Construction Spending Projected for Moderate Growth

First look at 2017 suggests continued balanced growth as nonresidential building activity moves into latter stages of the current construction cycle.

By Kermit Baker

For the first year in recent memory, in 2015 the nonresidential construction sector actually exceeded expectations. After an unusually severe winter in many parts of the country delayed many projects at the start of the year, other obstacles appeared as the year progressed, including a cutback in energy-related capital spending as energy prices fell, a financial sector that remained reluctant to lend into the real estate market, the looming specter of higher interest rates domestically, and a slowdown in the Chinese economy
that threatened international economic growth. As recently as last June, the American Institute of Architects (AIA) Consensus Construction Forecast Panel was projecting growth in building spending of just under 9% for the year, paced by 12% growth in commercial and industrial facilities, and a meager 3% increase in institutional construction activity.

The industry easily blew by those targets, effectively doubling the pace of growth expected by the experts. Through November 2015, building construction spending was up over 16% compared to the first 11 months of 2014, with commercial/industrial spending up 26%, and institutional activity up 8%. And even with this unexpected acceleration, 2016 is projected to produce healthy growth levels: over 8% overall with 10% growth on the commercial/industrial side and 7% for institutional facilities. With this panel’s first look at 2017, another year of healthy but more modest growth is expected: just under 7% across the building sector, with 7.5% for commercial, 5.3% for industrial, and 6.7% for institutional. With 4 years of nominal gains in nonresidential building activity in hand and 2 more years of healthy growth expected, the prospects of the beginning of a modest down cycle beginning in 2018 or 2019 are increasing.

Kermit Baker, Hon. AIA, is the AIA’s Chief Economist and part of the AIA Economics and Market Research Group, which provides AIA members with insights and analysis of the economic factors that shape the business of architecture. Article excerpt reprinted with permission from AIA’s magazine, AIArchitect, January 29, 2016 issue.

Looking Up

By Katie Kuehner-Hebert

So says the results of a survey of more than 1,500 construction firms by the Associated General Contractors (AGC) of America and Sage Construction and Real Estate, published in the January report, “The Challenges Facing a Growing Industry: The 2015 Construction Industry Hiring and Business Outlook.”

Construction firms continue to cope with shortages of available workers. Seventy percent of firms note they are having a hard time finding either salaried or craft professionals. And 69% of respondents predict labor conditions will remain tight, or get worse, during the next 12 months.

Firms are responding to worker shortages by increasing pay and/or benefits. Forty-nine percent of survey participants report they have increased base pay rates, 30% note they are providing incentives and/or bonuses, and 23% say they have increased their contributions to employee benefits to retain or recruit workers. And nearly half of firms report they plan to increase their investments in training and development compared to 2015.

“What is particularly striking about the findings on worker shortages is that they are consistent with the responses from last year’s Outlook,” says Ken Simonson, AGC’s Chief Economist. “In other words, after a year of raising pay and increasing benefits, contractors remain as worried about the lack of qualified workers as they were at the beginning of 2015.”

In addition to coping with worker shortages, contractors are worried about the continued increase in health-care costs. Seventy-nine percent of firms acknowledged the cost of providing health care for their employees increased in 2015, while another 81% expect their health-care costs will increase in 2016.

Reprinted with permission from Constructor, March/April 2016, a publication of the Associated General Contractors of America.

What Engineering Firms Can Expect in 2016

Looking back at 2015 offers many opportunities for engineering firms in 2016. Here are 8 trends we think you should be keeping an eye on and the messages to take away for your business.

By Mick Morrissey

If you’re like most mechanical, electrical, plumbing (MEP), and fire protection engineering firm leaders or managers in the United States, this was a great year for your firm. What’s 2016 going to look like?

Here are eight trends we think you should be keeping an eye on and the messages to take away for your business.

1. 2015 was a record year for many MEP and architecture/engineering (AE) firms; 2016 will be even better. The public sector is spending again, the private sector is hopping like it’s 2007, and health care and educational institutions are seeing their endowments at record levels.
   Message: Demand for your services will be off the charts—plan accordingly and choose your opportunities wisely.
2. It looks like the most recent federal budget will extend the tax credits for wind and solar energy projects and development. Both can be very attractive markets for MEP firms to diversify beyond the traditional vertical or buildings markets. As an added bonus these markets often pay faster than traditional MEP firm clients.
   Message: Fortune favors the brave—this is your year to diversify.
3. The one big down market will continue to be upstream oil and gas. This is going to come back a lot slower than was anticipated last year.
   Message: Don’t make an unhedged bet on the energy market. You always need to be in a sector that moves counter-cycle to the price of a barrel of oil.
4. The war for talent is back to pre-recession levels—and talent is winning! The labor market is as tight as it has ever been. The biggest challenge for your firm this year will be finding the right talent to allow you to take advantage of the market demands.
   Message No. 1: You will be tempted to hire quickly—don’t. Remember: hire slowly, fire quickly.
   Message No. 2: You’re going to have to pay a lot more for talent than you did last year.
5. The 2015 merger of KJWW Engineering Consultants (Rock Island, Ill., 2015 MEP Giants No. 24) and TTG Engineers (Pasadena, Calif., 2015 MEP Giants No. 31) sent shock waves through the MEP sector, creating a huge unified MEP capability from the West Coast through the Midwest. Expect to see at least one more mega-merger this year as the sector continues to shake out.
   Message: Your competitive environment can and will change overnight. Scan your environment. Match it up with your strengths and weaknesses. Then figure out if you would be better off buying, selling, merging, or staying the course in 2016.
6. The MEP sector will consolidate at record pace next year as more firms decide to sell because they will be unable to engage millennials in their ownership transition programs. 2015 saw a record number of AE deals and we expect 2016 to see an increase of about 10%.
   Message: The merger or sale of a competitor could provide an excellent opportunity for you to recruit key talent that is disaffected with the deal.
7. The rise in mergers and acquisitions (M&A) in this sector will result in more and more talent spinning off from the merged entities to start their own firms—either because they are forced out or because they see this as their once-in-a-lifetime opportunity to start their own firm. The problem? These smaller start-ups typically have low overhead and win work by charging lower fees, putting downward pressure on multipliers for the rest of the market.
   Message: Build your competitive advantage around tough-to-replicate competencies, a powerful brand for expertise, and flawless execution. This will make you “sticky” with your clients. They will be reluctant to drop you for a low-cost, risky provider.
8. Speaking of flawless execution, this is the year that you will embrace lean design processes. Why? Because there will be so much work to do and you will have so many production constraints, that you will be forced to think outside the box on how to get the work
   done. And when you look at the most successful MEP Giants, they either are all using lean or are about to.
   Message: Don’t wait for another job to blow up in your face due to 1950s project management philosophies. Figure out how to get lean.

Mick Morrissey is managing principal at Morrissey Goodale. Copyrighted 2016.CFE Media LLC. 122622:0316PF

Positive Outlook Continues for Engineering Careers

Engineering continues to be a promising career to choose, according to Aerotek, a leading provider of engineering staffing and recruiting services. Aerotek reports that today’s engineers enjoy the benefit of higher pay and low unemployment rates as well as the opportunity to drive innovation in an evolving world.

Engineers are projected to command the highest starting salary of $64,891 among 2016 graduates, according to the National Association of Colleges and Employers. This is up 3% compared to 2015 and significantly higher than graduates in other disciplines, who have an average projected starting salary of $48,963.

A low unemployment rate of 3.6% among engineers is helping to drive the demand, as employers face a relative shortage of talent needed to fill new positions as well as positions vacated by retiring workers. From January 2014 to December 2015, there were 2.5 million engineering jobs posted, but only 567,000 active job candidates, according to CareerBuilder.

Also fueling high demand for engineers is their essential role in many of the country’s most vital priorities and advances, such as constructing and repairing large infrastructure projects like roads and bridges; designing and building tools, engines, and machines; developing systems and tech advances in medical equipment; analyzing the environmental impact of construction projects; and developing sophisticated consumer electronics. These and many other needs are why, according to the Bureau of Labor Statistics, the following occupations are experiencing the fastest growth:

• Civil Engineers;
• Mechanical Engineers;
• Biomedical Engineers;
• Environmental Engineers; and
• Electrical Engineers.

Aerotek, headquartered in Hanover, Maryland, is a leading provider of technical, professional, and industrial staffing services. For more information, visit Aerotek.com.

Manpower Solutions

By Kermit Baker

The strong pace of growth in construction activity has put pressure on its labor force, as the availability of construction labor is now one of the serious issues facing the industry. According to information from the U.S. Census Bureau’s American Community Survey, the construction workforce nationally declined almost 20% between 2007 to 2013, from over 12 million workers to under 10 million. However, since the unemployment rate in the construction industry is close to the overall unemployment rate, it is unlikely that many more construction workers from the boom years will be returning to the industry. In fact, a recent research study by the U.S. Census Bureau tracked the movement of unemployed construction workers during the last downturn. Of construction workers who were unemployed 3 months or more between 2006 and 2009, 40% had returned to the construction industry by the end of 2013 (either recalled by their previous employer or in another construction job), about one-third moved to another industry, and about one-quarter were not employed as of that date. Presumably most of this last category has left the labor market.

In addition to increasing compensation for construction workers—and there is evidence that wages are beginning to climb for most of the skilled trades—4 other longer-term strategies could help increase the availability of construction workers:

Attract additional younger workers. The industry has always relied on young graduates (mostly men) right out of high school or vocational training programs to provide the next generation of construction workers. Over much of the last decade, there have not been many opportunities in this industry, so these job-seekers pursued other career paths. Now the challenge is to revive interest in this field by better explaining the compensation potential, career growth opportunities, and ability to become a business owner in an area that has traditionally had the most business start-ups of any industry in our economy.

Rebuild training and apprenticeship programs. There are many fewer opportunities to pursue training programs in the construction trades than there were in the past. According to the U.S. Department of Labor, there were fewer than 20,000 nationally registered active apprenticeship programs in construction in 2014, only about half of the number there were 15 years ago. As recently as 5 years ago, in the middle of a severe construction recession, there were one-third more of these apprenticeship programs—so as the industry has been growing, training programs have been shrinking.

Restart immigration flows. Construction is an industry that has traditionally relied very heavily on an immigrant workforce. Given the weakness in our economy during the recession, fewer immigrants were looking to come to the United States to pursue economic opportunities. Our economy has now recovered, but pre-recession immigration levels have not. And the political discourse on immigration is certainly not conducive to encouraging more of these potential construction workers to want to do so.

Make the industry more attractive to women. Younger women are pursuing a much broader set of career options than their predecessors of a generation or 2 ago; unfortunately, construction is not one of them. In 2007, at the peak of the construction boom, only 2.6% of the construction trades labor force were women, according to the U.S. Census Bureau. By 2013, even with a much smaller labor force and fewer employment options, that share fell to 2.5%. Quite obviously, many feel that construction is an industry
that is inhospitable to women.

The construction labor shortage is already causing problems for the industry. A survey conducted last summer by the Associated General Contractors of America found that two-thirds of construction firms report having experienced labor shortages during the past year. Those shortages are having an impact on construction activity, with 25% of firms reporting that they turned down work during the past year because of a lack of labor.

Kermit Baker, Hon. AIA, is the AIA’s Chief Economist and part of the AIA Economics and Market Research Group, which provides AIA members with insights and analysis of the economic factors that shape the business of architecture. Article excerpt reprinted with permission from AIA’s magazine, AIArchitect, January 29, 2016 issue.

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