Mixed workloads, not enough workers

Features - Construction Industry Outlook

The construction industry is starting off strong in 2018, but whether the high note will last through the year is up for debate.

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February 2, 2018
Ken Simonson

The construction industry heads into 2018 on a high note. But it is uncertain whether contractors will still be singing a happy tune at the end of the year.

Construction spending put in place hit a new record high of $1.24 trillion in October, the Census Bureau reported Dec. 1, 2017. That mark was 3 percent above the prerecession peak reached in February 2006.

However, if this number was being printed in a baseball record book, it would have an asterisk beside it. That’s because the figure has not been adjusted for more than 10 years of inflation.

No single price measure is available for adjusting the wide range of construction activity, but a reasonable proxy is construction employment. Like the spending total, industry employment has been growing since the start of 2011, but it is still 10 percent below the previous record, which dates to April 2006.

Construction employment totaled 6.99 million in December 2017, a gain of 30,000 jobs for the month and 210,000 jobs, or 3.1 percent, for all of 2017. The full-year growth rate in industry jobs was more than double the 1.4 percent rise in total nonfarm payroll employment.

Residential construction—comprising residential building and specialty trade contractors—added 18,200 jobs in December and 86,400 jobs, or 3.2 percent, over the past 12 months. Nonresidential construction (building, specialty trades and heavy and civil engineering construction) employment increased by 11,800 jobs in December and 123,100 positions, or 3 percent, over 2017.

Economic forecasters appear confident that the U.S. economy, as measured by inflation-adjusted gross domestic product (GDP), will grow around 2.5 percent again in 2018 and that employment will increase by roughly 1.5 percent. Growth will come from all four broad contributors—consumers, businesses, government purchases and investment and exports, though imports will grow about as fast as exports.

If these economic predictions are accurate—and it is said that economic forecasts exist to make weather and stock market forecasts look good—construction also should keep growing in 2018. But construction industry growth is likely to be much less balanced than that of the overall economy.

What’s growing where?

On the high-growth end will be residential improvements and warehouses. Normally, these segments are not particularly important for most recyclers. However, much of the increase in residential improvements in 2018 is likely to be associated with the renovation of damaged homes and apartment buildings in hurricane- and flood-ravaged areas rather than additions as in a more typical year. While some of the demolition already has taken place since Hurricane Harvey, subsequent flooding struck in August, and Hurricane Irma made landfall in September. Many buildings remain in need of rehabilitation and still await permits, designs and funding.

Some reconstruction and associated debris removal in the wildfire-ravaged areas of California also will occur.

Despite the need for replacement housing in these areas, spending on new single-family construction likely will grow at a similar rate as it did in 2017—7 percent to 9 percent.

Where warehouse construction historically meant greenfield buildings on vacant rural or outer-suburban land, more companies now are looking for city locations to serve customers who “click and collect”—ordering online with the expectation they can pick up or receive an item the same day. These facilities are often in much older buildings that require substantial modification and, therefore, removal of existing components.

Sector outliers

Two construction categories that likely will slow in 2018 may still provide opportunities for recycling: offices and shopping malls. Office construction, formerly dominated by low-rise, new suburban buildings, now entails a lot of renovating of older city properties. These include 30-to-50-year-old buildings that receive new exteriors, updated mechanical and electrical systems and open floor plans, as well as much older warehouses and factories that become hip new headquarters.

Mall owners are being forced to replace their anchor and smaller tenants. To attract new foot traffic, they can no longer just replace signage and make minor tenant improvements to replace one retailer with another. Instead, they are tearing off roofs, overhauling dining and movie theater spaces and adding nontraditional tenants, such as churches, that may have very different space needs.

Public sector construction has been a weak spot for several years and is likely to be flat or down again in 2018. However, two segments appear to be promising: schools and airport terminals. Both categories are less vulnerable than most public construction to the spending squeeze that the current Congress and state legislatures are likely to impose.

School districts rely heavily on real property tax receipts, which rise (though with a lag) once house and commercial property values increase, as they have for the past several years. As a result, elementary and secondary school construction has begun rising briskly and will do so again in 2018 thanks to a proliferation of school bond issues that voters have approved in recent elections. Because more millennials are staying in cities and older suburbs, even after they have school-age children, school construction spending often entails rebuilding or adding onto older schools rather than building new to accompany a new subdivision.

Airport funding comes largely from airline landing fees and gate rentals, ticket fees known as passenger facility charges and local taxes or rental income from retail, parking, rental car and hotel tenants. As the number of flights and passengers has mushroomed, so have these revenue sources—and the need to expand or update the facilities they use. Nearly every major airport in the U.S., and many midsized airports, is undertaking an overhaul. Projects range from consolidated rental car facilities to new gates and control towers. Each may require demolition to make way for replacements. But the biggest expenditure is in terminals, which generate interior restructuring.

Challenges present

Not every construction sector will do well in 2018, however. Multifamily spending, which outpaced single-family homebuilding for the first several years after the recession, grew more slowly than single family in 2017. This type of spending is poised to shrink slightly in 2018 based on the declining number of new multifamily starts and permits.

Lodging construction likely will flatten in 2018 after years of double-digit increases. This is because the industry faces increased competition from room and home rental services, such as HomeAway and Airbnb, in some markets as well as a decline in foreign visitors to some gateway and resort destinations.

Declining numbers of foreign visitors—in this case, students—also are why higher education construction could be headed for a downturn this year. The total number of postsecondary students in the U.S. has dropped sharply in the past seven years because of the increasing ease of finding a job without obtaining an additional degree and because the number of high school seniors has been slipping.

Hospitals, which once did a large amount of debris-generating renovation, have been a stagnant part of the construction market. In 2018, the trend toward locating medical services outside of hospitals likely will continue. Such locations include standalone urgent care, outpatient surgery and rehabilitation facilities and hospices.

Despite these changes in construction demand, one aspect of the industry is likely to remain constant: the difficulty of finding qualified workers.

That challenge may not be apparent to outsiders when they hear the industry was able to increase employment at a faster rate than other employers throughout the economy for the past several years. But another government data series shows end-of-month construction industry job openings hit record levels for several months in 2017.

The construction unemployment rate and number of unemployed reached 17-year lows in December 2017. The unemployment rate fell to 5.9 percent from 7.4 percent one year earlier, illustrating how difficult finding workers has been.

Also, a survey by the Associated General Contractors of America in late August found that 70 percent of the respondents said they were having trouble filling hourly craft positions, while 48 percent said they had difficulty finding project managers and supervisors. Even higher percentages thought hourly craft and salaried positions would be as hard or harder to fill throughout 2018.

Finally, recycling firms can expect a varied year for business opportunities, depending on which construction segments they rely on. They also can expect a continuing challenge finding workers to perform whatever projects they tackle.

Ken Simonson is the chief economist for the Associated General Contractors of America, Arlington, Virginia. A version of this article first ran in the January/February 2018 issue of Construction & Demolition Recycling, a sister publication to Recycling Today.