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:
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."
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."
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.
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."
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 ..."
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