2011 is nearing a close and it has been another tough year for contractors, architects, engineers and anyone else trying to make a living off of real estate development. So I’d like to turn our attention to 2012 and share my thoughts on the outlook for construction in Chattanooga. We’re going to do this prediction in the style of Leonard’s Losers, a popular 1980’s radio show where, instead of picking the winner, the late Leonard Postero would predict the loser of an upcoming college football game. Leonard may or may not have been any better than you or me in predicting the outcome of college football games, but his descriptions of the upcoming contests were something to behold. So in a tribute to Leonard Postero, here we go:
Contractors vs. Bid Market
This is a battle that occurs daily throughout the country. Contractors desperate for work turn to the bid market in hopes of securing work that will start soon. The problem is that this is not a one –on-one match up. It’s you versus ten other contractors—all trying to be the low bidder for a particular project. The winner is usually the contractor willing to take the most risk with his subcontractor selections and also work for a smaller fee.
AGC of America surveys contractors every year and the results of the 2010 survey showed that over 80 percent of the contractors bid projects at a reduced fee compared to 2009. The most telling statistic was that 11 percent of the contractors bid projects at less than their cost. Imagine starting a project in the red. I can’t. For many general contractors, the bid market is their only option for picking up work. For those of you who have other options, spend as much time as you can developing those options. Leonard’s Loser: Contractors
Banks vs. U.S. Government
Imagine going to work each day and having every deal you make with subcontractors or suppliers scrutinized by an outside agency; having to justify your pursuit of a particular project or, for that matter, your bid estimate for a particular project. This is the situation banks are in with government oversight today.
Do banks deserve some of this attention? Sure they do. The quantity of loans in default and properties in distress is a serious hindrance to economic recovery. But I have learned that when construction projects go bad, there is usually plenty of blame to go around among all parties involved related to defaults on loans.
We are beginning to see banks gain confidence in borrowers and make loans on projects that we would not have seen a couple of years ago. This is a positive indicator about the future of opportunities banks foresee to make money through lending. Despite this positive progress, though, not a week goes by where I don’t open the paper and to see some government official bashing banks for one reason or another. In a tight battle, I’ll go with the bankers—I think they’re smarter. Leonard’s Loser: U.S. Government
Chattanooga vs. Birmingham
Recent news in Chattanooga about the mayoral recall effort, gang violence and other urban problems might lead you to believe that Chattanooga is just another city with a lot of problems. Nothing could be further from the truth. All you have to do is travel down the road a couple of hours to Birmingham, Alabama to see what real problems look like. In fact, you don’t even have to get in your car, you can read all about the Magic City at www.al.com.
Jefferson County, in which Birmingham is located, is in the midst of one of the largest municipal defaults ever, stemming from rising interest rates on an old sewer debt. Birmingham has had a steady stream of elected officials involved in legal problems with some receiving extended stay vacations at correctional institutions.
I say all this to remind everyone not to get hung up on the minor issues we face here in the Scenic City. Chattanooga has a lot of great things going for it and I think the business climate here will prove more beneficial to contractors and developers than that in surrounding cities in 2012. This match up is really just an easy reminder of how good things are here in the Scenic City. By a landslide, Leonard’s Loser: Birmingham
Contractors vs. The Economy
This contest seems like it is in its sixteenth overtime. At the beginning, contractors viewed the economic downturn much as a college football coach would a bad first half performance by his team. “Let’s get to the locker room at halftime and straighten this thing out. We’ll come out in the second half and win this game in the fourth quarter.”
Well, it hasn’t turned out that way. This downturn has had much more staying power than most people could have ever predicted. According to AGC of America economist Ken Simonson, the peak for construction hiring occurred in August, 2006, and it’s been downhill ever since. In fact, 29% of all construction jobs in the United States have been lost since that date.
Contractors, like almost everyone, are weary. It’s been a long battle with no end in sight. But I’m impressed by the tenacity of most people in our industry. The contractor fallout during this economic crisis has been much lower than I feared. I’m betting on the contractors to stay in the game and hang in there as long as it takes for the economy to turn around. Leonard’s Loser: The Economy
So, what’s my prediction for the next year in the construction industry? I think the outlook for construction will be slightly better for 2012. We should see, on average, a 5 to 7 percent increase in revenue. However, I expect profit margins to improve at a much slower rate. Local, state and federal governments will still be tight on capital spending, so don’t look to them to give you a boost. The problems we created as an industry didn’t happen overnight and will take several more years to correct.
My 91-year-old mother-in-law is an expert card player. No matter how the cards are dealt, she always seems to come out the winner. I think it’s time for us in the construction industry to take the cards we have been dealt and turn them into a winning hand.
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