Will there be a mild and moderate recovery? CBO examines growth trends for the private construction market.

On April 2, the Associated General Contractors of America (AGC) reported that “construction spending in February topped year-ago totals by 5.8 percent as a double-digit increase in private construction offset a small drop in public sector spending.”

In addition, nearly all private nonresidential segments surpassed their February 2011 levels this February. And with new drilling techniques for natural gas creating a boom market for contractors, some in the industry are chattering about signs of a recovery. 

But just what does a recovery for the construction industry look like right now? CBO asked three prominent industry experts to paint the picture for us. 

To comprehend today’s construction landscape, it’s necessary to understand the construction sectors hit hardest by the recession. The sectors tied to the housing markets and private lending suffered the most. Also, commercial and office space was overbuilt and has still not recovered well, says Tim Sznewajs, managing director with FMI Capital Advisors.

Likewise, the prospect for notable increases in public construction seems bleak. “The whole public sector is still weak and likely to stay weak for several years—the weakest of all is school districts and local governments,” says Ken Simonson, AGC’s chief economist. 

Even with the negative news, the takeaway message for 2012 is positive: “Every month, I look at construction employment change by state from the year before. That picture has been gradually improving. The latest data for February show that construction employment was up compared to February 2011 in 30 states plus Washington D.C.—that was the largest total in over 5 years,” Simonson says. 

To sum it up, the construction industry is experiencing a mild and moderate recovery that is uneven across different geographies. Here’s a look at the market sectors surging ahead.

Power and Energy 

On February 8, The Wall Street Journal reported that the use of new drilling techniques to tap oil and natural gas “helped add about 158,500 new jobs in the past five years.” Not only is this new energy boom feeding the U.S. economy, but it is also great news for contractors. “All the activity going on in drilling these shale deposits in various parts of the country is generating quite a bit of construction activity,” Simonson says. 

Since these wells require access roads, storage ponds and pipeline connections among other needs, quite a bit of infrastructure must be built to support the mining of natural gas—not to mention the ancillary needs (housing, commercial and healthcare services, etc.) of booming areas like western North Dakota and northeast Montana, where the Bakken Shale is located. 

“Wherever shale drilling crews go, you can be sure that there will be some kind of activity in the surrounding community, and it’s not just for the few weeks or months crews may be active—some people get hired on to maintain the facilities to keep the liquids or gas moving, and the royalty checks keep coming,” Simonson says. 

According to FMI’s 2012 Mergers & Acquisitions Trends Report, “Contractors that can perform in remote, austere and harsh environments are especially attractive for such segments.”

But natural gas is not the only driver for this construction sector. “There’s been investment in retrofitting coal-fired power plants and natural gas fired plants, and wind and solar transmission lines—some of them hundreds of miles long and costing hundreds of millions of dollars,” Simonson says. Other examples of growth in this sector include the two recently approved nuclear plant locations to be constructed in Georgia and South Carolina. 

“There’s just a huge amount of money being spent cleaning up and expanding energy production,” says Hugh Rice, senior chairman for FMI’s Investment Banking division and founder of the firm’s Mergers and Acquisitions Group.



While manufacturing is still in a slow recovery mode, there are reasons to be optimistic.

The increased drilling for natural gas has prompted companies to produce steel pipe and mining, drilling, pumping and compressor equipment. Increased natural gas production will also impact where companies choose to locate. “Specifically, petrochemical plastic manufacturers are bringing production back to the U.S. to take advantage of the now very low natural gas prices,” Simonson says, citing an example of a steel plant being constructed in Louisiana that will use natural gas as a fuel instead of coal. 

Other manufacturers have increased capacity in the U.S. because of the disruptions caused in global trade patterns by natural disasters, such as the volcano that shut down air freight from Europe in 2010 and the tsunami in Japan a year ago. “All of these things were pretty disruptive to automotive and electronic manufacturers,” Simonson says. 

Multifamily Housing 

In an analysis of the federal data released this April, Simonson indicated that “new multifamily construction was up 26 percent from the previous February and 2 percent from January.” The surge in the multifamily housing construction market, which is very strong as of recently, is a direct reflection of the crash in the housing market, remarks Sznewajs. This recent activity is mostly concentrated in the rental markets, not high-end condominium buildings, Rice explains.


“Healthcare has been the one market that has kept more general contractors alive in the last five years than any other single market,” Rice says. Fueling the rise in healthcare construction are aging demographics, and the Health Care Act, which encourages mergers and acquisitions by large healthcare providers, Sznewajs explains.


Simonson offers another perspective: “The demographic changes are important over a longer time span, but I think what’s driving hospital construction now is much more technological and economic changes.” Before the stock market crashed and the bond market froze for a while, many hospital expansion and remodeling projects planned in 2008 were shelved.

“Now the stock market indexes are at multi-year highs, and private activity bond market has reopened with extremely low interest rates, so hospitals can afford to do projects,” Simonson says. Plus, the days of hospital wards and double rooms are over, and hospitals are responding by retrofitting their facilities. 

Even as healthcare construction reaches its peak, the need for technological improvements will continue driving healthcare construction as many facilities need to remodel their operating rooms or diagnostic rooms to accommodate new equipment and procedures. “I think this market will remain very strong for the next couple of years,” Simonson says.

Technology-Related Construction

Consider this: More than 750 million people are on Facebook. This substantial increase in data production and mobile computing is only one of the factors driving the construction of data centers, Sznewajs notes. As  more data moves to the cloud,  facilities must be bulit to house the hardware. 

On March 12, Digital Realty Plus, a global data center solutions provider, released results from its annual study of the North American data center market, which surveyed senior decision makers at large corporations in North America. Findings indicated that “92 percent of respondents are planning data center expansion.” 

Right now, only a small amount of firms are constructing these data centers, Rice says, and although the mechanical and electrical contracting work is very involved, the structure itself resembles a warehouse, presenting many opportunities for general contractors who have experience in this market.

Planning for the Future

Growing in today’s market means contractors will have to look for new opportunities and continue to find ways to combat stiff competition and low margins. Although construction is finally on the upswing (as shown by both the year-over-year spending and employment figures), it is also a treacherous time, Simonson cautions. “I’m hearing of more and more subcontractors going out of business because the bid prices are still low, and some of the materials costs have been shooting up, most notably diesel fuel prices,” Simonson says. 

The mid-sized general contractors are feeling the squeeze: Most large billion plus projects are almost exclusively accessible to the mega-firms, and owners often want a single point of contact, reports Rice. “It’s very different for the companies doing the $12, $15 or $20 million jobs,” he says. 

Despite the ueven nature of the recovery, 2012 promises opportunity for contractors—particularly niche-oriented companies with a very specific skill set. “Larger firms have a great appetite for acquisitions because they were more immune to the downturn and may be looking to diversity, especially in the energy, healthcare and high-tech sectors,” says Sznewajs. Rice also cites examples of healthcare contractors who are entering the industrial sector by hiring talent—another option for expansion into new markets.

The bottom line: Most agree that a construction recovery must come from the private sector. “If you have a project that you can pencil out and have a decent return, there is lots and lots of money to fund that,” Rice says. 

Construction Business Owner, May 2012