California Construction Forecast 2008

By Loren Faulkner | September 28, 2010

It may not become the "perfect storm" but three "bad weather fronts" are headed toward California's construction industry in 2008 and beyond. Bad enough to go into storm protection mode:

#1. The Housing Slump

The sub-prime mortgage fiasco has hit California hard. The trickle-down effect of foreclosed mortgages, slowdown of new housing construction and lost construction jobs has yet to peak. Kenneth Simonson, Association of General Contractors (AGC) chief economist, told California Builder & Engineer recently:

"Falling property values and sluggish sales-tax receipts will hold down public construction budgets. The huge overhang of unsold homes will require sellers to lower prices substantially. If they are willing to do so, home sales may pick up by midyear. But it will take several additional months before homebuilding resumes." However, the time lag could be much longer, according to other analysts.

Michael Bobeczko, of Sukut Construction, one California's largest grading contractors, said, "The downturn in the residential market is going to affect the construction industry hard in 2008, especially the dirt moving contractors. I think it is going to stay down for another year or two. A lot of people have a lot of equipment parked right now. It's tough to finance engine re-builds or buy new equipment if your equipment is parked; that's probably the biggest problem facing the industry right now."

#2. New CARB Regulations and Fuel Prices

The final version of California Air Resources Board off-road diesel regulations (CARB) has yet to be signed by Governor Schwarzenegger, but by 2010 fleets with over 5,000 horsepower must be compliant or face heavy fines. It is still unclear whether certain add-on devices for heavy equipment over 300 horsepower will be available, and/or viable.

"It's going to be tough," Bobeczko said. "Talk to anybody who has calculated the figures. As things exist right now, if you haven't started re-powering, or replacing equipment ahead of the game ... you are not going to get your return on investment. I think the construction industry has to put some real pressure on manufacturers to develop fuel efficient equipment — things that meet the pollution standards and run more efficiently."

Simonson added, "The (CARB) rules as proposed will create extreme and unnecessary hardships on contractors, driving up costs to the point that many projects are canceled or blocked because the required equipment doesn't exist. How quickly the rules go into effect and how drastic they turn out to be is still up in the air ..."

High priced fuel continues to be a big factor in bidding jobs.

"Fuel used to be about 10 percent of our costs," said Bobeczko. "Now, with diesel fuel above $2.50 per gallon, fuel is over 30 percent of our costs and a major consideration in bidding jobs. And no one can predict what the price will be three months from now." Kenneth Simonson added, "Elevated petroleum prices mean many construction materials costs will be higher in 2008."

#3. Big State Budget Deficit

California's Legislative Analysts office said recently: "In order to balance the 2008-09 budget, the state will have to adopt nearly $10 billion in solutions," an all-time record deficit. Plus, questions linger for 2008-09 whether some designated transportation funds will enter a lock-down mode, or be directed elsewhere. As reported by Transportation California the current budget allows:

  • Full funding of Proposition 42 at $1.48 billion plus $80 million in repayment of past Prop. 42 loans and another $100 million in tribal gaming money earmarked for transportation.
  • Appropriation of $4.2 billion to fund Proposition 1B projects in 2007–08.
  • (But) diversion of $1.259 billion from transit to the General Fund, including $800 million in so-called "spillover" money and another $400 million from PTA reserves.

Some Light

Simonson agrees with other analysts that some bright spots exist for California's construction industry in 2008: "Energy, power, medical, and university construction should be in good shape," he said. "In fact, K through 12 school construction is in good shape with Bond passage (Prop. 1D $10.4 billion) funds secured."

Outlook Hawaii

The University of Hawaii Economic Research Organization's 2008 forecast: "The construction job count is expected to peak in 2008 and decline only slightly in 2009 ..."

Transportation Sewer/Water Misc. Civil Total Hwy & Heavy Buildings Total
2006 4,326,630,245 2,934,585,878 2,298,719,768 6,625,350,013 28,537,032,236 35,162,382,249
2007 4,450,000,000 5,100,000,000 2,100,000,000 6,550,000,000 31,105,000,000 37,655,000,000
2008 4,325,000,000 3,700,000,000 2,100,000,000 6,425,000,000 30,500,000,000 36,925,000,000


CIRB's View of Heavy/Highway Construction 2008

The year-2007 heavy (nonbuilding) construction total was near $12.58 billion in starts and contract awards, down 6.7 percent from 2006, adjusted for inflation. The largest component of the heavy construction sector is roads and bridges, which totals an estimated $4.65 billion in 2007, down 27.6 percent from 2006. However, more than 85 percent of that decrease results from fully counting a $1.43-billion bridge contract in 2006 in San Francisco.

Contracts and starts for the balance of heavy construction categories (utilities, rail, sewage treatment, water systems, dams, river and harbor, power plants, airports, parks, sitework) total an estimated $7.93 billion in 2007, up 12.3 percent from 2006. The largest category in the balance of heavy construction is water and sewer works construction. That category totals $4.49 billion in 2007, up 31.1 percent from 2006, adjusted for inflation. In 2006, water and sewer works totaled $3.43 billion, down 10.8 percent from 2005.

Heavy construction is forecast to total $13.44 billion in 2008, up 6.8 percent from 2007 adjusted for inflation. That includes a 10.1-percent increase in roads and bridges and a 4.9-percent increase in the balance of heavy construction, which stands to gain somewhat in 2008 because of increased revenues from bond measures passed in 2006 and from the recent passage of a major water bill by Congress.

Construction Employment

In 2007, California construction employment averaged an estimated 924,200, down 15,200 (1.6 percent) from 2006 and down 23,900 (2.5 percent ) from the 948,100-employment peak posted in the month of February 2006 (seasonally adjusted). In 2008, construction employment is forecast at 901,300, down 22,900 (2.5 percent) from 2007.

Final Tally Including Residential

Total California construction volume, private and public, was some $74.43 billion in 2007, down 14.5 percent or $12.64 billion from 2006's $87.07 billion. The downturn in residential building accounts for 80.5 percent of the 2007 decline in total construction volume. The bulk of the remaining decline in 2007 is in the public works sector. The private nonresidential building sector also shows a slight decline in 2007.

In 2008, the total volume of construction in California is forecast to decline by another 0.6 percent overall to $73.97 billion. This forecast assumes that the bulk of the housing decline has taken place though an additional small decline in 2008 is forecast. The forecast also anticipates increases in public works construction but a slowdown in private nonresidential building construction.

Residential Construction Snapshot

At $29.62 billion in 2007, residential building, including new buildings and alterations and additions, is down 25.6 percent ($10.18 billion) from 2006 and is forecast at $28.91 billion in 2008, down 2.4 percent from 2007. The 2007 and 2008 totals are the lowest since 1997's $28.09 billion.

New housing units total an estimated 118,700 in 2007, down 27.7 percent (45,580 units) from 2006. The 2007 decline follows a 21.4-percent decline (44,692 units) in 2006. While the entire decline was in single-family housing in 2006, 2007 saw double-digit declines in both single- and multifamily sectors. New single-family units are estimated at 71,200 in 2007, down 34.1 percent from 2006 and the lowest level since 1995's 68,689. Multifamily housing totals 47,500 new units in 2007, down 15.6 percent from 2006's 56,259. All regions of the state had double-digit declines in 2007.

California housing production is projected at 115,500 units in 2008, down 2.7 percent from 2007. Single-family units are forecast at 69,500 in 2008, down 2.4 percent from 2007. Multifamily units are forecast at 46,900 in 2008, down 3.2 percent from 2007. (Source: CIRB)