The Outlook For Construction

By Andrew A. Shmina, President and Chief Executive Officer, A.Z. Shmina, Inc., Vice Chairman, Associated General Contractors of Michigan | September 28, 2010

Two words consistently used the past several years in forecasting the prospects for construction in Michigan, in particular Southeast Michigan, have been "cautiously optimistic."

Interestingly, and despite the struggles these past few years, those were the very words used by several members of the Associated General Contractors of Michigan (AGC) in a survey recently conducted to "crystal ball" prospects for construction in 2008.

Despite Michigan's nine-year-long economic downturn, which is the longest such stretch since the Great Depression of the 1930s, there is still a healthy optimism permeating the thinking of some contractors. Admittedly, not all contractors are looking at the next 12 months as a return of the boom times experienced during the 1990s. In fact, some are hoping to simply survive let alone thrive during these challenging times. But through commitment, creativity and diversification, contractors are seeking to make 2008 a better year than those in the recent past. So what are the expectations for construction in 2008?

  • The national construction economy will continue to grow at a modest 3-percent rate tempered by a whopping 25-percent plunge for single-family housing.
  • Construction in Southeast Michigan and across our state will lag behind the national picture and, in fact, see a decline of up to 2 percent.

According to Ken Simonson, nationally recognized economist for AGC of America, the national construction economy should continue to grow at a 2-percent to 3-percent rate with inflation in the 2-percent to 3-percent range as well.

But some of the problems plaguing Michigan are also now being felt nationally. Growth will be much spottier than the past several years, according to Simonson. Residential construction will remain in a deep slump until late in the year at best. Even condominium projects that were still under construction in 2007 will be done or halted mid-stream. The credit market turmoil that appeared in the summer of 2007, along with signs of excessive building that have appeared recently, will rein in income-producing projects like retail, office and hotel construction, although the ongoing rise in employment and real personal income will keep these categories close to 2007 levels. Most types of public construction will start to feel the effects of slower tax revenue growth.

On the bright side, Simonson states, "Several categories, however, that are relatively insulated from housing and credit market problems should perform well in 2008. Energy construction — refineries, pipelines, biodiesel, and experimental facilities — will bloom in many regions. Power projects — coal-fired plants, transmission lines, wind farms, and perhaps even a nuclear plant — will gain momentum. Hospitals and university-level education work will continue expanding rapidly in all parts of the country."

Unfortunately, Simonson added, "Michigan seems likely to miss out on many of these expanding categories. However, the state should benefit from the drop in the dollar, especially when compared to the Canadian dollar. Already, shoppers and tourists are coming across the border in greater numbers. Export-oriented manufacturing businesses should also do well and provide a modest boost to nonresidential construction."

As for Michigan, the annual forecast by The University of Michigan casts a dark cloud over our state's economy for 2008, but also offered some rays of optimism. According to the report, job losses will continue in Michigan in 2008, but job growth is expected in 2009. All told, the state lost approximately 76,000 jobs during 2007 — the most since 2001 — and it is expected to lose another 51,000 jobs during 2008. In 2009, Michigan can expect a net gain of 15,000 jobs.

As for construction, University of Michigan economists predict major job losses, primarily due to the housing slump, but a 2009 rebound given an expected stabilization of vehicle sales by Ford Motor Company, General Motors and Chrysler.

Overall, despite their projections for continued job losses in the short term, University of Michigan economists say Michigan has room for optimism.

The construction market for the Detroit region, while still in decline, is bottoming out. While the slump will continue in residential and multi-family housing, as well as office, retail and general government; work in the manufacturing and health care sectors is projected to increase by 14 percent and 36 percent respectively. K-12 school construction is expected to see a robust increase over 2007 as well, thanks to an increase in the value of bonds approved by voters in 2007.

Spending for water and sewerage projects is expected to be upwards of $1 billion for state, county and local projects, consistent with 2007. But the state road and bridge building program will see a sizeable $300-million — or 18-percent — cut due to lack of bond revenues this year.

So what are the expectations of contractors regarding their prospects for 2008? When asked, responses varied from those expecting the level of work to be about the same, to others who feel 2008 will be a good year, maybe even a strong year. The words "cautiously optimistic" echoed through several of the responses. And of the 24 general contractors interviewed, only two were pessimistic about prospects for 2008. The comments included:

  • We expect to do better next year in gross sales since that is always our goal.
  • I do not expect a significant improvement for the construction industry as a whole in the region. However I do not foresee a significant decline either. I expect there to be opportunities for work and fierce competition getting it with lower profit margins.
  • We have a backlog of work that should sustain us for the year, but it looks like it could be another slow year if the bidding activity does not pick up fairly soon. Prices seem to be dropping with no end in sight on how low they might go. This is not a good thing. We see pockets of activities, especially in the Grand Rapids marketplace, that seem bright.
  • For 2008, we expect another strong year but concentrated with our present customers.

Nearly every contractor cited the struggles in the automotive industry as having a negative impact on their business whether or not their firm had ever done work for an auto manufacturer. "You cannot escape the problems of the auto industry if you make your living in Michigan," was the common refrain.

Most of the contractors interviewed said that in order to secure work they've not only diversified their customer base by going into sectors such as health care, but are also looking for or have found work in other states. In fact, AGC of Michigan recently helped several of its members with critical economic, specialty contractor and work force availability information for markets such as North Carolina, South Carolina, upstate New York, Mississippi, Louisiana, and Nevada (Las Vegas). Ohio, Indiana and Illinois are also of great interest given their proximity.

In response to a question regarding diversification, comments included:

  • For the past four years we have been looking at emerging markets as well as local markets that we had not participated in previously. We have successfully penetrated the retail and education markets, and hope to enter into the health care market soon.
  • We have always been diversified since I founded the company. Every day we think of ways to expand our customer base and not put too many eggs in one basket, which has always been our strength.
  • We are marketing ourselves to a broader clientele. We also have increased our involvement with lump sum, public and/or hard bid opportunities in lieu of negotiated private work in order to respond to economic conditions and the nature of the marketplace.
  • The out-of-state work is the most significant way we have responded to the conditions in Michigan, but we are also looking to broaden our presence in the health care market. This is one area where we expect demand to continue to be high.
  • We are working with a lot of different product types and pursuing more public work (as a construction manager at risk with a guaranteed maximum price).
  • We are more active in the general contracting bidding market today versus a history of primarily construction management.

It is obvious contractors are aggressively pursuing work in other geographic and industry segments in order to reinforce that feeling of optimism many of them share.

A challenge contractors will continue to face in 2008 is the cost of materials and labor, and both appear to be headed higher. The record levels of oil prices seen in late 2007 affect construction more than most other industries. Contractors use diesel fuel directly for machinery and construction vehicles, and pay diesel surcharges on the thousands of deliveries and pickups from a job site. In addition, many construction materials require a lot of energy to mine, mill, manufacture, mix, and deliver. Asphalt and some plastics prices also will be affected by high oil prices. Steel will probably cost more. And wages will rise for most skilled labor, estimators and supervisors.

There is one major pocket of prosperity right now in Michigan that should be highlighted given its significance, and it's the city of Detroit. Unlike other urban centers, such as Grand Rapids, where growth fluctuates but on an overall upward slope, Detroit's fortunes have been on the downside for decades. The city, however, has turned things around and is experiencing a number of notable new construction projects including:

  • The continued revitalization of Washington Boulevard with projects such as redevelopment of several classic old structures including the Book Building and Book Tower into 175 condominiums and 108,000 square feet of commercial office space, the historic Book-Cadillac into luxury condominiums and a four-star Westin Hotel, and the Pick-Fort Shelby Hotel, which will become the Fort Shelby Doubletree Guest Suites Detroit.
  • Mimicking the progress experienced by other major urban centers such as Seattle, Wash.; Chicago, Ill; and New York, N.Y.; Detroit has numerous loft and condominium projects that have been announced, under way or recently completed that will add hundreds of new housing options that will appeal to students, young families, academics, and others wanting to live in the city's Midtown area.
  • Marathon Petroleum is planning a $1.5-billion expansion at its Southwest Detroit refinery. Marathon has already received approval from the city of Detroit for a 20-year, $176-million tax exemption and a $10-million Michigan brownfield tax credit. The expansion will create about 135 full-time jobs, about 60 of which will be Marathon workers with another 75 independent contractors. When completed, capacity at the refinery will increase to 115,000 barrels per day, up from about 100,000 barrels per day currently.

With the completion of two permanent casinos and one under way, the recent announcement that Quicken Loans will be moving its headquarters to downtown Detroit, and the prospects for an expanded Cobo Center, as well as a new home for the Detroit Red Wings, the city of Detroit has a lot to celebrate.

So let's be optimistic. Whether you're a seasoned economist or a hard-working contractor, predicting the future is an inexact science. So as we look ahead to 2008 and prospects for more projects in the pipeline and shovels breaking ground across our state, let's view the economic outlook with the cautious optimism expressed by so many. And given the difficult environment faced by those of us in the construction industry, that's perhaps the best way to be.