Construction Forecast Issue Home

March 30, 2000

Contractors scramble to keep up with demand

The cost of construction is rising but demand hasn’t slowed

By JAMES D. HEBERT
Hebert Research

The new century emerges with two very different but related industries leading the longest economic growth period in the region’s history: information technology and construction. One produces the hard products; the other produces soft ones.

Both begin with developer mentalities -- the creative ones who dream dreams, asking why not rather than why. From their dreams come projects and products that will employ thousands to produce. Both industries seldom wear the downtown suits, opting for causal shirts and slacks. And, both industries are marked by serious worker shortages.

The question is whether these two industries that differ greatly in the finished product are really interdependent. The answer is yes, but the reasons why are more important.

Strong surge in employment

From 1995 to 1997 employment rates increased. The strong growth rate began with a 1.9 percent increase in 1995, followed by a 2.9 percent increase in 1996, and a 4.1 percent increase in 1997. Starting in 1998, employment rates declined each year. In 1999, a decrease of 2 percent was experienced.

Hebert Research forecasts that 2000 will see only a 1.6 percent increase in employment. Does this represent any warning signs to the local construction sector? It could, if it were not for the tremendous need to catch up. There is a shortfall of employment in the local construction trades. The significant 6.6 percent growth rate in the last years of the 1990s are in fact resulting in negative growth rates of 1.3 percent forecasted for 2000. This is not because of the shortage of projects -- it's due to the availability of the workforce to meet the demand.

Employment affects three major areas of construction demand:

• First, office space growth and workplace growth are correlated. Vacancy rates for industrial, office and other commercial space remain below 3 percent throughout most of the Puget Sound area;

• Second, residential construction sales continue to be strong as the number of authorized housing units declines from a high point of 15,600 to 3,606 units in 2000; and

• Third, the need for infrastructure has resulted in building the massive third runway at Sea-Tac International Airport and Sound Transit’s light and heavy rail and express bus regional transportation system. The call for major expansion to highway and arterial capacity is an obvious area that requires some catching up due to political delays.

Business confidence

The Key Bank/Hebert Research Business confidence tracking study is currently at an index of 58 points. While that is a decline since the 1997 period in which the index was 68.3, it continues to reflect the confidence of the business community in the economy over the next quarter.

The construction sector remains behind schedule in meeting the past growth of the broad base business community. The Key Bank/Hebert Research quarterly economic report states that 78.8 percent of the local business leaders expect to see an increase in sales during the next year. This is even more favorable for net earnings among 85.4 percent of the CEOs and CFOs forecasting an increase for their companies.

Recently, productivity has become the best economic friend of business. Only 45 percent of the business executives are forecasting an increase in their prices and of those that do foresee an increase, an increase of only 5.2 percent is predicted.

Annual inflation for 2000 should remain under 3 percent. In addition, the unemployment rate is expected to reach a modest level of 4.9 percent and the GDP should experience strong growth as well. Major advances in productivity have contributed to this economic result. All of this combined with strong earnings and a regional Puget Sound personal income growth rate of 5.5 percent contributes positively to the construction industry. It means that the formation of personal and corporate wealth resulting from productivity gains and innovation can provide for the funding of future commercial development.

This is an especially important economic research finding because the costs of building have been increasing at nearly twice the rate of inflation, but demand for new construction has not been restricted. At least part of this can be explained by an ample supply of financing for local projects.

New urban models

Looking into the distant future, commercial and residential development falling behind schedule will be an issue. This is not to imply there has been mismanagement of the industry from within -- it is more a function of variables beyond the control of construction industry leaders that have delayed the construction process.

For instance, although progress has been made, the length of time it takes to get permit approval is still far too long. To meet demands, customers must compete in a new friction-free economy based on speed. Looking at the public sector, funding from poor economic polices such as impact fees, reductions in transportation funding from Initiative 695 and the uncertainty of alternative funding sources are very real concerns which must be resolved.

The long term health of the construction industry will depend on the creation of a very different urban model than that which originally emerged out of the 1960s and 1970s. The new model will be based on building livable neighborhoods that utilize land and airspace more efficiently. This includes establishing common areas that allow residents to walk to shopping, dining, entertainment and exercise. It will mean more neighborhood friendly designs that have easy access to amenities and allow reasonable expansion of major arterials and freeways in the area.

Public transportation will continue as one of the solutions to meet the goal of faster, cheaper and better access for workers and residents alike. The innovative transit-oriented model created by King County and other concepts, such as using public transportation to encourage economic development in less congested areas, will be further developed.

While much of this development is behind schedule there is an increasingly broader agreement that these new environmental models will allow expected growth and at the same time provide more livable neighborhoods to live and work in.