Examining The Regional Construction Market

By Tom Hale | September 28, 2010

Economists across the country are forecasting a downturn in 2009 construction activity. The U.S. highway and bridge market is expected to flatten during '09, with the value of construction work put in place on highways and bridges projected at $80.2 billion — a slight increase over 2008's $79 billion, according to the American Road & Transportation Builders Association

In addition, it appears to be a challenging year for the commercial and industrial construction industry.

Associated Builders & Contractors says commercial building, such as retail and restaurants, will be off between 10 percent and 20 percent in dollar terms compared to 2008. Office construction is pegged to be off between 15 and 25 percent in 2009, and institutional construction, such as hospitals, prisons and schools, will also see a decline.

FMI, management consultants and investment bankers for the building and construction industry, notes that 2009 will bring an end to five straight years of nonresidential construction growth in the U.S.

To get a better understanding of what to expect in the Midwest, I asked Midwest Contractor-area association officials to give me their views on the 2009 market. Here are their comments:

Associated Builders & Contractors (ABC) of Iowa

"What does 2009 hold for the non-residential construction market? When posing that question to members of Associated Builders & Contractors of Iowa, one gets answers that fall into two distinct categories — the glass is half-full or the glass is half-empty," says ABC of Iowa President & CEO Greg Spenner. "Even more interesting is the half-full crowd has started to drift to half-empty since the meltdown began on Wall Street in October. The general consensus is that nonresidential construction in the first half of 2009 will be slower than 2008. However, with the tight credit market and the uncertainty to the global economy, we are now seeing an increasing number of projects placed on hold. How long these projects sit on the sidelines is directly related to how long the volatility continues in our financial markets.

"Despite the record budget deficit and the hazy economic outlook, the consensus is that an Obama administration is likely to result in increased public construction for schools, government facilities, health care facilities, and public infrastructure. However, the majority of the construction industry in Iowa is merit shop, and the larger question remaining is will an Obama administration provide equal access and true competitive bidding on public projects that have federal dollars, or will Obama issue an executive order mandating this work be built union-only?

"Economic and labor relations challenges aside, 2009 poses other challenges for contractors as well. The continued shortage of skilled labor has not eased in Iowa even as the economy has slowed. Added to the lack of skilled craftspersons is the aging of Iowa's workforce. Replacing our retiring skilled workers with younger people has been difficult as our industry competes with high-tech job opportunities that seem quite glamorous to the young men and women of today who have grown up in the computer age.

"All in all, 2009 should be an OK year for nonresidential construction in Iowa with the caveat that all bets are off until the world economic picture becomes more stable."

Associated General Contractors (AGC) of Iowa

"During a series of Associated General Contractors of Iowa regional meetings held in November, contractors and suppliers got a preview of 2009 work," notes Scott Newhard, vice president for public affairs, AGC of Iowa. "Roger Bierbaum, Office of Contractors, Iowa Department of Transportation, projected the Iowa DOT primary road program to exceed $500 million. This represents a nearly $100-million increase over 2008. Breaking the program into components, Bierbaum forecast nearly $120 million for structures, over $100 million for grading, $65 million for PCC paving, and $200 million for pavement rehabilitation.

"Increased cost of materials was no great surprise. While Iowa DOT did not give a specific projection for '09, Bierbaum did chart price increases seen from 2002 to 2008. Excavation costs increased 80 percent, reinforced steel increased 85 percent, structural steel increased 78 percent, structural concrete increased 47 percent, PCC paving increased 37 percent, and HMA mix increased 63 percent.

"While the '09 program is considerably higher than previous years, outlying year projections fall back to past year levels ($420 million) due to uncertainty in future federal funding and cost increases. Those numbers may adjust upward due to 2008 Iowa funding legislation known as TIME 21. TIME 21 is a comprehensive increased funding plan designed to generate $138 million in new revenue annually by 2011. The plan is dependent on increased registration fees that take several years to become fully operative. At that time, future construction projects may increase. It is already anticipated that Iowa DOT will be able to accelerate $246 million to eight priority corridors during the next five years. In addition, Associated General Contractors of Iowa will be lobbying the 2009 legislature for Phase II of TIME 21 funding (an additional $80 million annually).

"Iowa, like many other states, has seen consolidation of existing construction companies or long-time businesses cease to operate. In the last six years, we have seen plan/proposal holders drop from 880 to 720. The average number of bidders on a project has dropped from 4.6 to 4.0.

"Iowa contractors and the Iowa Department of Transportation have worked closely to monitor market trends. AGC of Iowa and Iowa DOT are committed to increasing Iowa's program and ensuring the taxpayer that they are getting the highest quality of work at competitive prices."

Associated General Contractors (AGC) of Missouri

"The Missouri Department of Transportation (MoDOT) cash flow is in much better position than some of its neighboring states," says AGC of Missouri President Doug Smith. "There should not be any highway letting cancellations as we have seen in the Midwest region. Front and center for MoDOT is its Safe & Sound Bridge Improvement Program. MoDOT made modifications to this program in September 2008. In doing so, MODOT has taken a more traditional approach to bridge construction, with a steady supply of bridge work to be let in the coming months.

"MoDOT is committed to repairing 800 of the state's worst bridges. MoDOT has identified 248 bridges for rehabilitation, slating at least 100 for construction by spring 2009. The effect of this is twofold: Work is available to contractors, but competition for this work is fierce. The decline in residential and commercial construction has brought new players to the game of pubic construction.

"The other 554 bridges in the Safe & Sound Program are slated for replacement and have been packaged in a single design-build contract. The procurement process to select one team to perform the work has begun, and a final contract will be awarded to the winning team in May 2009. All 802 bridges are to be completed by October 2014.

"Supply and materials prices somewhat stabilized in the final months of 2008; oil and steel are less volatile than they have been in months. Time will tell if this continues in 2009. Skilled labor is still in supply, with the Missouri unemployment rate at or around 6.3 percent, and contractors are able to add to their workforces.

"Funding is still a major concern for contractors in Missouri. The uncertainty of SAFETEA-LU's reauthorization, the constant battle for state transportation dollars, the increase in budgetary spending at the state level, and the trend of decreasing state revenue collections all paint a somewhat gloomy picture. An economic stimulus program with an emphasis on infrastructure spending at the Congressional level is encouraging, but time will tell if this becomes a reality. Uncertainty in the financial market, materials shortages and unanticipated public funding shortfalls will all make 2009 a year to remember."

Associated General Contractors (AGC) of St. Louis

"AGC of St. Louis members see a cloudy horizon for the St. Louis market," says AGC of St. Louis President Len Toenjes. "As with most weather systems, it depends in which direction you look to read the forecast. In the transportation area, the Interstate 64 reconstruction project will continue through the heart of St. Louis during 2009. This is the second major portion of the largest contract in MoDOT history. MoDOT is also moving forward with a modified version of their statewide 800-bridge reconstruction program, having divided it into a rehabilitation portion of approximately 250 bridges to be let in smaller portions, and a 550-bridge portion to be let as one large design-build bundle. Beyond 2009, the uncertainty of transportation funding — both on the federal and state levels — is too much in a state of flux to call. The level of work for 2009 should be about the same in this area as 2008, but storm clouds may be building for 2010.

"Utility work and some public projects are being impacted by the uncertainty of the bond market. Both Ameren (our electrical utility) and the Metropolitan St. Louis Sewer District have changed funding structures for their upcoming work. While the work is still moving forward on a somewhat modified schedule, as bonding becomes more uncertain there may be changes in this work program. As with transportation, the 2009 work load appears to match 2008 to a large extent.

"On the building side, financing and the general economic conditions are holding back many major projects. One of our sizable local contractors stated to me that he would have difficulty finding enough workers if all the projects he has been awarded would get funded. The St. Louis Art Museum recently put a $125-million expansion project on hold due to funding. The Ballpark Village next to Busch Stadium continues to look more like a sandlot ball field than a village. The changes with the sale of Anheuser-Busch and the downturn in the automotive market are impacting industrial work. Until banks and lending institutions have some certainty with their lending practices, we can consider this area of low pressure to hover over the market. Building and industrial work will most likely be somewhat lessened in 2009 when compared to 2008."