by Mike Kolakowski
The numbers are in, and it seems to everyone at KBE Building Corporation that our economy and industry have passed through the worst of the recession and crept into a slow and sustainable recovery. We all know that the construction market was one of the industries hardest-hit by the recession. Our industry’s nationwide unemployment spiked upwards of 25 percent at the worst moments, and many projects have languished on drawing boards.
Economists are predicting an uneven recovery for construction in 2014 and beyond. The construction market segments that took the biggest nosedives, such as housing and institutional building, are coming back in a big way next year. Multifamily residences and housing facilities will drive 2014 growth, which bodes well for commercial construction companies. Although demand for rental properties soared following the housing collapse, experts predict that single-family home construction will take much longer to catch up, causing residential builders continued heartburn.
One explanation for the swinging 2014 forecast is the simple fact that numbers got so low in previous years. Economists say that while construction starts will rise in 2014, the depth of the recovery lies in institutional building.
McGraw Hill Construction (MHC) forecasts that 2014 will see the end of a three-year decline in institutional building with a modest 2% gain. Of the sectors that make up institutional building, educational facilities show the greatest potential. Educational buildings are predicted by MHC to come back from a negative 3.4% in 2013 to a positive 3% in 2014. That’s great news for construction companies who know how to work with campuses on asset reinvestment programs – comprehensive facilities upgrade, maintenance and improvement programs. Our 2014 contracts support that forecast.
Asset reinvestment isn’t glamorous, but these facilities maintenance programs have given KBE Building Corporation a way to maintain relationships with our education sector clients during the lean years when there was little money for new building. If the forecasts turn out to be true, KBE and other construction companies who turned to maintenance and facilities management during the recession are ideally positioned to take the lead on any new building projects.
Overcoming Uncertainty to Make Room for Growth
Economic uncertainty continues to be the largest hurdle for construction, which lagged in 2013 primarily because of consumer fear of spending. According to FMI’s Construction Outlook 3rd Quarter Report, commercial construction is still waiting on consumers to recover from debt or find good-paying jobs. Many employers reduced office space last year after staff reductions. The Association of General Contractors (AGC) pointed to the switch from retail shopping to online purchasing as another factor limiting commercial construction.
However, we are entering 2014 with a new federal two-year budget deal in place, which could provide a heighted level of predictability. Unemployment is holding steady, and the Federal Reserve will soon begin reducing its qualitative easing program. I wouldn’t characterize these developments as “consumer confidence,” but they do point toward greater economic stability. Stability allows companies to begin emerging from the bunker mentality of the past five years. In 2013, we were happy to see commercial development projects like the Steelepoint Harbor Development in Bridgeport, CT take off.
What Makes 2014 Different
Projects such as Steelepoint Harbor illustrate how construction growth in 2014 will differ from what we’re accustomed to seeing. Usually residential construction takes off, and the rest of the market follows. The 2014 predictions call for small increases in institutional construction and multifamily housing, with single family homes still stuck in park.
Another big difference this year is the minimal planned investment in federal infrastructure. All the data point to reductions in federal funding for building, including roads, bridges, and power lines. If economic factors such as gradually-decreasing unemployment and slow-rising consumer spending and interest rates indicate more stability, then federal construction spending is a giant question mark.
The federal shutdown in October 2013 unsettled companies working and bidding on federal projects. Earlier automatic sequestration cuts in 2013 eliminated nearly $4 billion in construction from federal discretionary spending. Congress has reached a two-year budget deal, but the debt ceiling fight is looming once again in February. Therefore, the federal government remains a wildcard in construction forecasts for 2014 and beyond.
Overall, the news is mostly good – and I didn’t even touch on the predicted 5% rise in manufacturing, an industry many people thought would never come back. While this recovery looks different from previous construction cycles, I think we can all agree there’s a good reason to keep on swinging.
Mike Kolakowski is President and CEO of KBE Building Corporation in Farmington, Connecticut.