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There’s a new norm in the construction market — a new normal when it comes to measuring growth and opportunity.
Construction has made a comeback in certain market segments, said Cam Dickinson, senior vice president of San Francisco, Calif.-based Woodruff-Sawyer’s construction group. But it’s not going to comeback like it was in the good-old days. “It’s like the new norm,” Dickinson said. “The majority of contractors have readjusted and there’s cautious optimism, but there’s a new normal in construction.”
However, not every contractor made it through the tough days of the recession. But those that survived have made adjustments and appear to be in a better position today than before, Dickinson said.
McGraw Hill Construction 2014 Dodge Construction Outlook predicts that total U.S. construction starts for 2014 will rise 9 percent to $555.3 billion, higher than the 5 percent increase to $508 billion estimated for 2013.
The construction industry has definitely made a comeback, said William Blanchard, managing director, construction and bonds for Texas-based Higginbotham & Associates. “Those that made it through the hard times are in better shape,” Blanchard said. “Some of those contractors that failed have only created a healthy market for those that survived.”
While 2013’s construction market was “mixed” but “positive,” Brian Schofield, senior managing director and construction practice leader for Crystal & Co., a national risk management and insurance brokerage headquartered in New York, believes in many parts of the country the construction industry has made a roaring comeback.
“Anyone you talk to would say that they are surprised that residential construction — high rise and midrise — has made such a roaring comeback after the 2008 financial struggles,” Schofield said. “Right now Miami is going like gangbusters.”
New York City is also incredibly hot, according to Schofield, despite challenges in that area with ongoing litigation involving Labor Law 240.
“We had a project (in New York City) that literally the penthouse went for the full value of the gut renovation and that left the other 17 floors as a profit,” he said.
In his view, East Coast urban centers are hot for construction as well as the entire Florida market. He also sees Houston as an up-and-coming construction center going into 2014.
In Arizona, things have just begun to rebound for construction, said Dennis Tsonis, vice president, Lovitt & Touche Inc., which has offices in Phoenix, Tucson and Las Vegas, Nev.
“It’s starting to rebound but it’s a mixed bag,” Tsonis said. “It depends on the type of construction. We are seeing that most of our clients are projecting increased payroll and sales but it’s modest for the most part.”
Tsonis says that in his region residential is starting to heat up again. “At the peak (of the construction boom), Arizona had about 60,000 new home starts a year; that dropped to the 8,000-home range but it’s starting to climb.”
Habitational is kicking up for the apartment sector as well, Tsonis added. “That’s been doing quite well for the last couple of years and seems to be going strong.”
One area that doesn’t seem to be making much headway in Arizona is commercial. “We are still very overbuilt when it comes to commercial space and offices,” he said.
For the Northeast, in particular the New England area, construction’s comeback hasn’t been as optimistic.
Dave Byrne, bond manager and vice president at Starkweather & Shepley based in East Providence, R.I., said the rebound in construction has yet to hit his part of the country.
In 2013, there was a slight rebound in construction in New England, but construction insurance sales have still been disappointing, Byrne said. “It’s nowhere near where it was before the recession, and the industry hasn’t rebounded as well as we would like to have seen.”
There are some bright spots, particularly the downtown areas of Boston and Cambridge, he said. However, the farther away from downtown, the less new construction is seen, he said.
Growth Opportunities
For agents and brokers writing business in construction the biggest growth opportunities will come from private sector projects, said Bret Lawrence, vice president of construction for Woodruff Sawyer.
That includes the life sciences industries and the healthcare sector, private user developers, high-density residential projects and private schools, Lawrence said.
“The residential private side is going gangbusters in the Bay Area and downtown San Francisco,” Lawrence said. “The metropolitan areas and urban high-density populations are experiencing significant growth and will continue to in 2014.”
Of course, Lawrence added, the growth trends are nothing compared to the hay-day of the pre-recession construction boom. “It’s nothing like it was, but from a percentage standpoint there is growth from 2008, 2009, and 2010, but it’s all comparative to what you had in the pre-recession days.”
“Generally speaking the construction market is healthy,” said Mary Ann Krautheim, senior vice president and unit manager at Lockton Cos. in Kansas City, Mo.
Krautheim says she expects that the construction industry will continue to see investments in the healthcare and education sectors.
“I think we’ll still see improvements in those areas for the next couple of years,” she said. “Education and healthcare will steadily improve.”
Crystal & Co.’s Schofield sees four sectors that are “on fire” in the construction business and expects continued growth in these areas in 2014.
One hot area is colleges and universities, but anything in the healthcare arena will be hot next year as well, he said.
“Whether it’s hospitals, biotech, or pharmaceuticals … all of that,” Schofield said, but also the “oil patch” or anyting related to oil and gas industries.
“That never saw any stop in 2008. That industry just continued to see investments,” he said.
Lastly, Schofield predicts continued growth in the vertical condominium arena for metropolitan areas.
Insurance Market
Aside from workers’ compensation, most lines of coverage in the construction insurance market remain stable, the experts said.
“Across the board insurers have been looking to improve their position through requests for rate increase, but not in the double digits,” said Lockton’s Krautheim.
Rate increases on most construction accounts she works with range from a mere 3 percent to 5 percent. “For the most part increases are slow and steady,” she said.
In workers’ comp, which has traditionally been the loss leader in construction, there has been some rate strengthening, she said.
In California, Woodruff Sawyer’s Lawrence says contractors have experienced a definite hardening in the workers’ comp market.
“Some carriers, particularly Travelers, have been at the forefront to push rate,” Lawrence said. “But now we are starting to see them flattening a little bit with their pricing with respects to package policies.”
On the property side, Lawrence sees a lot of capacity in the market, however it depends on the risk. “But in general it’s still a pretty fluid market. Not seeing significant increases there at all, usually flat.”
Those construction firms that remain well managed with good loss history and good safety policies still have options when it comes to insurance, Dickinson said.
For those accounts, carriers are a lot more receptive to keep premiums as flat as possible, he said.
In Texas, Blanchard sees carriers are positioning themselves for slight increases in construction premiums. “However those insureds that do a good job with loss control, contract review, and risk management service are in good shape.
“I personally haven’t seen more than about a 5 percent increase on any of my construction accounts and expect that to remain the case going into 2014,” Blanchard said. Of course, poor loss history supersedes all else.
Starkweather & Shepley’s Byrne says the contractors that successfully survived the recession are wiser today than they were five years ago. “In fact the contractors that are still in business are truly better business risks.”