Twenty Years of Lessons

 OP COMM ED PIC 1By Todd Andrew

In August, three leading organizations – the American Institute of Architects, National Association of Home Builders and Associated Builders and Contractors – published their mid-year construction economic forecast.

For those of us who are general contractors specializing in commercial projects, the report will probably conjure up some memories.

According to a summary of the forecast in Architect magazine, “Commercial spending, which includes sub-categories such as retail, is projected to increase by just 6.5 percent from 2016 to 2017– roughly half of the prior year’s gains and anticipated due to the projected slowdown in office construction in the next year.”

Twenty years ago, market conditions were quite similar: relatively strong but projected to weaken in key areas. Like today, America in 1996 was about five years into recovering from a recession – granted, nowhere as bad as the most recent.

As anyone who has worked in construction long enough can attest, the late 1990s and early 2000s turned out to be, by and large, pretty steady times. Of course, the highs and lows were just around the corner.

Looking back, it’s been a roller-coaster ride for the better part of these past two decades. We’ve all learned a few lessons along the way, and it will be interesting to see what the next 20 years has in store. To understand where the industry is today, and where we might be headed tomorrow, let’s take a trip down memory lane – from boom to bust and everything between.

A (Mostly) Good Run: 1996-2003

The 1990s have been dubbed the longest period of growth in American history, and that rising tide lifted all boats in the construction industry. During this stretch, most general contractors with a good reputation and viable service providers tended to do quite well.

To close the decade, there was stable growth in all sectors, interest rates were trending downward and the stock market kept climbing to record highs. Sound familiar? In contrast, the dawn of the 21st century – known for the dot-com bust, Sept. 11 and a brief recession – did put a damper on things. Yet “the rubber band effect” meant that negative repercussions didn’t actually hit until about 2003.

The Boom: 2004-07

This era – defined by easy access to credit, soaring home values and lax regulatory oversight – was defined by an overheated market for residential construction. But it also translated to incredibly strong profits for firms specializing in commercial, industrial and institutional.

Business was going through the roof. Artificially high demand pressured developers to move on their next project before prices shot up once again. The throttle seemed stuck in overdrive, but few people realized the economy was heading off a cliff.

The Bust: 2008-12

Remember that rubber-band effect? This time, it was a quick snap, with devastating impacts once the housing market and banks began to collapse. Across America, almost nobody was investing in commercial construction, and the banks weren’t lending anyway.

For contractors and their bare-bones staffs, survival required a “whatever it takes” attitude. At several small- to mid-sized companies, supervisors donned tool belts and hung dry wall, and managers ran jobs and swept floors. Cold-calling and being “pleasantly persistent” in securing payments was a must. 

During the Great Recession, subcontractors became very aggressive with their pricing, too. They’d often send out a rock-bottom proposal one day, followed two days later by another one (unsolicited, mind you) that offered an even better rate. Too bad those days are gone!

Despite 2010 and 2011 seeing some improvement – mostly because of latent boom-year projects that finally got underway – 2012 was just more of the same. Wall Street had rebounded nicely, but Main Street still felt the pain.

The Recovery: 2013-Today

Economists tell us the recession ended in 2009, but it wasn’t until four years later that commercial construction – along with many other industries – truly regained its footing.

With the worst behind us, phones started ringing in offices across the country. Clients began spending money on smaller, repeat jobs. Contractors could afford to rehire employees. The quality of jobs started to improve. Caution turned to confidence.

Today, construction loans are still difficult to attain for many clients – a new reality in our post-boom world. But low interest rates and creative financing continue to grease the wheels of progress, resulting in a solid stretch of steady gains.

Tomorrow: Three Areas to Watch

Forecasting the near-term future of construction, three areas of concern stand out.

First, during the recession, a lot of good talent either left the industry or left the country. How will this shortage of skilled workers impact our ability to meet demand?

Second, all signs point to the Fed wanting to raise interest rates in the next six months. Even though rates will still be at historically low levels, this could spell trouble for clients looking to finance capital projects.

Finally, a slowdown in apartments and single-family housing appears imminent. Multifamily residential construction led our industry out of the recession, but oversaturation seems to be creating another bubble.

While it’s impossible to say what’s in store for the next 20 years – let alone the next 20 months –similar cycles are inevitable to one extent or another. But with history as our guide, we can better prepare for success in any market condition.

Todd Andrew is president and owner of Andrew General Contractors, a full-service Orlando-based firm he started in 1996 after nine years of management and operational experience in the construction industry. Andrew GC specializes in commercial ground-up construction, interior buildouts and renovations. To learn more, e-mail tandrew@andrewgc.com.

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