI market. Initially Zurich’s two other competitors, XL and Arch, were overwhelmed with requests for quotes from agents and effectively put a moratorium on new SDI business. That overreaction has settled down since then but Zurich’s problems clearly created the opportunity for another carrier.
Because of the emphasis on prequalifying subcontractors, insuring against subcontractor default isn’t going to decline. Bly says Alliant has a proprietary financial bench marking service, called Contractor Credit Model (C2M) that uses the analytical tools that sureties use to qualify subs and risk rates them for the contractors, assigning capacity limits for single projects and total capacity.
“We’re getting a lot of interest in that. Sureties are the best at prequalifying subs in the market. That’s what they do; it’s all they do,” says Bly. “People are hungry for that. There are other services in the market that are emerging because all the underwriting with sub default has been pushed out to the general contractor or CM and they are not really equipped for it.”
In addition to XL’s exit from the surety market, there are several other competitive situations that are creating a frothier surety environment. The January 2016 merger of Chubb Corporation and ACE Ltd. created the fourth largest surety in the market, with $700 million in business written globally. Industry observers expect the merger to make Chubb more growth-oriented than in past, as evidenced by its increase in participation with one client to $5 billion, which was only the second instance of a single insurer at that volume.
“They’re going to get a mandate to grow and Chubb had a tendency to keep its powder really dry. That will be worth watching,” notes Bly.
The loss of XL’s capacity in the market will also likely be negligible because of inflows of new capital into the surety insurance sector. Unsatisfactory investment returns and poor performance in other markets is driving new money into surety in the hopes of boosting return on equity.
Global giant Allianz is entering the U.S. surety market through its Euler Hermes surety business, bringing $500 million in capacity per account. Tokyo Marine purchased HCC Surety Group to add to its U.S. surety business, which it serves with Philadelphia Insurance Group. The move makes the combined companies the equivalent of the sixth largest surety. Nationwide, which opened surety lines in 2014, is expecting to aggressively expand its business and offers $200 million in single-project capacity and $400 million aggregate capacity. Commercial surety companies have grown construction surety profitably and are expected to continue expanding capacity. Names like ARGO, Berkeley and One Beacon are each capable of adding $150 million in capacity.
Experienced surety professionals see the changes in competitive landscape as potential precursors to increased problems. Even without the new capital, utilization of surety capacity was inconsistent and less than potential. The addition of insurers that will immediately be among the ten largest sureties is likely to have some liberalizing of underwriting standards so that new capacity can be utilized. History has shown that such market dynamics can influence underwriting flexibility about pay on demand capacity, security and indemnification in the pursuit of market share.
“Stay tuned. Fasten your seat belt,” jokes Bly. “It’s still relatively soft but if anything, the needle is starting to move towards potentially hardening the market if the losses continue.”
At the Pittsburgh regional level, the biggest negative factor for surety bonding is the continued high level of competitive bidding. Prior to mid-2015 the bridge and highway market was mired in below average volumes for three or four years. School districts have been faced with slumping demographic support, political pressure against raising taxes and two separate moratoriums on the PlanCon process by two different governors. All of these factors have limited school construction volume. For more than a decade, both the city of Pittsburgh and Allegheny County have drastically under investedin capital spending due to fiscal crises. Some of the frozen conditions began to thaw in 2015 and the taps should open wider in 2016 for public construction, but the pressure to get work hasn’t abated yet.
“It’s still very competitive. Contractors just don’t have backlog and backlog is life,” Jeffe points out. “They don’t have backlog like they did coming into 2008 and 2009, so bidding is still very tight to build backlog.”
There are significant increases in spending on highways and bridges planned for 2016 and beyond. Some $700 million more will be spent in PennDOT District 11 for example.
Brian Jeffe has seen plenty of early signs that 2016 will be a year of further improvement and says Seubert is counseling clients to avoid the trap of filling up on the first course of the meal.
Over the past year, several studies into the generation of young adults in the workforce have found that the so-called Millennials may not be so different from their generational predecessors. The children of the Baby Boomers, these young people were born between 1980 and 2000 and they number even more than the Boomers, which had been the largest demographic cohort born in America up to that point.
With more buying power and political clout, Millennials were viewed with great interest by businesses that wanted to attract their consumption and employ them. In the mid-2000s, as the first of this generation reached adulthood, there appeared to be striking differences between the expectations of the Millennials and those of the previous generations. Kids who grew up in the last 30 years knew only the digital world. The Internet was their encyclopedia and their entertainment medium. Sustainable living was a given. And they seemed to think that they could change the world, even at such a young age.
While there will inevitably be differences between the assumptions that people raised thirty years apart will make about the world, much of what was held up as different about the Millennial generation isn’t all that different, or even all that true.
“One thing that struck me was how similar the values were across the generations,” says Sabine Hoover, content manager for FMI Consulting and the co-author of Millennials in Construction: Learning to Engage a New Workforce. “Think of when you were young. You’re energetic. You want to change the world. That changes as we age. Because the Millennials are so large we’re just more aware of those values in them.”
FMI’s study was one of several that have shown that many of the preconceptions that were popularly held about 18 to 35 year olds may be misconceptions. FMI surveyed 369 people – including 201 Millennials – in the construction industry in the spring of 2015 to find out about their level of workplace engagement. What they found was that young workers are seeking the same kinds of engagement and are willing to make the same commitments as Generation X or the Baby Boomers with whom they work. If you’re surprised by that result, you’re not alone.
“I was very surprised. The first time I saw the results I went back to the analyst and made him run it again,” laughs Hoover. “It was very encouraging. I started looking at other studies for similar results and found ours wasn’t the only one.”
A year earlier, IBM Institute for Business Value had conducted a study of those born between 1980 and 1993 in the workplace. Their findings were similar to FMI’s and, in fact, they labeled the results “myths, exaggerations and uncomfortable truths.” The five myths IBM revealed were:
- Millennials career goals and expectations are different than those of other generations
- Millennials want constant acclaim and think everyone should get a trophy
- Millennials are digital addicts who want to do everything online.
- Millennials can’t make a decision without asking everyone to weigh in.
- Millennials are more likely to jump ship if their workplace doesn’t meet expectations.
The IBM study found that Millennials goals were within one to three points of the previous generations. They valued transparency and ethics over recognition from a boss (35 percent to 29 percent). Millennials listed their top three learning preferences and all were physical rather than digital (conferences, classroom training and working alongside an experienced colleague). While 56 percent of Millennials said they would seek input before deciding, 49 percent of Boomers said the same thing and 64 percent of Gen X-ers sought input. And their top reason for leaving their job was the same as Baby Boomers, with 42 percent of each saying they would leave for more money and a more creative workplace. More than seeming like a divergent new group of workers, the younger generation sounded a lot like the Baby Boomers.
“Most of the Millennials have Boomers for parents, so it’s not surprising that they would have the same values,” notes Hoover.
Also in 2014, global real estate service firm CBRE how the generational expectations were changing the workplace. In response to what was obviously a significant workplace design trend – the shift to open, collaborative plans – CBRE sought to see how much the preferences of the Millennials was driving this new way of working. Like IBM and FMI, CBRE discovered that younger workers wanted to work like their older colleagues.
CBRE found that Millennials were looking most for space to think and create, ahead of space to meet and collaborate. Millennial respondents were the most likely to seek more time to collaborate but only by a 51 to 49 margin compared to Baby Boomers. But Boomers were half as interested in more formal meetings (27 to 54 percent) and much more interested in connecting via social media than Millennials. Younger workers preferred to do more work by email than Boomers or Gen X-ers but only one in three responded that way.
Understanding how the younger generation thinks about work has taken on greater urgency. For one thing, 2015 marked the point in time when more Millennials were alive than Baby Boomers. In 2015, workers under the age of 35 made up 34 percent of the workforce; that same generation of workers will comprise more than half the workers in 2025. Moreover, attracting and retaining talent has become a higher priority issue for businesses. This is especially true for construction industry businesses, which face a bigger potential shortage in workers. What FMI concluded in their study is that Millennials offer a great opportunity to the construction industry and that engagement was the key.
Construction has a smaller share of younger workers than other industries, yet its challenges appear to be the kinds that the 18 to 35 year olds want to solve. There are some key attributes about construction that are especially attractive to Millennials: the uniqueness of one project from another, the need for creative solutions and collaboration, and the key role of communication. Millennials bring new qualities to the construction workforce, which would be of great benefit to the industry. They look to technology for solutions and expect that problems can be solved. FMI also found that the attitudes and preferences of Millennials tune well to construction’s strengths. What the consultant found missing was a consistently engaging atmosphere.
The key findings of the FMI survey were that Millennials are motivated as much by financial and career security as previous generations. That’s not surprising given that the financial crisis may have defined the start of their careers. Millennials also expressed a willingness to work beyond their job requirements and an interest in being challenged at work that exceeded the responses of other generations. Most striking was the fact that 92 percent of the Millennial generation responded that they expected to stay five years or more working at a place where management demonstrated a sincere interest in their well-being.
FMI’s key findings were:
- Having a defined and well-communicated vision is critical to engaging Millennials long term.
- Millennials are eager to be challenged and ready to go above and beyond to make their companies succeed.
- Having clear career advancement opportunities in place is the key to engaging people long term across all generations.
- Engagement starts at the top.
- For Millennials, money counts.
- Millennials in construction want to push the envelope and drive innovation.
The problem, as FMI sees it, is that construction is an industry where these kinds of engagement conversations have regularly happened. Most construction companies – be they contractors, architects or supply chain – aren’t large corporations; often the companies are closely-held small businesses. Construction is a results-oriented, project-focused business. What it will take to attract and hold onto more of the younger generation is a change in the rules of engagement.
Millennials ranked a company’s commitment to social responsibility low in priority but put personal development third, behind competitive pay and work/life balance. Business owners will need to have more conversations about how they see a young employee’s career mapping out and how the employee can develop. Millennials won’t be as motivated by the thought of working hard to become a senior project manager as they will by the opportunity to contribute to the company’s success now. That means involving them in project meetings that they might not need to attend and listening if they have input. It means checking in with them and giving them feedback in a direct but positive way.
“The big takeaway for me was how important culture was,” says Hoover. “Regardless of the industry, if you have a strong culture – a leader who can inspire people, who cares – it’s impossible to underestimate the importance of that culture to young workers.”
By: Jeff Burd
As the seventh year of economic expansion begins in the U.S., expectations for gross domestic product (GDP) in 2016 are in line with a mature economic cycle. In a growth environment of just under three percent, however, economists forecast continued strength in hiring and for construction spending to increase at a rate that is three times the rate of GDP growth in 2016.
Observers whose forecasts reflect a weak outlook for the global economy are predicting GDP growth of 2.4 or 2.5 percent for the U.S. economy in 2016. Most economists see the strong employment market, more rapidly rising personal incomes and low costs of credit – even with the first interest rate increases – as factors that will encourage consumer and business spending in 2016. That school of thinking is driving the majority of forecasts to look for GDP growth of 2.7 or 2.8 percent in the U.S. And most forecasters continue to be fooled by the strength of job creation as the recovery grows long in tooth.
New hiring in October and November exceeded the expectations of virtually all economists, especially on the heels of slowing job creation in August and September. Bureau of Labor Statistics (BLS) reported on December 4 that hiring increased in November by 211,000 jobs. That report came on the heels of 298,000 new jobs in October. In addition to the higher-than-expected November number, BLS revised both October and September – which was weaker – upwards by 35,000 jobs. The improved hiring pace lifted the monthly average to 210,000 new jobs per month for the full year of 2015, a pace that is again higher than forecasted.
The strength of the job market helps to explain why construction spending is significantly higher. At a November 19 seminar held at GreenBuild in Washington, DC, economists for the Associated General Contractors (AGC) and American Institute of Architects (AIA) gave their forecasts for 2016 and 2017.
Kenneth Simonson, chief economist for the AGC, noted that construction in 2015 was significantly stronger than expected. Through that date, construction spending was up 14.1 percent year-over-year, with residential construction still very strong well into a period of recovery. Although the multi-family sector was up 27 percent and single-family was up 13 percent year-over-year, Simonson saw that trend peaking in 2015 with both segments of residential construction slowing to between five and ten percent in 2016. Simonson’s forecast for 2016-2017 is for six to ten percent increases in nonresidential construction. He sees office construction as the strongest building type, with growth in construction of educational and healthcare facilities at or above five percent. Notable among the weaker sectors will be hotels and manufacturing, which Simonson predicts could decline by as much as ten percent.
AIA’s Kermit Baker estimated that total nonresidential construction would end the year 2015 up 8.9 percent and forecasts that nonresidential construction would see similar growth, rising 8.2 percent, in 2016. Baker, the AIA’s chief economist and senior research fellow at the Joint Center for Housing Studies of Harvard University, explained that the prevailing trend in the AIA’s Architectural Billing Index (ABI) was positive. The ABI has been above 50 – meaning more firms experienced increased billing – most of 2015, including three of the past four months. Moreover, Baker noted that architectural backlogs have climbed from 4.2 months in 2011 to 5.6 months in 2015. Both of these signals indicate that construction activity should be strong through at least summer of 2016.
One business cohort that appears to agree with the predictions of Simonson and Baker is the so-called Middle Market. The National Center for the Middle Market (NCMM) is a research effort in collaboration with Ohio State University and GE Capital that surveys the behavior and attitude of businesses that have between $10 million and $1 billion in annual revenues. These companies comprise only three percent of the total number of businesses but employ one-third of all U.S. workers and comprise nearly one-third of U.S. GDP. As of the third quarter of 2015, the businesses in the Middle Market were experiencing steady growth at a faster pace than the U. S. overall but were feeling more cautious.
According to the NCMM’s Middle Market Indicator, growth of Middle Market companies has been 7.2 percent over the past 12 months, which has spurred employment growth of 4.1 percent. As these companies look forward, however, their forecasts are for growth to slow to 4.1 percent over the next year, with employment gains slowing to 3.2 percent. Only 49 percent expect revenues to rise in the coming year, compared to 64 percent who felt revenues would rise in fall of 2014. Slightly more than one in three expects to add jobs in the next 12 months, although those planning to invest capital were still at 61 percent, down only two points from last year.
It appears that most of caution comes from the slow overseas markets. When surveyed, the Middle Market companies showed 81 percent confidence in their local markets and 72 percent confidence in the U.S. market, but only 49 percent expressed confidence in the global markets.
Conditions in the Eurozone have strengthened, with third quarter real GDP growth at 1.7 percent. That’s the best year-over-year growth since 2011; however, the real GDP growth rate for European Union nations is still weak by historical standards and is well below the pre-recession peak in 2008. With fewer headwinds and internal crises, the Eurozone is not the drag on the global economy it represented just 12 months ago. The main threat to the U.S. economy that Europe poses is the distinct possibility that the European Central Bank will ease monetary policy further to boost growth above anemic rates, a move that will strengthen the dollar and make exporting tougher for U.S. manufacturers.
For 2016, the drag on the global economy will come from the so-called BRIC countries – Brazil, Russia, India and China – that fueled the global boom in the mid-2000s.
Brazil’s political paralysis and poor infrastructure are outweighing its economic potential. Low oil prices are hurting Brazil and making life even more difficult for Russia, which is also struggling with Western sanctions. China’s slowing growth rate looks to decline further in 2016 and the threat of major asset bubbles remains. Only India among the BRIC nations can boast continued strong economic growth, but its relative size and more limited trade ties mean India’s economy won’t offset the slowing Chinese growth.
Industrialization of previously underdeveloped economies has slowed, meaning that global economic growth is more likely to hover near the long-term historical average of three percent during the next few years.
The biggest negative impact on the U.S. from sluggish global economic growth continues to be on manufacturing. November’s ISM manufacturing report showed that activity fell below the breakeven point for the first time in several years. Manufacturing activity rose only 1.7 percent and the ISM survey dipped to 49.6. As in recent months, declining activity was due to continued inventory depletion and weak exporting. The latter is a result of both weaker global demand and the relative strength of the U.S. dollar.
U.S. manufacturing is also hurt by the slowdown in oil and gas exploration triggered by the 50 percent price decline in summer 2014. Lower energy costs are having a salutary effect on the consumer and on energy-dependent manufacturing, however, and the International Energy Agency (IEA) is forecasting that demand for energy will climb in 2016. The IEA predicts that markets should be more stable for energy pricing – not necessarily great news for producers. Its outlook for oil pricing is for $60/barrel conditions in the next couple years, with gradual price increases to the $80/barrel level in 2020. The IEA also makes a persuasive argument for prices to remain at $50/barrel into the 2020s.
Assuming that the five-year outlook for oil doesn’t shift dramatically – never a good assumption – the forecast should mean that the U.S. economy can rely on having cheaper energy but lower contributions to GDP growth from the energy sector.
For a change there was good news from Washington, where Congress and the President were able to come to an agreement on the budget and debt ceiling this past month that will allow defense and discretionary spending to rise modestly in 2016 and also push any fight over the debt ceiling past the election into 2017. With the budget deal in place, government spending is poised to rise at its strongest pace in seven years in 2016 and will likely boost real GDP growth by 0.3 percentage points.
Congress also passed the first comprehensive transportation bill since 2005. The Fixing America’s Surface Transportation (FAST) Act of 2015 was signed into law on December 4, providing $305 billion over the next five years. The final bill fell short of the $400 billion that administration officials felt would be needed to avoid falling behind traffic growth but the law provides states with assurance about the federal contribution towards infrastructure repairs.
Data on construction spending at the end of 2015 supports the optimism that economists like Ken Simonson and Kermit Baker expressed about 2016. The Census Bureau’s report on October construction spending showed total activity at a record $1.107 trillion, the fifth consecutive month above $1 trillion. Private spending topped $800 billion, an increase of 15.9 percent year-over-year, with the investment split evenly between residential and nonresidential construction.
The Census Bureau reported on December 16 that housing starts in November were at a seasonally adjusted annual rate of 1,173,000. That is 10.5 percent higher than October and 16.5 percent higher than November 2014. Building permits for November were at a seasonally adjusted annual rate of 1,289,000, an 11 percent increase over October and 19.5 percent more than November 2014.
U.S. economic activity should support high single-digit construction growth in 2016. Unlike the last growth cycle, credit has not been overextended as the expansion matured. There remain fewer financing obstacles, which may encourage more investment as owners see the beginning of a rate increase cycle as a good time to borrow. Moreover, investment interest in the U.S. is likely to increase further in 2016, as emerging market economies are perceived as too risky and mature economies are viewed as too sluggish.
By: Jeff Burd
The Finance Consultant will be a key contributor to the consulting team which serves mid-sized enterprises across a variety of industries including information technology, construction, real estate, health care, government contracting and emerging entrepreneurs. The Finance Consultant will advise and assist clients in both optimizing their finance function and accomplishing business objectives by assessing financial and business situations, developing and presenting strategies and plans, and monitoring changes in financial status and business performance.