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June’s Construction Health Update with Anirban Basu

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Plus, a Q&A on Anirban’s Tips on How to Use the CHI for SMB  

In the past eight years, since the economic recession, construction has seen a resurgence in the stability of the industry opportunities. And not only amongst the largest firms, but among small to medium-sized companies as well.  

In this issue of the monthly Construction Health Update, we sat down with Procore’s Chief Economist, Anirban Basu, to talk about the opportunities and challenges that this presents for those companies. As well as, how to use the health indicator to their advantage.

First, here is a summary of this month’s construction health indicator readings.

As of Thursday, June 1 our national Construction Health Indicator score is 82.90.

Construction demand remains strong. After beginning 2017 with a marginal decline, the Architecture Billings Index posted three consecutive months of growth in design revenue at architecture firms. As a leading economic indicator of construction activity, the index reflects the nine- to 12-month lead time between architecture billings and construction spending. The new projects inquiry index is at 60.2, while the new design contracts index increased from 52.3 to 53.2.

Among the hot pockets of construction activity are office developments in New York and condominium and rental-housing projects in downtown Los Angeles, Boston, and Miami. Big infrastructure projects include the modernization of Chicago's O'Hare International Airport and a tunnel in Seattle that will replace a viaduct vulnerable to earthquakes.

  • The national Labor score is 82. 

Construction employment's upward trend slowed last month as the industry added 6,000 jobs in March, according to the Bureau of Labor Statistics. The month's total construction employment of 6.882 million represented a 2.6% increase from March 2016, signaling that the industry’s challenge is no longer providing jobs, but finding workers.

Nearly a third of the 388 metropolitan areas tracked by the Bureau of Labor Statistics have an unemployment rate below four percent, well below the level that economists consider “full employment,” the normal churn of people quitting to find new jobs. The rate in some cities, like Ames, Iowa, and Boulder, Colo., is even lower, at two percent.

That’s good news for workers, who are reaping wage increases and moving to better jobs after years of stagnating pay. But most companies cannot afford to chase workers by raising wages. 

The average construction employee is already earning $28.43/hour – the highest average wage rate for any public sector on record. These labor costs are outpacing the rate of inflation as they increase an average of four to five percent annually – leaving most SMBs saying, “We could grow faster and build more, if we had the workers.”

Construction input prices rose for a fifth consecutive month in April, increasing by 0.7% on a monthly basis and 4.3% on a year-over-year basis, according to Associated Builders and Contractors (ABC) analysis of U.S. Bureau of Labor Statistics data. Nonresidential construction input prices behaved similarly, increasing by 0.7% on a monthly basis and 4.2% on a year-ago basis.

So how does Anirban Basu see Procore’s Construction Health Indicator playing to the strengths of small to medium sized construction businesses?

Bassem Hamdy: What do small to medium-sized contractors and subcontractors have to most look forward to in this economic climate?

Anirban Basu: We are in the eighth year of macroeconomic recovery and the sixth year of construction recovery. Since then, larger firms are finally able to be more selective about the projects on which they bid, looking for opportunities that generate sufficiently high profit margin. That is making more work and opportunities available to smaller contractors. 

The fact that small companies and  subcontractors are having so much difficulty finding workers gives us a good sense that they are busy and expanding despite the fact that backlog has fallen in recent months. 

Bassem Hamdy: What indicators in the Construction Health Indicator should small to medium-sized contractors focus on?

Anirban Basu: The key question for small to medium-sized construction firms is how long this construction cycle will endure. 

They need to know how long this recovery from the recession is going to last in order to make sound decisions. If the construction health indicator suggests that there are solid periods of work in front of them, they should continue to invest in their workforce and continue to acquire or lease equipment.

If, however, they begin to see signs of wear with respect to the current construction recovery, then that implies that they should operate more tightly with capital. They should not enter into such long-term agreements like leases or other agreements that will tie up their capital in the future. 

In other words, If they make commitments long into the future and the recovery turns out to last much shorter than they expected, they’re going to be left with a set of financial commitments they may not be able to handle. And that’s true for everyone, not just SMBs.

Bassem Hamdy: Which markets are performing well or poorly? 

Anirban Basu: New York, of course, tends to benefit when financial markets perform. The New Yorkers are financing investment management specialists. Because of this, New York real estate is red hot. Investors from around the world have been pouring money into New York. That has raised property values, whether for office buildings or hotels, triggering new construction. New York’s strength originates largely for its appeal to foreign investors and the strength of the financial services sector.

The Southwest has a different story that is largely about population growth. The South has generally been adding population faster than other parts of the country. And Arizona, for instance, and other states from the Southwest, have really benefitted from the ongoing migration of baby boomers, in many cases, to the South. 

California is actually the poorest indicator at the moment. Incredible increases in costs of living have also made it more difficult for construction firms to live in these communities. A recent study was conducted by Trulia, indicating that for new college graduates, less than 3% of apartments in the San Jose area would be affordable to them if they obtained the median job for new college graduates. In other words, there are lots of jobs there, but it’s so expensive to live there that they can’t move there to take advantage of these opportunities.

What that results in, this incredible cost of living, is a slowdown in economic activity. Firms can’t expand the way they otherwise would if there were workers available to hire. Also, the elevated cost of living drives up the requirements of workers who are working in construction. In other words, construction workers will ask for more money. And construction firms operating in an intensely competitive environment may be reluctant to offer the compensation that construction workers are demanding. 

Bassem Hamdy: What can firms do to encourage recent graduates to work for them?  

Anirban Basu: If construction wants to attract the best and the brightest, it needs to be more technology oriented, including information technology oriented. That’s where firms should think about implementing new processes, delivering more information to their customers, including ongoing progress reports, and positioning themselves to attract more knowledge workers.

Big data is not only for large firms. People who are looking to purchase construction services have all kinds of questions. They have questions about why the cost of construction changes over time. They have questions about which materials they should select for their building. Where can they find the most value? Where can they drive the most capability for their facility without paying the highest price?

There’s nothing that stops a small general or subcontractor from walking into a prospect’s office with an iPad and telling that story. Somebody coming into the office of a prospect with that kind of information on hand is going to be very impressive. Many small firms don’t take advantage of that.

Also, if a company wants to protect their “home turf” including from larger construction firms, one of the ways to do this is to use technology to develop local regulatory expertise and to remind prospects that there is an advantage to using local contractors including their superior knowledge of what local governments demand. 

If they do this, purchasers of construction services will be willing to offer a somewhat higher price to the provider of services because they feel comfortable with that service provider, with that construction firm. So, there are all kinds of things at work here, all kinds of opportunity. 

That’s all we have for now. Keep building and we’ll keep crunching the numbers. Check back here daily as numbers refresh and we’ll continue to translate this into meaningful digests that will help you make informed decisions all week long.

Click here for recaps from Construction Health Updates from past weeks.

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