But when Ben? When? Last time I checked (4 seconds ago), the US unemployment was at 9.7% and all projections that I have seen are showing unemployment to be over 10% through the first quarter of next year. I suppose GDP is a more accurate measure of economic growth, but without jobs, increased GDP will probably only help those of use that are lucky enough to be getting a pay check instead of ranting about the economy over a domain name they buy for $8.50 a month.
The worst part about this situation is that, for those of us in the construction industry, an improved economy will not help us out too much until further down the line. In order to start a construction project, you must first get financing from the bank. The banks hold the cards like Chris Moneymaker in the World Series of Poker. And lately, they've been folding even with three of a kind before the flop.
So suppose you deal the bank a royal flush and they decide to wager a few chips on your project. The slow design and permitting process must then begin and nearly end before the drawings can go out for bid, contractors are selected, and the work actually gets going. This is what causes the "lag" in the construction industry as the economy improves.
But what about "shovel ready" projects? I think this term is misleading, and certainly over-used. Unless you are filling potholes, there are really few projects that are truly shovel ready. If plans have been shelved for several years, in the very least the existing conditions have to be verified and brought up to date. What construction has taken place since these plans were generated? Has there been erosion, or effects of weather? What maintenance issues from existing structures have arisen and now need to be dealt with? What code requirements have changed since the initial design? Are the LEED certification requirements the same as they were when the plans were generated?
All of this stuff takes time. So even with a project that was shelved for several years, we can't just pick up the plans grab, our shovel and hard-hat, walk out the door, and start whislin' Dixie.
The bottom line is that construction is a lagging beneficiary of economic growth, so if we are just now starting to show signs of activity in the economy, we may have quite a while before contractors start hiring again.
But have your shovel shined up because when it turns around, we'll be diggin' like there's no tomorrow.
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John - Being a former construction analyst and C-Level building product executive, I have always observed the correlation between unemployment rates and the need for new commercial building due to increasing office and hotel vacancy rates. “Makes since right?” In addition the increasing unemployment rate will not necessarily deplete the need for new Institutional building (schools, prisons and other projects); however the loss of jobs will water down the tax base and the available states funds will be required to provide relief to the unemployed. It would appear that commercial architectural firms are just starting to increasingly show signs of pain by either cutting back drastically or worse. From my perspective all of these events and the lagged hardship of design firms would indicate that for much of 2009 there were still several projects in design and construction and that this cycle is headed toward a more exaggerated collapse in Q4 2009 and will continue into 2010. Please note that I hope to be wrong, but I am just looking at the motivational metrics for construction and they are the in dire straits. Let’s talk about it.
ReplyDeleteDoug Bevill
dbevill@team1solutions.com
the recession is far from over but there's lots of money available
ReplyDeletehttp://theweblender.wordpress.com/2009/08/29/the-increased-value-of-a-business-loan-broker/
Doug - I kind of feel like we are ticking ourselves out of it. However 2010 could be another dull year. It's not like there is no work going on, it's just few and far between.
ReplyDeleteweblender - i suppose you are correct, can you get me some of that money?
John - You are correct, there will still be pockets of construction; my point is that the metrics used to forecast demand are the worst that I have seen in my professional career. The unemployment number will continue to be the protagonist in this tumbling commercial and institutional construction market. I consult exclusively with building product manufacturers and they are forecasting at least a ten percent further decline in sales for 2010. These are just the economic facts. Many of the developers have money, but they are either going to keep these assets in cash or they going to start hoarding property on “the cheap”.
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