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Construction Industry Insight | Spring 2019

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This document focuses on a number of topics that affect the construction industry as a whole, including expectations for continued growth, ongoing challenges to acquiring talent, funding for the southern border wall that could come from unawarded military projects, the move toward robotic construction, and the recent drop in housing starts. It also includes a brief summary of trends in used equipment values.

Experts Expect Construction Industry to Experience Fast Growth into 2020: The construction industry is booming and experts expect growth to continue. The Bureau of Labor Statistics, along with a report from Timetric’s Construction Intelligence Center, project construction to be one of the fastest growing industries into 2020. Although there currently exists a skilled labor shortage due to the hard hit from the most recent recession, with increased work the construction industry is expected to have a higher employment rate than the overall economy. The growth rate for construction is projected to be 4.5% over the next several years, making it the leading industry in wage and employment growth.

Professionals predict that the construction industry will have one of the largest increases in real output, reaching almost $1.2 trillion by 2020. Upcoming efforts to modernize the battered U.S. infrastructure, as well as the number of oil and gas facility and pipeline projects currently under consideration both here and abroad, will create such output. The renewable energy sector will also be booming over the next few years as the government plans to make renewable energy 20% of the country’s total energy mix by 2025, up from the current 2%. With continued climate change issues, both federal and state governments are pushing for renewable energy sources. Additionally, the U.S. population is expected to grow from 321.2 billion to 338 billion, resulting in a rise in residential housing, and escalating residential construction to the top of the growing markets’ list. Commercial construction will also continue to grow with more consumer spending and governmental investments in tourism, office buildings and retail space.

While the above factors bode well for the construction industry, during the same period certain construction markets are expected to decline in growth. Electric utilities construction is expected to experience a significant decrease, continuing the current downward trend. With the high number of construction starts that occurred during 2011-2012, more projects are now coming on line. As a result, capacity utilization rates will stay low, thereby limiting the need for new construction. Combined with the new investments in sustainable, renewable energy, this market with continue to decrease. Another market expected to decline is manufacturing plant construction. This market experienced a huge 57% increase during 2014 due to chemical and energy related projects, but that number is expected to slip to a more stable 16% over the next few years.

Acquiring Talent an Ongoing Challenge for the Construction Industry: While the projected growth for the construction industry is strong, the tight labor market continues to present a pervasive challenge that could hamper the industry’s growth and momentum. The U.S. construction industry has been consistently adding workforce and currently employs around 7.2 million professionals, the highest levels since the Great Recession of 2008. Additionally, unemployment levels in the U.S. construction industry have dropped to an 18-year low. In fact, the latest data from the Bureau of Labor Statistics shows that since 2014, while the number of job openings has almost doubled, the number of new hires over the same period has increased by just 14%. Labor shortages are reaching crisis proportions and are expected to continue through the remainder of 2019.

Not filling job openings and not having the right skill set in the workforce can negatively impact engineering and construction companies in various ways, including not being able to respond to market needs, losing project bids, and failing to innovate. With the level of new projects expected in 2019, engineering and construction companies need to consider innovative approaches to attract, recruit, and retain talent. Long-term strategies include engaging with the open talent network; tapping the resources of the experienced, retirement-age workforce; and developing in-house training programs. To win the talent war, companies must project a positive brand that reflects the advanced technologies that are part of the connected construction site. To appeal to new generations entering the workforce, companies must also showcase the sustainability initiatives that many firms have adopted. Additionally, sourcing talent through apprenticeship programs and technical schools can identify prospective employees with the right skills. Finally, considering the progression of technology it is also important to understand how skills are changing and then design a talent management strategy that considers those changes.

Pentagon Identifies Nearly $13B of Military Projects that Could be Shelved to Fund Border Wall Construction: In mid-March, Patrick Shanahan, Acting Defense Secretary, released the Department of Defense’s $12.8 billion list of unawarded military construction projects, some of which might be shelved in order to meet President Trump’s $3.6 billion national emergency request for U.S.-Mexico border wall funding. The list includes projects in the U.S. and around the globe that have been authorized since 2015, but were still unawarded as of December 31, 2018. However, only those projects with award dates after September 30, 2020, are at risk of being canceled, and housing, barracks and dormitory projects are safe from being defunded. The Department of Defense noted that if its Fiscal Year 2020 budget is enacted in the timeframe requested by the department, none of the projects on the list will be delayed or canceled. Later in March, the House failed to override the President’s veto of legislation blocking his national emergency declaration at the border, capping off a months-long congressional battle over the President’s signature issue.

By declaring a national emergency at the U.S. southern border, the President hopes to secure a significant amount of money to build new sections of border wall, a request denied by Congress in the appropriations bill Trump signed in February. Through an emergency declaration, the White House said it could tap about $6.5 billion beyond the $1.4 billion included in the bill. In addition to the $3.6 billion of military construction money, the administration has its eye on $601 million from the Treasury Forfeiture Fund and $2.5 billion from the Department of Defense’s counter-narcotics budget. However, the path to being able to use that money is proving to be difficult. On March 14, the Senate supported a House resolution and voted to overturn the President’s declaration. The following day, Trump vetoed that piece of legislation. In addition, in the days after the President announced he was declaring an emergency at the border, 16 states filed a lawsuit claiming the President’s use of his power to do so was unconstitutional. This could be the beginning of a lengthy legal battle and further delay the administration’s ability to tap into extra border wall cash. The White House took another swing at securing major border wall construction funding through the President’s $4.7 trillion 2020 budget proposal, submitted to Congress in March. In the request, the administration asked for $8.6 billion for the wall.

Autonomous Robots Working Together — the Industry’s Next Big Step: A new study from Science Robotics finds that the construction of large structures by autonomous robots working together is “rapidly gaining momentum” and can address a “critical societal need for safe, inexpensive, sustainable and automated construction.” According to “A review of collective robotic construction” written by five academics, collective robotics, through which several robotic systems modify a shared environment, allows companies to integrate design, construction and other controls. The study identifies an opportunity for these systems to attain labor savings and productivity throughout the full lifecycle of building by carefully selecting and preparing a site, assembling or breaking down scaffolds, demolishing other structures, and more. According to the study, collective robotics will continue to develop along with advances in robotics technology; computing; algorithms for streamlining coordination; and sensors, which allow them to interact in space and detect progress.

Analysts believe that autonomous robotic construction on a large scale could play a key role in eliminating safety issues in the construction industry, which account for 20% of all worker injuries in the U.S. In addition, as the population of people living in cities increases from 54% to 66% by 2050, collective robotics can help meet the urban construction demand that a limited workforce is struggling to keep up with. Nonetheless, because mistakes are inevitable, robots are best supplemented by humans. Most construction robots currently operating at a large-scale are single systems, but they are achieving some of the same safety and labor-saving benefits. The two categories of materials handled by construction robots are referred to as “discrete”, which pertains to individual objects like bricks or blocks, and “continuous”, which references the flow of concrete, fibers and other substances. For example, Construction Robotics’ SAM 100, a mobile robotic arm, automates the repetitive bricklaying process at a rate that is three to five times more productive than a human mason and involves 80% less lifting. Its sister robot, MULE, takes the strain off human workers as they lift, handle and place blocks or other items on site. In the continuous category is the Cybe Construction-designed robot that 3D-printed a house in Milan last year using a mix of concrete and other additives. Concrete was squeezed through the robot’s nozzle in layers and the full structure was completed within 48 hours. Additionally, as construction robotics continues to develop, it is possible that some unexpected uses such as disaster relief or construction in risky environments may be discovered.

Housing Starts Drop 9% in February and Show Little Sign of Perking Up: The construction of new homes, known as housing starts, fell almost 9% in February and remained well below year-ago levels, offering more evidence of a broad slowdown in the housing market that still isn’t showing much spark. According to the Commerce Department, housing starts slowed to an annual pace of 1.16 million, 4% below the seasonally adjusted 1.21 million rate forecasted by the economists polled by MarketWatch. Permits to build new homes, fell a smaller 1.6% to an annual rate of 1.3 million.

The work on new construction plunged 30% in the Northeast, 19% in the West and 7% in the South. The Midwest was the sole bright spot, with starts rising 27%. Starts on single-family homes, which account for most new construction, tumbled 17% in February to 805,000. In January, the government revised its estimate of new starts to 1.27 million from 1.23 million. This difference reflects the fact that housing starts are volatile and subject to constant and sometimes large revisions.

In the bigger scheme of things, tumbling U.S. interest rates could bring more buyers into the market and spur builders to ramp up construction, but a housing boom is not expected Prices are still relatively high despite recent declines and builders face an array of obstacles, such as tighter regulations, the expensive cost of land and a shortage of labor made worse by a crackdown on immigration. “Builders are still hampered by the three L’s: land, labor and lumber, which means finding zoned land at reasonable prices remains hard, and then building on that land is expensive because of a lack of tradesmen and more costly materials,” said Robert Frick, corporate economist for Navy Federal Credit Union.

Trends in Used Equipment Values
The current expectation for continued growth in the construction industry bodes well for the construction equipment market. Optimism among contractors, equipment dealers, rental companies and equipment manufacturers remains high, and executives at Wells Fargo predict 2019 will be another strong year for the construction equipment industry. This is supported by the following highlights of a recent survey of 441 construction industry executives in 48 states taken by Wells Fargo Equipment Finance:

  • 96% of contractors plan to purchase new or used equipment in 2019. Of those, 76% plan to increase spending on new equipment compared to the prior year, and 75% plan to spend more on used equipment.
  • 92% of the contractors intend to maintain or increase their level of rental activity. 46% of those who rent equipment say that the primary reason is flexibility — far above other reasons for renting, including the cost of rentals.
  • 69% of dealers expect an increase in new-equipment sales, and 73% expect an increase in used sales.
  • The #1 concern among survey respondents is their ability to hire qualified workers.

The prices for used equipment remain particularly high due to the backlog of new construction equipment. Some suppliers of components needed for the manufacture of new equipment have concerns about a possible recession and are reluctant to ramp up production and add more resources. Other factors that could contribute to the strength of the used equipment market include the additional spending that comes about in connection with efforts to upgrade the U.S. infrastructure, the heightened emphasis on renewable energy projects, and the recovery in oil prices.

Irontrax believes the market for sales of used heavy equipment continues to be stable to flat. Lead times for new all-terrain cranes, as well as orders for custom equipment, continue to be extended. Rental fleet utilizations are holding at high levels and more consolidation in this sector is expected this year following a very active 2018 period of mergers and acquisitions. We are cautiously optimistic that a trade resolution will be reached with China in the near future that will strengthen U.S. manufacturers’ access to the Chinese markets.