Rates of construction work under contract, but not yet completed, have risen dramatically in the West, according to the Associated Builders and Contractors Backlog Indicator. Technology-based construction projects are driving backlog growth to almost 11 months, particularly for markets like San Jose and Los Angeles. While that means that construction companies can expect to be very busy through 2019, it doesn’t necessarily mean that margins will improve or major growth is guaranteed for this industry.
In the current environment, the ability to engage contractors on new projects and at negotiable rates in the next two years could prove challenging for affordable housing developers. Even though they access new sites and line up deals, rising interest rates and costs may cause developers to delay plans for new projects, despite post-WWII level demands for affordable housing in many markets.
The main challenges lie with increased materials and labor costs. According to a recent article in Construction Executive,construction materials prices rose 7.4 percent on a year-ago basis as of September. Unemployment in the construction sector (as of October) stood at 3.6 percent with an estimated 500,000 construction-related job openings nationwide. Add to these factors increased fuel prices, health care benefits costs and borrowing costs, and it remains to be seen if potential federal tax breaks can counter the construction industry’s rising expenses.
What does this mean for contractors and their clients? Contractors will need to keep a tight rein on cash flow and manage their debt ratios in the coming year even while optimism is high and teams are busy. Focus on project starts in 2020 for new business development, particularly marketing this year to project sectors that show healthy foreseeable growth such as conservation, public works, manufacturing, and public safety.
Leaders in affordable housing may choose to delay new projects until 2021 and focus on reinvestment in existing properties as well as buy-out planning. However, developers may also look to additional municipal and state initiatives, where leaders are acknowledging the dire demand for affordable housing and are stepping up legislation to fund it at the local and state levels. The fact that many state coffers have healthy reserves could support these initiatives.
Some quiet indicators also note that economic conditions are right for a downturn, which may bring down the costs of new development within three years. While the next 12 months seem to show business as usual, the future beyond that is a bit hazy.
Looking for ways to balance strong cash flow with the costs of doing business in 2019? It’s time to talk to LvHJ.
Source: Construction Executive: 2019 Construction Economic Forecast