Prizio Construction Inc

550,000 sf VWR warehouse in Visalia with tilt-up panels in place

Tilt-up wall panels are now in place at our VWR Visalia project.  Mister Crane of Orange, CA was able to erect the entire building for us in only four days. With the majority of our work now complete we will be reducing our crew for the duration of the project, but other trades such as the panelized roof structure and fire sprinklers are now gearing up for a May 2012 completion. The construction manager is Epstein Construction, Inc. Chicago, IL.

Echoing a point made previously in this blog, AGC SmartBrief cites an article in Modern Distribution Management noting the uneven nature of the recovery in the construction industry. AGC chief economist Ken Simonson says, “At a time when private sector construction activity appears on the mend, local, state and federal funding cuts for infrastructure projects may be forcing layoffs in many metro areas,” The big question remaining is, will private sector gains at least balance off public sector losses? If they do not do that and then some, there will be no net recovery in construction.

According to AGC these areas have managed to tip the balance in favor of net growth:

Dallas-Plano-Irving, TX, again added more construction jobs (7,400 jobs, 7 percent) than any other metro area during the past year while Grand Forks, ND-MN, added the highest percentage (18 percent, 400 jobs). Other areas adding a large number of jobs included Fort Worth-Arlington, TX (2,900 jobs, 5 percent); Beaumont-Port Arthur, TX (2,300 jobs, 13 percent); Columbus, OH (2,200 jobs, 8 percent); and the Chicago-Joliet-Naperville area (2,000 jobs, 2 percent).

Of course, any long term recovery of public works spending relies heavily on a strong recovery of the private sector, since the private sector is the source of all tax revenue.  Even as the people of Texas have figured this out, the politicians in Washington, DC and Sacramento have yet to grasp this economic mystery.

We are seeing signs in our market in southern California that private work is picking up. There are some significant industrial projects coming up soon, and we have seen a marked increase in bid opportunities for private work ourselves. My real estate broker friend, Lee McCullough, is also seeing improved lease activity from private companies seeking to lock in low rents before the recovery more fully develops. To be sure lease rates are still low and construction profit margins are still razor thin, but there is a real sense that we have finally turned the corner.

                A recent Reuters article lends support to our admittedly subjective analysis of the market by citing increased tax revenues coming into the State of California coffers. This lends welcome support to our view that things will be better, at least on the private side by the end of the year.  Unfortunately we are less certain about the future of public works projects, as the state government and many cities and local agencies struggle to balance badly out of balance budgets in the coming year.  Hopefully the private sector will take up the slack where the public sector is still weak.

Jim Haughey of Reed Construction Data posted an article recently entitled, Bitter Winter Weather Twists Price Trends. In it he looks at the effect of winter weather on construction material prices and comments on expected cost inflation of these prices in general. There is no doubt that the severe winter weather has reduced demand for many construction products, thus dampening potential inflation of the cost of many of these items. He also notes that basic metals such as steel, copper, and aluminum are unaffected by weather for the most part, because they are used in so many other industries besides construction. He rightly notes that those prices have remained firm and in most cases increased.

                Lumber, concrete, and gypsum are almost entirely dependent on construction for their demand, and those prices have languished with the overall state of construction.  China’s recent increased demand for some lumber products has at least arrested the decline in wood prices, but others items remain mired in a deep recession.

                Based on Haughey’s crystal ball, overall inflation of construction material prices is predicted to be 5-6% for 2011. However, what is not addressed at all is the potential for meteoric price increases once demand returns. Lumber mills have closed and laid off thousands of people. Concrete suppliers are operating at losses that need to be recouped. Construction workers have for the most part not received pay raises in three years.  In addition, renewed construction activity, when it comes, will put more upward pressure on basic metal prices. The groundwork is in place for rapid inflation in the construction industry. It only awaits the trigger of a broad economic recovery to set it off.  It is not a matter of if but only when this will happen.

After rising substantially towards the end of 2010, rebar prices have continued to jump in January by increasing another 13%. We thus have a nightmare scenario in which profits are squeezed to the limit on the one hand and at the same time material prices are rising on the other.  Anyone remember Jimmy Carter? He brought us a stagnant economy and inflation at the same time – stagflation.  That’s what this is.

Since no one has any room in their cost structure to absorb anything, look for rebar subcontractors to insist on recovering these price increases.  Subs will walk away from bids before they absorb such huge hits to their already meager profits.  Concrete subcontractors who include rebar in their scope, and farther up the food chain general contractors, will need to be aware of the issue and be prepared to pass these increases along to the end user whenever possible. 

We should also all be aware that there is tremendous pent up inflation waiting for us in concrete prices, as soon as any signs of a construction recovery start to emerge. We have not seen it yet, but look out! It is definitely coming.  The problem concrete sellers have is that there are almost no uses for their products outside of the construction industry. Steel, on the other hand, is used by many industries, so it can see price increases despite the limited demand for it in our sector.  However, concrete suppliers have been badly hammered by rising energy prices and ever-tightening regulations on cement production.  They are desperate to get back to a profitable price point.

                Even as the overall economy seems to be turning the corner, construction remains the hardest hit of the economy’s major sectors, with no signs of improvement in sight. This is according to AGC SmartBrief citing an article in International Construction. In fact a weakness in public works spending previously predicted in this blog is now materializing, as federal economic stimulus money runs out and state and local government spending also fades in the face of budget crises.

                Unusually harsh December weather is no doubt responsible in part for the poor showing in construction employment last month, but the fundamentals that are likely to lead to a lean 2011 are still in place. The truth is we need a solid recovery of private construction spending to get us out of this mess, and that recovery has simply not materialized.  We can only hope that it begins to emerge in the near future. Until it does the livelihood and dignity of some 2 million unemployed construction workers will be held hostage by politicians who think gaining more control over us is more important than allowing hard working Americans to regain control over their own lives.

The good news is that Christmas sales are showing a marked improvement of the last few years, according to a recent article in the Wall street Journal entitled Shoppers Splurge. That is great news for the much-anticipated economic recovery. On the other hand, on the same day, the Washington Post tell us that unemployment just increased to 9.8%. Are you confused? We certainly are.

                What does this have to do with construction specifically? Uncertainty has put a major damper on the private commercial construction market. People do not make long term investments in things like new buildings when they can’t figure out what’s going on in the economy. And we desperately need to get private construction spending going again.

                One place where there is some certainly is in the public sector. We are certain that the public sector in California is in a lot of trouble and will not be able to continue spending on construction, or anything else, as it has in the past. Thus a decline in public sector construction is all but guaranteed. Even federal work is likely to see cuts next year as the Republicans in the House of Representatives have promised to cut spending.

                Based on this and our own experience with declining bid opportunities locally, we predict a further contraction of the commercial construction market in 2011, at least in California.  Get ready for another tough year. Maybe 2012 will be better.

I feel compelled to comment on a story brought to us in the AGC SmartBrief from Reuters, in which they herald the coming green jobs destined to save us from the current construction depression. I am tempted to use some colorful profanity to describe my opinion of this obviously self-serving article, but I will reluctantly do my best to maintain a suitable level of decorum.

                According to the authors of this piece, green building has already created 2.4 million jobs in America and promises to bring us 7.9 million more by 2013. This is really good news if it were only true, since we only have a little over 2 million unemployed construction workers in the nation today. To call this projection optimistic is the height of self-restraint. To call it a load of shovel ready bovine excrement would be much more accurate.  It would be hilarious to contemplate the wild speculation involved in such a prediction, if it weren’t so deadly serious.

                Green jobs may or may not materialize somewhere in the future, but we have over 2 million unemployed construction workers who need real jobs right now to feed their families and make their house payments. We need real solutions based on proven free market principles that will restore the dignity and livelihood of these once hard working men and women. Pie-in-the-sky projections like these will not do that, but they might well divert needed investment dollars and effort to things that will delay the implementation of things that will really work.

                AGC, of all people, should be a little more critical of what they publish as news. This is not news at all, but merely a public relations effort by people with a vested interest in promoting government spending on so-called green technology.  This kind of nonsense will not put people back to work in our industry; it will delay effective efforts to do so, and as such should be condemned.

The long awaited recovery for the construction industry is just around the corner, according to an article in today’s (10/29/10) Wall Street Journal. McGraw Hill, the source of the encouraging news, says that the most marked improvements will be seen in single family residential and multi-family, with both sectors expected to post strong gains next year of 27% and 24% respectively. Commercial construction is in store for a somewhat less robust, but still impressive 16% increase. Public works projects, which have been the salvation of many beleaguered builders this year, are expected to be off by 1% next year

            Of course, the bad news is that construction is coming off a 50-year low, so the improvements are being made on a base that is dismally depressed. Furthermore, McGraw Hill’s powers of prognostication are in some doubt after they forecasted an 11% improvement for 2010, that you may have noticed wasn’t quite on target.

            I am seeing a weakening public works market in California, owing mostly to the state’s terrible budget crisis. No quick fix to this problem is on the horizon. In fact, things will probably get worse before they get better. The results of next Tuesday will have some bearing on that, but how much or in what form is not clear at this point. Based on what I see, a forecast of a 1% decline seems optimistic.

            Single family construction is definitely picking up in southern California. This does our company no good, but it is still good news for many other contractors. We still have a lot of condos-turned-into-apartments in our market, so I am less optimistic about a multi-family construction recovery. The improvements for single family predicted by McGraw Hill seem credible, but I would be skeptical of their 24% improvement forecast for apartments and condos.

            Commercial construction is still very weak in California. While it is true that a 16% recovery just barely makes up for the losses posted since 2009, there is still scant evidence that there is much improvement in store for this sector of the market. A robust showing by Republicans may give private businesses some new confidence in the economy for next year, but that is less than certain, to say the least.  Any national trend will likely be blunted locally by the California results, which promise to be much less favorable to private firms.

            It is risky business to make economic predictions a few days before a major election, but if McGraw Hill is willing to stick their necks out, I will too. I think their forecasted improvement for single family construction is credible and their public works forecast is believable if slightly optimistic. However, I think that their multi-family and commercial construction forecasts are not going to pan out. I hope this isn’t true, but you see where hope has gotten us so far.