Ep. 79: 2018 Construction Market Outlook

2017 has been a big year for the construction industry, as the market has begun to pick up. This podcast will look to the future and identify trends about what to expect in the year ahead. Ken Simonson, chief economist, Associated General Contractors of America joins CONEXPO-CON/AGG Radio to discuss the construction market outlook for 2018, addressing trends related to labor availability, natural disasters, infrastructure funding, and emerging technologies.

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Show Transcript:

Host Peggy Smedley: 2017 has been a big year for the construction industry. We kicked off the year with CONEXPO-CON/AGG and the market has certainly picked up since the start of the year. The surge of natural disasters such as hurricanes, floods and wildfires across the country have resulted in an unprecedented boost in employment in the construction sector. Now, it is December and time to look to the year ahead. On today’s show we’re going to look at 2018 and identify trends for labor, infrastructure funding, and give an overall forecast about what you can expect in the next 12 months.

We all recognize it is very difficult to predict any future outcomes, but the good news is I have an expert on the show to help me look at all these trends with a much sharper eye. In fact, he has studied this market for many decades and understands better than most the ebbs and flows. He is a staunch advocate for construction professionals. Our guest today is an economist with more than 45 years of experience analyzing, advocating and communicating about economics and tax issues. Please join me in welcoming Ken Simonson, who is the chief economist for the Associated General Contractors of America. Ken, welcome to the show!  

Ken Simonson, Chief Economist, AGC: Thanks Peggy, good to be with you!

PS: Ken, it’s really an interesting time right now. What I’d like to do is look from this high level, this 30,000 foot level of construction as a whole. I’m curious because you’ve been doing this for such a long time and most people don’t have the perspective that you do. What do you see looking back and now looking forward because the industry is at a very interesting tipping point as we look at 2018.

KS: You’re right. Construction had the longest and deepest decline of any sector during the recession. It really started back in early 2006. Construction spending is measured by the Census Bureau each month. It topped out in February of 2006 and employment followed soon after in April of 2006. They both declined until the beginning of 2011 and now we’ve had almost seven years of growth. Yet, construction spending is barely back to the level that it set in early 2006, and that doesn’t take into account inflation. Now, fortunately, we’ve been in an era of very low inflation, but nevertheless it has happened.

If we could apply a uniform inflation measure, which is pretty hard to do when you’re talking about things as diverse as home improvements and highways and massive pipelines or power plants. The best way, probably, to see where we are is looking at the employment figures, because while there has been some productivity improvement, it still takes a certain number of workers to put up any one of those structures. Construction employment dropped by 30 percent, 2.3 million people, from 2006 to 2011 and its been climbing steadily since then but at a much slower rate than it fell. Construction employment is still about 10 percent below peak.

Looking forward into 2018, I do think we will continue a pattern of slow and somewhat uneven growth, but it will be growth.

PS: Let’s talk about those numbers. Somebody listening right now might hear about this 2.3 million person drop that is still down 10 percent. That’s pretty staggering since we talk about how we now have this workforce shortage. Construction companies, I don’t want to say are pushing the panic button, but we’re right there. We’re very concerned about how to find the right skilled labor to adjust for that decline and that fear of how do we find the right people to do the jobs when we’re now getting to some growth.

KS: You’re right. This is the biggest challenge facing contractors this year and has been for a couple of years. Interestingly, the industry is hiring a lot of workers. Construction employment has been rising at a rate of 2.5 or three percent a year throughout 2017. That’s about double the rate of growth for the overall economy. At the same time, contractors say they’re not getting the workers that they want.

A series from the Bureau of Labor Statistics shows job openings at the end of each month are running at decade long highs or sometimes the highest ever in the series. I think what’s happening is the contractors are able to attract workers that haven’t previously worked in construction or perhaps haven’t worked at all. They’re certainly having to spend more time advertising for workers, more time training them and then paying more overtime for the experience workers that they do have so they can complete the jobs on time or so they can train the newbies.

PS: And that training part of it is because we’re not seeing enough of these newbies wanting to get into the trades. That’s part of the challenge. It’s not just being able to find them, it’s being able to find the people that want to do the traditional jobs…plumbers, tile, all those traditional trades that we have, engineering, things that we want. How do we find those people for those positions…those traditional trade jobs?

KS:  Companies really have to get creative. They have to get more engaged with the school districts, with the local community colleges and with the local or state workforce development agencies. They certainly have to reach out to groups that have historically not provided as much of the workforce, specifically women and some minority groups depending which part of the country they’re in. Frankly, do a better job of keeping people in the industry once they try it out. Now, I think contractors do have a compelling message that this is no longer, if it ever was, the backbreaking, dead-end jobs that people imagined it was. Workers in the construction industry really do get to play with cool toys, whether its drones, GPS or laser guided equipment, experimenting now with robots with mixed reality goggles that teach people skills in a much shorter time, 3D printing, the list goes on and on, of course building information modeling.

PS:   That’s an interesting point because the hourly earnings continue to rise as well when you find these quality workers and I think that’s something to say. Your numbers show that construction employment in 41 states between October of 2016 and October of 2017 really was booming. I think if you’re saying that, you’re getting to play with these high-tech toys that you talk about, AR and VR and drones…today’s construction worker is completely different than what we saw 10 years ago, let alone five years ago, let alone what it’s going to be like in 2018 on the jobsite.

KS: That’s right. I think the industry and the supplier industries are just now at the cusp of figuring out how to make use of the so-called Internet of Things, miniaturization and new materials and techniques for doing construction. This is going to keep work interesting and job tasks evolving. I think that we will see ever-greater safety. We may see more of the assembly of buildings, and bridges for that matter, moving offsite. What you see onsite is really assembly and not piece by piece or so-called stick built construction.

There are a lot of directions that construction may change in the next few years. This has a lot of implications for the workforce. In some respects, you’re going to need new skills certainly to take full advantage of things like building information modeling. Workers need computer skills or at least a familiarity with systems that you never needed when your were just picking up a power tool and pushing the button to start it or to stop it.  It also means pure physical skills may not be needed so much and that can create opportunity for people who would have passed up construction. The fact that the job and the task keep evolving means that there is much more chance for progression than perhaps there had been for entry-level workers a few years ago.

PS: We’re seeing things like exoskeletons like you said, helping out at the jobsite so that physical labor and tiring…those machines that we have are assisting so it’s not so exhausting when you go home at night. Those are the things that you’re referring to I would suspect.

KS: That’s right. It’s not just that it’s less tiring, but it’s actually safer. Fortunately, the fatality rate in construction has dropped markedly over the decades. Many of these systems will mean that workers are at less risk, both of getting exhausted, incurring muscle injuries or just being put in places that may be hazardous. For instance, the use of drones can substitute for sending workers into hard to reach locations.

PS: Those remote areas that we talk about that we would have to visually look at, now we can use drones to go to those tough terrains that we couldn’t do before. Safety is so much different now for those very reasons.

Let’s talk about that, taking that crystal ball, different sectors that you talk about residential, private, non-residential, public construction. I think we’re really talking about a lot of different things that will bear the technology, bear the use of solutions that we have on the jobsite or in the field so to speak, that workers are going to be able to adapt to and use things differently from manufacturing to telematics. Do you see the use of these solutions opening up the doors for new opportunities and workers to be able to expand and really grow, and construction companies really being able to leverage a new form of worker at the jobsite than ever before?

KS: Yes, there is clearly the opportunity for people who would not have had the right skillset for construction to get into the business. I do think many of these advances will make jobsites safer. They will make the actual construction onsite go more quickly. For instance, when you can lift and entire room or at least the wall into place rather than having successive crews working on it, that can go much more quickly and you can have fewer people who are at risk from working at heights and so forth. Also, you can get higher quality control in some cases by building things offsite, undercover, under standardized conditions. That can mean both quicker installation or construction, less rework, and also, again, a different skillset. People who are working inside in an enclosed space such as a factory may be able to do things that they would not be able to do if they had to climb the skeleton of a structure under construction.

PS: At the intro I talked a little bit about some of the hurricane recover work being boosted by employment levels slightly. We might have more masonry work, or plumbers or electricians, different kinds of things because of these natural disasters.

Do you think we’re going to have increased construction based on some of that in parts of the country because of what we’ve seen from some of these natural disasters? Or you indicated 41 states have seen a boost and 26 states just between September and October, but are those natural disasters also contributing to this increase?

KS: Fortunately, that seems to have had little impact so far. Just before we started this interview, I was talking to someone in the Houston area who was telling me that there seem to be very little damage to non-residential structures there. Now, it’s a very different story with homes. We had thousands of homes, tens of thousands even, that were ruined or at least heavily damaged in both Texas and Florida, and California from the wildfires. I think that piece of construction will take a long time to catch up.

In terms of the non-residential building construction, infrastructure, and multi-family, I don’t think we’re seeing as much impact as people feared we would from these natural disasters this year. Now, Puerto Rico, of course, is an entirely different story, a much harder case.

In terms of mainland U.S., the growth in employment has been coming from steady demand from many sectors and maybe this is a good time to talk about the outlook of some of those for 2018.

PS: Let’s talk about that because one of the things that we all know is infrastructure and things like that, ASCE’s grade of the infrastructure was a D-, and we know we have to do a lot of investing there. What’s you’re outlook on some of that in the coming year?

KS: I think the market is going to continue to evolve in 2018. We are close to finishing 2017 as we do this interview, and so far, we have Census Bureau figures on spending through September. Those looks as if we’re going to wind up with total construction spending rising somewhere between three and five percent this year. That’s a little weaker than in 2016 when spending was up six percent.

For 2018, I think total spending will be up somewhere around that same range. The market is continuing to evolve. For instance, multi-family construction spending has been slowing down throughout the year, while single family has shown some pep. I think by next year, multi-family is likely to be flat, with single family rising at high single digit rates. On the private, non-residential markets we had a definite slow down. We had a huge drop in manufacturing construction this year and pretty sluggish results on power construction, which is actually the biggest category the way the Census defines things. Power includes not just all forms of electricity transmission, generation and distribution, but also, oilfield construction and pipelines.

In 2018, I think we’ll see good growth in natural gas pipelines, in natural gas fired power plants, and also in wind and solar projects, which have been a strong niche market for a while.  As for manufacturing, I think the steep decline is going to end. By the end of the year, we will see a tick up in some energy related projects such as ethane crackers, petrochemical plants, maybe another natural gas liquefaction train and export terminal, and also, some transportation equipment, particularly electric vehicles and things like batteries or computers and communications processing devices associated with autonomous cars.

In commercial segments, I think we’re headed for a flattening out of hotel construction which has been very strong. Warehouse construction has been extremely strong and that looks like it will continue through 2018. Office construction has also been very strong. I think that is going to continue to grow, but not quite as strong a clip as previously. Retail and healthcare have been pretty flat and I don’t see much improvement ahead for those.

Turning to the public side, we actually had a small decline in 2016 that worsened through the first nine months of 2017. In 2018, I think it’s likely to flatten out and may have small growth, but it’s going to be limited to a few portions. Public schools, K-12 schools, we’re seeing more bond issues passed and more school districts benefiting from the rise in house prices and commercial property prices, so they are undertaking more construction. There is also a lot of airport construction happening around the country, but other kinds of public construction are still holding pretty flat. Some policy changes could make a difference. Tax policy, trade policy, immigration policy – all of those could affect the outlook.

For now, these are my guesses as to where we will see the strengths and weaknesses in 2018.

PS: Does a lot of that have to do with the burgeoning idea of what the Internet of Things, block chain, all these other terms that we see that are coming into play, that technology companies are bringing to bear on the market, and what we see with what will effect construction?

KS: I think that will be a more gradual process. Certainly, we have already seen it in the shift from retail construction to warehouse and distribution facilities. You have the massive one million square foot or even bigger distribution centers out at the junction of interstates or places where there was good transportation connections. Now, we’re getting so-called ‘click and connect’ points where people can order something online in the morning, maybe from their office and get it delivered to the office or home that same day. Or, they can go to a place that is both a pickup point and perhaps has a showroom and a small amount of retail associated with it.

I think that will definitely be a strong growth niche. The broader Internet of Things notion will certainly, as I mentioned, be affecting vehicles and parts and components construction. You have the massive battery plant that is being built outside of Reno. That is expected to finish up in 2018. You’ve had some automakers announce that they were also going to invest in batteries and sensing and monitoring processing devices to go into autonomous or semi-autonomous vehicles.

I do think that we’re continuing to see the market drawn along by this Internet of Things, but in terms of the actual types of construction, not a great deal yet. It will be incremental I think. One niche that I didn’t mention that’s certainly related to internet demand, the ever growing use of the internet, whether it is for things, or communication, or entertainment, data centers have been a very hot market for several years and every indication is they’ll continue to be springing up all over the country in 2018.  

PS: As more companies push it to the edge, but not want to go to the cloud, they want to keep more of that information a little closer with those data centers.

KS: They’ll be both proprietary, that is single user data centers, and merchant data centers where various companies will lease space within the building. The biggest example of that is Amazon World Service, where you have lots of companies using Amazon or using Microsoft to host their own websites.

PS: So you’re basically predicting this mild 2018 with growth, but some sectors might be mildly strong or positive? Looking at your forecast overall is there some advice you would give the construction industry right now to say, “Hey, if you’re a contractor or construction company right now, these are the things you might want to take into consideration when looking ahead for 2018.”

KS: Any contractor needs to try to stay on top of the evolving technologies there and try to look more widely for workforce. Definitely get familiar with things like BIM, the autonomous equipment that is coming to the market. That may mean robotic bricklaying equipment. It may mean 3D printers for dangerous or hard to reach places. It may mean the exoskeletons that we talked about for lifting. It may mean the mixed or virtual reality devices to help with training and visualization. I think companies really have to up their game in terms of the sophistication of their leadership, awareness of market trends outside of construction, as well as evolving equipment and workforce needs.

PS: Well Ken, we are out of time but I want to thank you, the chief economist from Associated General Contractors of America, thank you so much for joining us today.

KS: You’re welcome. Glad to do it.

PS: There are some big opportunities for the construction industry as you just heard in 2018. I think what you have here is, understanding how the market is shifting is truly essential. Hopefully on this show we gave you some insight to where the industry is headed for 2018 or at the very least something to ponder. That’s all the time we have for today and if you want to stay up-to-date on all of these technologies, all of these trends impacting the construction industry I really encourage you to sign up for the e-newsletter. You can do that by visiting CONEXPOCONAGG.com/subscribe

 

Posted: 12/6/2017 5:52:13 PM



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