Southern California’s Construction Sector Continues to Heat

Southern California’s construction sector continues to gain momentum, making good on positive outlooks issued late last year, and agents and brokers who deal in this segment can’t be any happier – especially those who remember the historically rough times that began in 2008 as the Great Recession unfolded.

At that time the ranks of the unemployed swelled and construction companies ran dry of contracts and prospects with the crashing of the housing and then the commercial construction markets.

It was a double-whammy looked at from many perspectives. In Orange County, for example, home values plummeted and jobs were lost while office vacancy rates soared as a number of large mortgage companies based in the area downsized.

Commercial deals couldn’t get done because lending pipelines froze, and lenders came calling on homeowners who could no longer pay their mortgages because they lost their jobs as firms battened down the hatches and settled in for the long rough ride out of economic stagnancy.

“We were giving back premiums to clients and clients were shrinking,” said Bill Wooditch, CEO of Irvine, Calif.-based Wooditch Risk Services. “For us it was a horrific time.”

Looking back Wooditch referred to a quote hung on a conference room wall from hedge fund manager Paul Tudor Jones, and recalled there were a lot of real world examples that bore out those thoughts in the following years of the recession.

“You adapt, evolve, compete or die,” Wooditch said. “That really was the mantra for the construction industry.”

Jamie Knoop, vice president of Lockton’s construction services division in Southern California, remembers the year well.

“When 2008 hit that was a pretty rough go,” he said. “The phone wasn’t ringing that much.”

Lockton of course weathered the rough patch. However, like most insurance firms with construction divisions, they suffered wages freezes, cuts and uncertainty.

The slowly recovering economy the nation finds itself in now isn’t news, but the pace at which the region’s construction industry has begun to pick up is a cheery welcome to insurance professionals who service Southern California’s once abounding industry.

Construction Uptick

“The insurance market – particularly workers’ compensation – is hard and is hardening,” said Wooditch, who is bullish on rates.

Knoop doesn’t see extremely large rate increases, expect for worker’s comp, on the horizon. However, he is feeling the pick up.

“We are inundated with work right now,” Knoop said.

Riding a surging tide of growing demand for housing, Lockton’s residential builder customers have been purchasing smaller companies and growing rapidly, he said, adding, “this has really kind of all exploded over the last six months.”

Late last year there were signs of improvement in the nation’s construction market. McGraw Hill Construction’s 2014 Dodge Construction Outlook predicted that total U.S. construction starts for 2014 would rise 9 percent to $555.3 billion, higher than the 5 percent increase to $508 billion estimated for 2013.

So far this year in Southern California the words “recovery mode,” especially the residential sector, can be used with some degree of confidence.

“We’ve definitely seen an uptick in construction,” said Kimberly Ritter-Martinez, an economist for the Los Angeles County Economic Development Corp. “The housing market is definitely doing a lot better.”

Over the past few years investor-buyers have been coming in and clearing out foreclosure properties, and people are jumping back into housing, leading to year-over-year price increases of double-digit percentages, Ritter-Martinez said.

“You’ve got price increases, you’ve got the foreclosure inventory pretty much cleared out, so builders are going to start building again,” she said.

She added that in the single-family market there is now an “incredibly low new home inventory.”

However, with dropping affordability, rising interest rates and job and income growth failing to keep pace with rising home prices, she cautioned, “the housing market recovery still has some time to play out.”

Perhaps the best news Ritter-Martinez could deliver on the construction front is about hiring, for which the sector has been atop the list of positive economic indicators for the region as of late.

“We’re seeing a big uptick in construction hiring,” Ritter-Martinez said.

Final figures for hiring are still being complied by LAEDC, which plans to issue a report later this month that shows just how strong construction hiring has become in Southern California, although it is still below its pre-recession peak, she said.

“It is definitely turning around,” she added.

Aging Workers

Construction has picked up so much that companies have had trouble filling openings and replacing an aging workforce – a trend that some believe could have a long-term impact on workers’ comp rates.

“The challenge facing contractors and construction is that the workforce is aging,” Wooditch said. “The industry is having difficulty attracting talented young people.”

Cam Dickinson, construction practice leader at San Francisco-based Woodruff-Sawyer, said the problem is something those within the construction industry have been grappling with for some time.

“Like any businesses, there is a focus on attracting young talent,” Dickinson said. “Many firms and trade associations recognize the potential disparity. Many businesses and unions’ associations are collaborating through training, educational and scholarship programs to address this industry-wide concern.”

In fact, Dickinson believes that an aging workforce is already driving workers’ comp rate hikes.

“For California, workers’ compensation is hardening – this trend will continue through 2014 and possibly 2015 as claims experience continues to put pressure on pricing,” he said.

Lockton’s Knoop said base rates are experiencing a double-digit increase.

“Cleary we’re seeing the workers’ compensation market rates rising there,” he said.

Wooditch is seeing increases of 10 to 15 percent in workers’ comp.

“There’s a new saying, that a 10-percent increase is the new flat,” Wooditch said, adding that the hardening workers’ comp market is being driven by loss experiences, which are becoming more frequent as the construction workforce ages, he said.

“The industry has difficulty attracting talented young people to build that workforce,” Wooditch said.

Workplace safety is among the biggest concerns of small business owners, a poll issued in mid-February shows.

In the poll from Reno, Nev.-based workers’ comp provider Employers, workplace safety risks were cited as the source of greatest worry and the area in which small businesses expect to focus most of their attention this year.

The poll shows 35 percent of respondents plan to spend most of their time addressing workplace safety risks.

Professional liability (24 percent), cyber-security (23 percent), natural disasters (11 percent) and terrorism (1 percent) were other risks employers planned to address this year, according to the poll, which was conducted via phone with more than 500 businesses that have 100 or fewer employees.

Wooditch said he is trying to help his clients reduce workers’ comp costs by making them aware of where the sources of the claims that drive their rates are generated. But it’s a slow process, and it often goes against a company’s viewpoint on employees, he said.

“A lot of old-line companies that have been around 70 years, 80 years, they’re now seeing employees at well over the 50-year-old line,” Wooditch said, adding that he works to call out the aging workforce to his clients and explain that as a reason they are seeing rising workers’ comp rates. “We point them out and say it’s a position of your workforce. That’s now striking to core of an owner’s philosophy – people first. There’s a loyalty factor. You’re trying to fracture a loyalty.”

Wooditch’s task then becomes to explain to his clients that he as an insurance broker is not trying to encourage them to get rid of older employees, but to consider vulnerability to injury and safety when supervising jobs, and that an emphasis should be placed on recruiting more young workers.

“We’re trying to protect their people, their product and their profit,” he said. “You just need to get new young, fresh talent.”

Wrap Ups

Aside from workers’ compensation, in counties like Los Angeles, Orange and San Diego, several lines of insurance are experiencing strong growth and interest.

General liability and excess is experiencing generally flat to modest increases for firms with a good experience and risk profile in nonresidential, and pollution and professional markets are competitive and pricing is expected to be flat this year, although firms are offering coverage enhancements, Wooditch said.

Both Dickinson and Knoop have seen a pickup in wrap ups – owner-controlled and contractor-controlled insurance programs – thanks to a new law that passed in California.

“With California’s new indemnity statute we have seen an increase in OCIPs – these could have an impact on a firm’s program pricing,” Dickinson said.

California Senate Bill 474, which passed in 2011, decreed that in the case of contracts for private commercial projects, indemnity obligations arising out of the active negligence or willful misconduct of an indemnified party are unenforceable.

Knoop has seen that law have a big impact on his business.

“We’re seeing a huge increase in wrap ups on the commercial side,” he said. “As a result, we are seeing an increase in OCIPs and CCIPs. We’re seeing some really competitive rates and commercial capacity on wrap ups right now.”

Topics California Workers' Compensation Talent Training Development Construction