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January 30, 2012
Ken Simonson, AGC of America’s chief economist, says a new survey shows members are mixed in their outlook for the construction industry in 2012. He was in town Friday to talk with members of the AGC’s Washington chapter, and said 2012 will be modestly better than 2011.
The survey suggests private sector construction is improving while the public sector is weakening as stimulus projects end and government budgets get cut.
Simonson said 32 percent of the 1,305 members surveyed plan to hire this year and 9 percent plan layoffs.
In Washington, 40 percent of respondents said they plan to hire, while 2 percent plan layoffs. Another 29 percent of in-state contractors said they will keep employment levels even, while 29 percent said they don’t know.
Last year, 43 percent of Washington construction firms added employees while 36 percent laid people off.
Contractors were also asked when they expect construction to grow again. Nationally, 12 percent expect the market to grow this year, 36 percent in 2013, 34 percent in 2014 and 18 percent in 2015.
In Washington, 21 percent expect the market to grow this year, 33 percent in 2013, 24 percent in 2014 and 22 percent in 2015.
Simonson said sometimes there’s a disconnect between hiring plans and views about the overall market. He said some contractors think they will win more projects and need to hire even though the amount of work available hasn’t changed.
Employment statistics released last Tuesday by the U.S. Bureau of Labor Statistics show Washington had an increase of 900 employees in construction, or .7 percent, for the year ending December 2011. Overall employment in Washington increased by 54,000, or 2.4 percent, during that period.
Washington ranked 25th in the nation for construction employment. The country’s construction workforce grew by .8 percent last year.
“The state certainly has moved off its low point,” Simonson said, “but it’s still below the all-time peak.”
Construction employment hasn’t changed much for the past two years while overall employment has substantially recovered, according to Simonson.
“It’s far different than what’s happened in the overall economy,” he said.
Apartments are hot
Nationwide, contractors expect only two sectors power and hospital/higher education will have higher demand this year compared with 2011. Washington contractors also see demand growing for highway, manufacturing, retail/warehouse/lodging and private office.
But Simonson cautioned there are still a lot of companies with dark offices that must get filled up before they lease new space.
The gloomiest market segment in the survey was public construction, especially K-12 schools and public buildings. Only 9 percent of Washington contractors expect higher demand in K-12 schools and 39 percent are looking at lower demand in that sector.
Simonson said high demand for rental housing will continue, especially in cities, as young people get jobs and move out of their parents’ homes. A lot of them don’t qualify for loans for a house or they don’t think buying is a good investment, Simonson said.
“Market-rate apartment construction should be gang-busters this year,” he said. “Single-family is just not an affordable option.”
Simonson called single-family housing a “total unknown at this point.”
Construction at West Coast ports and rail yards could be affected by one big project: the Panama Canal. The wider waterway will let bigger ships bypass the West Coast.
Simonson said there is a real risk of that happening, so the ports of Los Angeles and Long Beach have been improving intermodal connections trying to remain competitive. He said he was in Houston a few weeks ago and the mayor gave a speech about expanding port operations there.
Before post-Panamax ships can arrive on the East Coast, those ports will have to dredge their harbors. Simonson said few have been dredged, but the ports have until late 2014 to prepare.
A major dilemma facing contractors is the combination of shrinking margins and escalating prices for construction materials. “It’s been a really tough four years for contractors,” Simonson said.
Last year, materials prices were up 5.3 percent but prices for finished projects couldn’t match that: industrial building prices were up 3.3 percent, warehouses 3.8 percent, office buildings 3.9 percent and schools 4.7 percent.
Simonson said that’s better than a year ago, when bid prices were dropping, but contractors will still have a tough go in 2012.
When contractors were asked if they adjusted bids last year, 62 percent nationally and in-state said they were lower. For 2012, only 20 percent of the national contractors and 14 percent of the in-state contractors said they expect further declines.
As for materials, Simonson said, “I think we’re in for another year of volatility in oil and metals.”
Last year, copper and steel prices initially shot up, but copper ended the year down. Simonson said steel prices were moving up in December and early January, but may be leveling off. He said a lot will depend on demand from China and developing countries.
Diesel prices are about 15 percent higher than they were a year ago, but aren’t moving sharply higher like they did in early 2011. Still, Simonson said prices will be volatile unless there’s a resolution to threatened blockades in the Strait of Hormuz.
Prices for concrete and lumber are expected to be subdued this year, barring a major rise in housing, highway and heavy construction, he said.
Simonson said he’s looking for construction materials prices to rise between 4 and 6 percent this year. But, general contractors will only be able to raise their prices between 2 and 4 percent, so they will have to find ways to increase productivity or their margins may get squeezed even more, he said.
Some of those productivity measures are BIM, scheduling software and GPS/laser-guided systems for grading and close-tolerance work. More contractors said they are using BIM.
Simonson said some firms will go back to their original niches this year while others will close their doors. That will take some pressure off the survivors. He said subcontractors will be more vulnerable because most of them have less to fall back on, in terms of backlog, and have less equipment they can sell or offices to close.