Construction Forecast Hinges on Demographics

BY ROBERT P. MADER of CONTRACTORs staff ORLANDO, FLA. Hugh Rice, managing director of FMI Management Consultants, doesnt pretend to be a soothsayer, but he told mechanical contractors here what signs to look for in 2004 and the years ahead. Demographics is destiny, Rice said March 1 at the Mechanical Contractors Association of America annual convention here. The important factors are household formation,

BY ROBERT P. MADER of CONTRACTOR’s staff

ORLANDO, FLA. — Hugh Rice, managing director of FMI Management Consultants, doesn’t pretend to be a soothsayer, but he told mechanical contractors here what signs to look for in 2004 and the years ahead.

“Demographics is destiny,” Rice said March 1 at the Mechanical Contractors Association of America annual convention here. The important factors are household formation, job creation and per capita income. All that information is available for a contractor’s metropolitan area, he said.

One number to watch is the growth of single-person households and the decline of family households. Rice believes that both single-family and multifamily residential will decline in the immediate future.

Local demographics are important because Rice can make some national generalizations that don’t apply in some areas. For example, Rice said that population trends show that the number of school-age children — and thereby school construction — will decline over the next few years.

But those are just national numbers that may vary from regional statistics. Greg Larson, vice president of Raven Mechanical in Houston, said last December that school construction is booming in his area, with school districts building $50 million high schools. Similarly, Paul Buddy, president of Cannonball Mechanical in Aurora, Ill., recently told CONTRACTOR that school construction is hot in the growing exurbs southwest of Chicago.

That’s why contractors need to watch where the people are migrating and immigrating, Rice noted. The fastest growing states will be California, Texas, Florida, Virginia and Georgia. Immigration will increase and Hispanic residents will double to become 24% of the U.S. population by 2050.

Similarly, if contractors watch where the population is going, they can anticipate where the water and sewer construction will be. Older water systems also will need rehab work to stop leaks and for water conservation.

A lot of construction is driven by excess money — the United States is one place where we build just because we can afford to do it. People with money and time on their hands drive the entire recreation market; many of these people are retirees.

Half of all industry activity is retrofit and service, he said. So what might contractors look for? Cost reduction and market demands cause factories to retool to better compete, Rice said. Technology creates a need for different facilities.

Political and social trends can create or hurt markets, he noted, adding that environmental law grew out of public demand. Environmental cleanup will continue to grow by 2% to 3% per year. Multifamily construction might not recover for a long time because of the construction defect concept and lawsuits, especially with condominium construction.

Rice shared a host of other predictions that would apply on a national level. Some cities such as Atlanta, Dallas and Denver have too much vacant office space, so that market will be slow. Retail will be flat, he predicted, except for big boxes such as Wal-Mart, Sam’s Club and Costco. Aging Baby Boomers will be the reason for $900 billion in health-care construction over the next 15 years. Security concerns will lead to more military construction and more public safety and prison construction.

Rice also gave his views on the labor situation in the construction industry.

“We don’t have a labor shortage in mechanical construction today,” Rice said. “We have a shortage of really good, really qualified people.”

He explained the two completely different schools of thought on future labor shortages. Rice said he doesn’t take sides on the issue.

Those who expect a shortage point out that there will be 168 million jobs in 2010 for 158 million workers. The number of people older than 65 will increase by 26% and Baby Boomers will begin retiring. Nurses, civil servants and construction have an inordinate number of older workers. Fertility rates are declining in the “first” and “second” worlds.

One the other hand, those who don’t expect a labor shortage say Boomers will need to work beyond age 65. The existing labor force and increased productivity will be able to handle the load, according to this school of thought. That’s grounded in recent history — the labor force has doubled since 1945, but the economy is eight times larger than in 1945. Immigration will continue. Some jobs will move offshore. Retraining and relocation will move the labor force where it’s needed. And if spot shortages occur, wages will increase.

“What we have now is a capital shortage,” he said.

Thirty years ago all banks had departments that lent money to contractors. Now, he said, the only banks that lend to contractors are LaSalle Bank and Harris Bank, both in Chicago.

If contractors can’t get surety credit or have to sign personally for a bond, then they have a capital shortage, he said. Sureties recently have suffered direct losses that total more than 80% of their income, he noted, so most of them are losing money.

An alternative product is an insurance-based product called “subguard,” which is sold by Zurich as a replacement for subcontractor bonds on large projects, Rice said. The general contractor makes the determination, subguards the good subs and bonds the high-risk subs. Another insurance product called “genguard” works the same way for general contractors.

Rice urged the contractors to open up a line of credit when they don’t need it or borrow money and then sock it away. It’s worth paying for, he said, to have the extra cash when it’s needed.