5 Predictions for 2009

March 3, 2009

5 Predictions for 2009
by Ted Garrison

#1—U.S. Economy

The U.S. recession is only going to get worse with a decline in gross national
product of more than 1 percent in 2009 and unemployment reaching double
digits.

Despite nearly a trillion dollars from a so-called stimulus package, the
economy will continue to falter because the package is ill conceived and
doesn’t do what’s needed to create jobs. Instead Congress is hiding behind the
need to do something to fund many of its pet projects that will create very
few, if any, jobs. Unfortunately, much of the stimulus package will start to
make an impact when the country is already coming out of the recession, and
this may lead to inflation as we saw in housing prices in 2003–2005.

Worse for the construction industry, much of the money dedicated to
infrastructure is for projects that will take time to get into construction
because they are not shovel-ready projects.

Having spent the past few months talking to industry leaders, economists and
others with their ears to ground, I will attempt to predict the construction
industry’s future for 2009. Recently I spoke with Ken Simonson, AGC Chief
Economist, and I agree with his conclusion that when the nation comes out of
the current recession, the construction industry will be different.

The question is this: How will it be different?

#2—Residential Construction

My prediction is that new housing sales will remain at depressed levels
through 2009. During the first half of 2009, new housing starts will remain
below 600,000 in average annual sales. Some areas of the country will do
better, but areas such as California, Florida and Nevada that experienced
rapid large growth in recent years will continue to have almost nonexistent
markets. The reason is it is virtually impossible for homebuilders to compete
with the drastically reduced foreclosure properties that heavily impact these
areas.

At the end of the third quarter 2008, only 56.1 percent of families could
afford the national median price for a house of $206,000. This is the highest
level in more than four years, but it’s still below normal historic levels in
the ’60s. Worse, these figures were before the economic crisis reared its ugly
head and the start of massive layoffs. The economy lost 2.6 million jobs in
2008, of which 1.5 million were in the last quarter, the most since 1945, so
this will continue to suppress demand.

Existing house sales increased during November, but sale prices drop
significantly. This condition will place greater pressure on homebuilders to
reduce their costs, but they can’t do that unless they eliminate the waste
that is in the process. The good news is the recession will bring down
materials costs, but unless the industry eliminates its significant waste,
most builders will not be able to reduce their costs enough to improve their
situation. A bailout or tax credits for first-time buyers will not solve the
inherent problem in the industry that housing prices are too high compared to
what people can afford. There will be little growth in new house sales until
incomes rise, and that seems unlikely in the near future when one considers
the economic situation, or homebuilders face the fact that they must eliminate
waste in their systems.

The good news is those homebuilders that get the message and learn how to
remove the waste from their processes will be able to offer affordable housing
and will get more than their share of business. Those that continue to pursue
the business as usual will probably disappear unless they have deep pockets.

#3—Nonresidential Construction

Nonresidential construction will go down between 5 and 10 percent in 2009.

Despite the credit crunch, the Census Bureau’s revised report indicates that
the three months ending in November actually saw an increase in construction
expenditures compared with the three prior months. Construction spending in
November totaled $1.078 trillion at a seasonally adjusted annual rate, but the
impacts of the deepening recession are going to start taking their toll.

The combination of a credit crunch, a decline in manufacturing, large numbers
of retail closures and declining hotel occupancy will force cutbacks in
capital spending. These impacts will force construction expenditures down to
between $900 billion and $950 billion. Unfortunately, the stimulus package is
just not going to have a significant impact in the short term for the
construction industry.

#4—Infrastructure

What may shock some is that I predict that infrastructure work is going to be
down during the first half of the year. It may recover to prerecession levels
in the second half of the year depending on the actual projects funded in the
stimulus package.

First, states are cutting back on capital expenditures because of their budget
problems, so the financing of infrastructure will fall more heavily on the
federal government. In the fog of Washington, it is difficult to determine
exactly where the stimulus money will be going, but after my initial optimism
about President Obama’s commitment to infrastructure, there appears to be more
business as usual. Depending on whose figures you look at, the infrastructure
needs an additional $300 billion to $500 billion a year in expenditures above
2008 levels. So while any additional money spent on infrastructure is good, it
comes in degrees.

As a stimulus package, it should focus on shovel-ready projects in order to
maximize its impact on the economy. A press release on December 16, 2008, by
the AGC stated, “Personal earnings will increase by $1.1 billion and the
national gross domestic product will increase by $3.4 billion for every
billion dollars invested in new infrastructure projects.” They also added that
for every billion dollars invested in projects “more than 28,500 jobs will be
created or saved nationwide.” However, to receive these benefits in 2009, the
commitment in funds must translate into projects that can start immediately.

Also, the cost of not fixing the problems could be even greater. For example,
the Department of Transportation estimates that traffic congestion costs
Americans $200 billion a year. To receive the maximum benefit to the nation,
we must focus on projects with the highest return on investment, not some
congressperson’s pet project.

I disagree with those who argue that infrastructure work will take up to 18
months to start taking effect. The St. Anthony Falls Bridge in Minneapolis was
a $230 million replacement bridge that was completed in 13.5 months from the
date the original bridge collapsed. The key is for government to work with the
industry in a collaborative way to maximize the use of the available funds.
Integrated project delivery methods have proven they can deliver maximum value
to communities. For example, the aggressive schedule of the Flatiron-Manson
team on the Minneapolis bridge saved the community more than the cost of the
bridge.

The financial crisis I predict will force more government agencies to consider
the use of public-private-partnerships. Not only does this increase potential
capital, but Peter Luchetti of Table Rock Partners says that P3 projects cost
the tax payers about 18 percent less. This approach is essential considering
the huge capital investments that are needed.

#5—Time of Opportunity

Despite the first four predictions, I don’t predict doom and gloom for the
entire construction industry, just those that aren’t prepared for the changes
that are coming. In fact, I predict that companies that know what to do and
act on those opportunities will have a relatively good year and be primed for
growth when the recession winds down.

Winston Churchill said, “A pessimist sees the difficulty in every opportunity;
an optimist sees the opportunity in every difficulty.” I see evidence that
well-run companies see the opportunities to better serve their clients. These
companies focus on value, and in a crisis clients typically are more concerned
about the value received.

During recent interviews with Charlie Bacon, President and CEO of Limbach
Facility Services, and Steve Halverson, President and CEO of the Haskell
Company, there was a common theme. They said they couldn’t stop investing in
the development of their people or technology that would help leap forward
when the recession ended. It’s this kind of forward, positive thinking that
will hold companies in good stead during the recession.

Of course, they reported that companies need to act smart by not wasting
resources and focusing on keeping receivables under control. But successful
companies focus on the positive, not the negative. Contractors that do the
latter will struggle during the recession and may even perish.

Those companies that prosper during the recession and position themselves to
surge out of it will do several things. They will focus on LEED construction
and retrofits, place greater emphasis on collaboration through integrated
construction processes, and invest in proven technology such as BIM to help
operate more efficiently and effectively.

In the end it will be about value. Those companies that focus on maximizing
the value to their clients will not only survive, but thrive. This is true in
a recession or a boom.

Ted Garrison, president of Garrison Associates, is a catalyst for change. As a
consultant, author and speaker he provides breakthrough strategies for the
construction industry by focusing on critical issues in leadership, project
management, strategic thinking, strategic alliances and marketing. He can be
reached at 800-861-0874 or by email at Growing@TedGarrison.com. For further
information see his web page at www.TedGarrison.com.

 

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