Apartment Communities May Be Key to Revival
The overall construction industry appears to be making a recovery, albeit, a very slow one. Industry watchers say the outlook is better for big utility and public works construction projects, as well as for luxury, mixed-used apartment projects.
New construction starts in April advanced 11 percent to a seasonally adjusted annual rate of $531.3 billion, according to McGraw-Hill Construction. The increase for April followed a 23 percent gain in March.
Much of the lift in March came from work at a nuclear power facility in Georgia, and a similar lift was provided in April by work at a nuclear power facility in South Carolina. Aside from the strength shown by electric utilities, April drew support from public works construction activity and a sizeable upturn for nonresidential building after a weak March.
Also contributing to April’s gain for total construction was a slight increase for residential building. During the first four months of 2012, total construction on an unadjusted basis came in at $138.2 billion, up 4 percent from the same period a year ago.
Michael Hastings, national project risk practice leader in Marsh’s U.S. Construction Practice, believes indicators point to a bettering construction market.
Design firm business is picking up. “That’s always a good harbinger,” Hastings says.
But Hastings warns the industry’s recovery is slow. “We are only seven months out of a 12-year low for construction in the U.S. so we are better than we were a year ago but things are moving very slowly and it’s very specific by sector,” Hastings says. “We are going to have a slow construction market at least through 2012.”
Scott Rasor, president of construction for Zurich North America, is seeing more mega-sized U.S. projects; big projects that he says will bring much needed jobs and infrastructure to some states.
“We are seeing an uptick in the large, over $500 million projects,” Rasor says, however some of these are speculative. “Some of them are being rushed out before the financing is lined up,” he says. He thinks state governments are trying to create an expectation that the commitment is there to bring the big dig jobs to fruition — a move states hope will push the federal government to also buy in.
“A lot of states have been identifying major infrastructure needs for years — identifying major projects that will create jobs in their area such as bridges, tunnels, mass transit on a large scale,” Rasor says.
This trend is different than what was going on right after the economic downturn began in 2008. “In 2008, the American Infrastructure and Reinvestment Act that the president put out was mainly small type projects aimed at a broader array of state and governmental construction needs,” Rasor says. That money has since dried up.
While big project construction starts have ticked upward, that growth is geographically-driven and not widespread. “We are seeing (big projects) along the West coast, up in Washington and parts of California. In the East, we are seeing them in New York, Virginia, and Washington, D.C.,” Rasor says.
Texas is another area where major construction projects are underway.
“We have seen a lot of work in Texas,” says Michael Pilla, president and CEO of Technical Risk Underwriters (TRU), a managing general underwriter of Ryan Specialty Group. “Louisiana has had a couple of really big projects as well, in particular big hospital starts. There’s still a lot of rebuilding going on.”
Pilla says even in Florida, where building hotels and condominiums might seem counter intuitive, things are going up. Private investment seems to be driving that construction growth, he says.
While mega construction projects do exist, the number of these projects is small.
“There are some good solid projects out there, but nowhere as close to as many as it was a couple of years ago,” according to Peter Arkley, senior managing director, construction services group, at Alliant Insurance Services Inc. Arkley says the number of surety bonds issued by Alliant has dropped dramatically year-over-year. Lack of funding and investor confidence is still very much a concern.
For many travel destination states, hospitality construction has fallen off completely. “When you look at the southeast, southwest and Hawaii, those areas are having very difficult times,” says Arkley. “The only work you see is civil work.”
Arkley agrees that New York continues to see major projects but by New York standards, the amount of work is still down.
Competition within the insurance sector for the big projects remains tough, says David DeLaRue, senior vice president, national construction practice, and managing director, project insurance practice, for Willis.
DeLaRue says that in recent months he has experienced increased activity for projects more than $100 million in size. “We are getting more submission flow, more requests for proposals, broker selection on the large projects looking at some kind of owner or contractor controlled programs,” he says. “It seems that the activity has increased, and we are hearing that same song from some of our carrier partners.”
While the number of insurance carriers willing to write major project accounts is select, there is plenty of capacity available and plenty of price jockeying going on. There’s a large number of underwriters chasing a small amount of work.
“The carriers are still being very competitive,” DeLaRue says. “There’s about seven or eight players in the large project space and there’s always going to be one or two (carriers) that will still provide very competitive pricing.”
TRU’s Pilla agrees there is sufficient capacity and competition in the market for major construction projects. “We probably have as much, or more capacity than I’ve ever seen in the market,” Pilla says.
Marsh’s Hastings says the slowdown in the construction industry has heightened competition for business, while at the same time the property/casualty industry’s poor investment results and rising loss cost trends have made underwriting a core focus on these accounts.
“You have a need for increased rates, but a lot of competition,” he says. “So what we are getting is that every project is very carefully underwritten. They want to look at the controls and want to see clients who are a source of recurring business so the carriers are not betting their entire results on one project.”
The big construction sector has seen a firming of prices when it comes to the lead excess market, according to DeLaRue. Not too long ago, carriers were more willing to offer $25 million on the lead excess followed by another $25 million, and then followed by another $150 million. That has changed. In today’s market, it also takes more carriers to get to the big dollar limits needed by major construction project risks.
“Where you would maybe get $25 million and $50 million layers, today you might be dealing with $10 million or $20 million on the first layer and building up,” according to DeLaRue. “But now it’s taking a few more players to get up to $100 million. Instead of dealing with three or four carriers to get up to $100 million, it might be more like six carriers.”
Zurich’s Rasor says geography is affecting prices the most in the major construction market. “There are some very challenged geographies right now,” he says.
When it comes to workers’ compensation for the construction industry, loss costs are outpacing premium dollars. “In California you are seeing loss ratios above 100,” Rasor says.
In New York, the general liability line for construction is experiencing substantial loss development, three or four times that of neighboring states, according to Rasor.
“So depending on your geography, you are seeing a lot of rate differential, and in some markets, such as California, New York, Florida and Illinois, you are seeing the rates go up in a meaningful fashion,” Rasor says. In other states, rates seem to be moderating.
One bright light in the construction industry today continues to be the apartment market. The amount of multifamily housing in April was up 9 percent relative to its average monthly pace for 2011, according to McGraw-Hill Construction.
Most apartment projects do not fit into the major construction projects market, but some large scale mixed use projects, as well as condominium developments, have caught the eye of insurers and brokers.
Large multifamily projects that reached groundbreaking in April included a $100 million addition to an apartment building in New York, N.Y., an $89 million apartment building in Brooklyn, N.Y., and a $75 million conversion of a hotel into a condominium building in New York, N.Y.
“We are seeing uptick in multifamily residential, mainly around apartments,” Zurich’s Rasor says.
TRU’s Pilla says the building of apartment communities that include mixed-use properties with both retail and housing is a growing trend. In response, his firm has developed a new master program product to target large developers of apartment community building.
“We have attracted some of the larger high-end developers in multifamily type development so far,” he says.
Higher-end, luxury apartment living is growing in popularity.
“The trend for luxury, apartment communities is very big in Southern California, along the whole West coast,” he says. Pilla also sees pockets of growth elsewhere including Austin and Dallas, as well as parts of the Southeast.
Some of the big developers that have held off the last few years seem to be gearing up for more growth in the coming year, he says.
Alliant’s Arkley believes that the mixed use, multifamily housing trend is what will really revive the construction industry.
“Mixed use— I think that’s what’s going to lead us back,” Arkley says. “Rental properties are the hot commodity. The mixed use, and the private sector, is what will pull us out and keep us going and it’s the larger developers really driving the process.”
Willis’ DeLaRue views the trend as a renaissance in the residential construction market.
“That particular area has been very quiet for a long time and we are starting to see an increase in apartment and condo construction, which is a big change over the past couple of years,” DeLaRue says.
It’s been so long since carriers wrote new construction coverage for condos that DeLaRue says the markets had some reconsidering to do.
“We had to actually go out and talk to some of the carriers about how they might look at condominium construction,” he says
“While they’ve been dealing with losses in residential construction during the boom they hadn’t seen much new stuff come in,” DeLaRue says. “So they have to figure out how they will address the risk now that they have a little bit more experience with construction defects than in the past.”