The Outlook for Construction

Sept. 28, 2010

Little did we know one year ago what the world would be like today, particularly the condition of the U.S. and global economies.

Despite the difficult times we were in 12 months ago, contractors were still looking ahead with some optimism that the "one state recession" we called the Michigan economy would turn around, and we'd be seeing more projects in the pipeline and more shovels breaking ground.

Little did we know one year ago what the world would be like today, particularly the condition of the U.S. and global economies.

Despite the difficult times we were in 12 months ago, contractors were still looking ahead with some optimism that the "one state recession" we called the Michigan economy would turn around, and we'd be seeing more projects in the pipeline and more shovels breaking ground.

But what we didn't know at that time is that we were on the brink of a mortgage meltdown, an auto industry on the verge of collapse, oil prices running amok, and an overall economy in such poor condition that even our much hallowed health care industry is feeling the brutal punch of growing unemployment and weakened credit markets.

And while oil prices have returned to some sense of normalcy, the condition Michigan has been in the past eight years can now be found in all 50 states and in nearly every country on the planet.

There's not much comfort in that reality, but at least we don't feel so all alone. So despite these conditions, what can we expect for our industry in 2009?

An economic outlook, much like the annual budget you prepare for your business or household, is typically based on certain assumptions. And in today's world of global uncertainty and startling economic surprises, making those assumptions can be risky business.

At the time of this writing, however, there are certain initiatives under way that hold some promise:

  • While the bailout plan developed by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr. has come under some fire, there is still the belief among analysts that over time the infusion of capital back into the system will free-up tightened credit, allowing owners and developers to secure the financing needed to get their projects under way.
  • At the time of this writing, President George W. Bush is considering the bridge loans so desperately needed by General Motors, Ford and Chrysler. While the total amount proposed is less than originally requested, it could provide the continuation of Detroit's Big Three for the near term. And while the loans don't guarantee any kind of building boom, they do hold out the promise of projects currently under way continuing and contractors hopefully getting paid.
  • And Michigan could be in line for hundreds of millions of dollars from Washington if President-elect Barack Obama's $500-billion-plus federal stimulus proposal gets the nod from what will be a Democratic-controlled Congress. While much needs to be detailed regarding the specifics of the package, preliminary reports are that these funds would be targeted for badly needed road and underground projects, drinking water and wastewater treatment projects, as well as for public building construction and making existing public buildings more energy efficient. President-elect Obama has indicated his support for jump-starting the U.S. economy through funding for legions of infrastructure projects that are "ready to go."

So with those hopefully positive developments in mind, we asked some of the experts for their insights about what we can expect in 2009.

On the national scene, given the condition of financial markets and the national recession, the U.S Department of Commerce is projecting a 7.5-percent decline in total new construction put-in-place.

And according to Ken Simonson, nationally recognized economist for Associated General Contractors (AGC) of America, non-residential spending will drop by as much as 9 percent, material costs will be down as much as 5 percent depending on the inputs for a given project, but labor costs will rise from 3 percent to 4.5 percent.

As for Michigan, out of 20 industry sectors only five are projected to see growth in 2009 — energy, health care, sewer, water supply systems, and parking garages.

It must be noted, however, that the credit crunch has put a damper on many health care-related projects across our state, as evidenced by the recent announcement by Beaumont Hospitals that it was slowing down construction projects at the Royal Oak, MI, and Troy, MI, hospitals and putting plans for additional ambulatory medical centers on hold.

Residential housing, another industry segment that enjoyed a building boom for many years, will continue to see adecline. The Building Industry Association (BIA), southeast Michigan's homebuilders' group, reports a continued erosion of residential building permits in the first half of 2009, with the market then stabilizing in the second half of the year, leading to modest growth in 2010. This assumes, however, a stabilization of the automotive sector and a federal economic stimulus package.

And with the projected slight decline in road, highway and bridge building, it doesn't factor in the potential impact of the stimulus package.

As for what's currently anticipated for roads and underground construction, the Michigan Infrastructure & Transportation Association (MITA) predicts the level of funding in 2009 to be about $980 million for the state road and bridge program, excluding routine maintenance, and $1.2 billion for the local road program. In addition, spending for water and sewerage projects is expected to be in the $500 million to $550 million range for the State Revolving Fund (SRF) program. Work will continue on major upgrades to water and sewer treatment facilities and the expansion of storm water control systems throughout the region. Although private underground work remains very weak due to the lagging economy, the SRF program has nearly doubled in the last two years.

In addition, AGC's economist Simonson reports that Michigan is one of the few states that reported a significant rise, 5.5 percent, in total tax collections from the third quarter of 2007 to the same months of 2008, which may bode well for some public construction. And Michigan has plenty of infrastructure projects "ready to go," which makes our state a prime candidate to benefit from the fiscal stimulus package mentioned above. Beyond possible public construction projects, there is potential for conventional and wind power, transmission lines, energy, and hospital work.

Finally, Simonson also states that the sudden, steep drop in materials prices provides a rare opportunity for owners to build some projects at lower cost now than a year ago. Materials costs are likely to end 2009 no higher and perhaps a few percent lower than at year-end 2008. In addition, owners will find they have a wide choice of qualified contractors bidding for work. But owners who wait may find both conditions have changed by 2010. Materials costs are likely to resume their upward climb once countries like China and India resume rapid growth.

In closing, unlike years past when we were "cautiously optimistic" about the coming year, contractors polled are, unfortunately, somewhat "pessimistic" about their near-term prospects. There are few new projects in the pipeline with backlogs fading and competition greater than ever for what remains. In an informal survey of contractors, projections of 10 percent to 20 percent less work for 2009 were given.

So as we look ahead, while there may be pessimism in the air, we should still be hopeful for the future. With help from Washington for our auto companies, a loosening of the tight credit market, and the anticipated federal stimulus package that could be ready for a rollout on January 20, inauguration day, we have reasons to look for that light at the end of the tunnel.

Author Information
Andrew A. Shmina is president and chief executive officer of A.Z. Shmina, Inc. and 2009 chairman of AGC of Michigan.