Construction Specialists See Slow Recovery in 2010

Bright Spots for Commercial Contractors; Tough Times for Residential Market

Construction insurance specialists say market improvement in 2010 for the construction industry will be slow for most sectors — even so opportunities do exist. Publicly funded construction projects have seen an uptick in recent months. But privately funded projects continue to be challenged by the lack of available credit.

“I think any market improvement we see will be very slow throughout 2010,” predicts Timothy Kania, senior vice president of construction for Liberty International Underwriters. Kania says the tight credit market within the private sector construction industry is the primary obstacle in construction growth today. In addition, Kania says the economic slow-down and a decreased demand for certain types of construction projects, also have put further pressure on when the market will improve.

Bright spots do exist for construction professionals, he added. “We really see opportunity in market improvement occurring in 2010 through public financing and publicly funded projects,” Kania says.

Kania predicts the construction industry will continue to see infrastructure growth, including publicly funded projects such as road projects, rail projects and pipeline projects. “We will also see renewal energy projects on the rise both from a wind and solar standpoint,” he added. He also expects growth in infrastructure improvements for waste water treatment facilities. “There continues to be growth in the power sector, but on smaller type projects compared to the mega projects that we may have seen 18 to 24 months ago.”

Tom Warner, senior underwriter for Beazley’s builder’s risk team, also sees optimism when predicting the future of the construction market in 2010 and says the signs are there for an uptick in some areas.

Warner — who recently joined Beazley from Allianz Global to expand Beazley’s builder’s risk unit in the United States — says the industry hit its “natural bottom of the market cycle” and “things are going to improve.” Builder’s risk underwriters view the market a year to 18 months ahead of time because projects need to be bid and financed in advance. Today, Warner says he’s seeing a pick-up in submission activity and quote activity in the builder’s risk sector. He believes this uptick will represent an overall increase in building construction in the next year to 18 months.

“As unemployment is said to be a trailing indicator, construction quote activity can be said to be a leading indicator,” Warner noted.

Warner says now’s the perfect time for expansion, which is why Beazley made the move to build a dedicated builder’s risk team in the United States. “When times are very difficult like this it’s actually not a bad time to set up a new operation. We are hoping as times improve we will be well placed to take advantage of that and be a force in the market as the economy comes back.”

Residential Not So Bright

Kevin Hastings, managing director of Jansen & Hastings, a London-based excess and surplus lines broker with a specialty in residential construction, says that while commercial construction is beginning to see some large projects break ground, the residential side continues to suffer.

“We have endured very difficult market conditions in the construction insurance marketplace,” Hastings said. “Volumes of traditional construction project premiums are down massively, especially in the residential sector.”

Hastings said that despite the stabilization of home prices and a potential bottoming out of the market, there still exists some very significant economic dynamics suppressing new residential construction and new home starts. Although he anticipates some regional improvement in residential construction, on a national level builders continue to be hampered by a significant housing overhang and shadow inventory.

“The sheer number of loans that are in delinquent status that are destined to liquidate creates a huge shadow inventory,” he said. The construction market needs to find ways to deal with the large volume of incomplete and semi-complete housing projects that are now owned by the banks, Hastings added. “This bank owned real estate stockpile needs to be addressed,” he said.

The credit crunch will also make new construction projects in 2010 limited, he added. As a result, Hastings also expects little growth in the insurance construction market, at least for residential. “We do not expect to see a dramatic increase in the premium volumes associated with the residential construction and contractors market in 2010.”

Hastings predicts that as the market for residential construction improves, there will be a need or demand to evolve the traditional project wrap-up policy approach that assists builders with their premium insurance spending and associated cash-flow.

“In this regard we have developed some new insurance policy forms that will provide builders with a ‘pay as you go’ mechanism in respect of their completed operations exposures,” he said. “I think this approach will evolve to be a permanent feature of the homebuilding insurance market. It may even create a secondary ‘comp ops only’ insurance sector within the residential construction insurance market.”

Challenges in 2010

The state of the economy will continue to dampen the outlook for the construction industry and construction insurance professionals, experts say.

“I think the financial stability of the construction industry and individual contractors will continued to be strained due to the continued slow down of construction activity,” said Liberty International Underwriters’ Kania. “A lot of activity in 2009 that we saw was a result of past project backlogs. A lot of that backlog is cleared or is currently being cleared, which puts additional pressure to secure new jobs in a very competitive contractor environment.”

Kania says the pressure on contractors to compete will drive some to go outside their normal scope of operations, a concern to insurers and brokers alike. “They (contractors) need to stay focused in their area of expertise and discipline.”

Beazley’s Warner says that while contractors have not seen an increase in construction projects they have seen an increase in workload, something he predicts will continue in 2010. And the cost to compete and bid more frequently on the few projects out there puts additional pressure on contractors.

“Whereas before you had $100 million project, you might have three or four contractors bidding on a contract. You now have 20 contractors bidding on that same project. There is a lot of churn and not as much activity going on. I think that is probably going to continue because everyone is extremely hungry,” Warner said.

But the future is not universally bleak for contractors this year. Warner says he hasn’t seen any of the larger contractors go out of business, so far. “Almost all of them are definitely in a reactive type of mode just trying to get through, but a number of them had fairly healthy backlogs on various types of work and are still going alright,” he said. “If you were building high-rise habitational buildings in South Florida you probably are in trouble. If you are building waste water plants for hospitals, or governmental or military facilities then you are probably not doing so bad.”

Topics Contractors Construction