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Staying the course
Construction market hot for upcoming year, luke warm for 2002By Jeremy Harrell
Daily Reporter Staff
The economy is robust, and most contractors have more work than they know what to do with. But will the construction market falter as the industry heads into next year?
Many industry experts predict 2001 will be a lucrative year for construction, but it may not match the record-setting pace of 2000.
Spending is expected to top $10 billion by the time 2000 draws to a close, and all industry segments experienced increases from last year, said Mike Fabishak, Associated General Contractors of Greater Milwaukee executive director. The industry should expect another strong showing in 2001, mainly because spending on projects now under way will carry over, he said
"There's plenty of steam in the engine, at least as it relates to 2001," Fabishak said. "Many contracts overlap into the next year, so we should continue to see growth."
Matt McClone, Associated Builders and Contractors of Wisconsin marketing coordinator, shared Fabishak's outlook, saying the construction economy would likely maintain its phenomenal health.
"There's been such a boom in commercial construction, and now we have a backlog of work," he said. "We're at an amazing pace now, and I think we'll maintain that."
Ken Isaacs, president and chief operating officer of Graycor Inc., a private contractor based in Homefield, Ill., said the company recently opened up offices in Stevens Point and Oak Creek. That move was partly due to existing clients operating in Wisconsin, but he said the move also reflects the company's optimism that the state's economic atmosphere will support future growth.
"We have a belief that there are enough clients in Wisconsin who will value our services," Isaacs said.
Putting on his prognosticator hat, Isaacs predicted 2001 would hold the same opportunities for the industry as 2000. But, as in any economic climate, certain segments will do better than others.
"2001 will be roughly comparable to 2000, not substantially better or worse," he said. "Within construction, there are individual markets that are doing unusually well or unusually not well."
VOLUME THROUGH OCTOBER
Milwaukee
Construction
Volume
Milwaukee
MSA
$2.4
Billion
Milwaukee
MSA
$2.1
Billion
15.9%
Wisconsin
Construction
Volume
Wisconsin
$8.9
Billion
Wisconsin
$7.9
Billion
12.8%The sky is falling
Not everyone in the industry is convinced 2001 will be another banner year for construction. Don Croysdale, executive vice president of the Greater Milwaukee Chapter of the American Subcontractors of Am-erica, predicted a storm on the horizon even though others around him see nothing but clear skies.
"Everybody's saying this is the greatest economy in our nation's history," he said. "But suppose that conclusion is wrong. When you're on top, everything looks great. But on the way down, things can begin looking bad in a hurry."
Croysdale cited a debt buildup in all areas of the economy as a portent that spending will drop off dramatically in the coming year. Paying off the debt would eat into an owner's profit margins, Croysdale said, and owners use profits to expand facilities and pay for construction projects.
"The economy is so highly leveraged right now," he said. "As soon as the music stops and people begin looking for the empty chair, there could be projects that could come to immediate halt. I'd say there's a 40 percent chance we could have a curtailment of activity, and it will come as a surprise to most people."
To prepare for his doomsday scenario, Croysdale said contractors could take a few cautionary steps toward shoring up their businesses. They could start by tightening up their financial position, shrinking their retainage, double-checking the quality of their personnel and, perhaps most important, beefing up their customer service acumen.
"There's no better time to be really, really nice to your customers," he said. "When it comes time to cut, the cuts could be very ruthless. The well-managed companies should score some advantages over the others. It's the ones who didn't do planning, who didn't nurture their businesses, who will say, 'Now what do I do?'"
To a much lesser extent, Fabishak echoed Croysdale's sour predictions for the future, but Fabishak said any collapse wouldn't happen until at least 2002. And a reliable forecast for 2002 won't come into focus for another six months, he said.
"I may not be surprised if the construction industry takes a breather," Fabishak said. "We'll know in a few months how soft the landing is."
But even if the industry slows down in the coming years, he said it's important to bear in mind how fast the economy has been revving recently.
"If the economy is going at 50 mph then hits a recession and slows to 20 mph, that's very serious," Fabishak said. "But slowing down from 80 to 50 is a lot different than slowing from 50 to 20. Even if things slowed somewhat, it's still a pretty decent economic environment.
We're now judging things by this incredible economy we're in and not looking at the historical perspective."
35,000
33,000
30,200
30,800
National Association
of Home BuildersOn the home front
A slumping economy will most likely hit residential construction in the coming year, said Jerry Deschane, Wisconsin Builders Association dep-uty executive vice president. The National Association of Home Builders reported 35,000 housing starts in Wisconsin in 1999 and 33,000 in 2000, indicating that the market is already beginning to level off.
He said the NAHB predicted Wisconsin housing starts for 2001 would drop by about 10 percent to 30,200.
"The decrease reflects the impact of recent interest-rate increases and a slowing of the economy in general," Deschane said.
Looking further into the future, the NAHB predicted the Wisconsin residential market would rebound in 2002, with a small jump to 30,800 housing starts, Deschane said.
"The NAHB projects that the Fed will lower interest rates in 2001 because it will see the economy is slowing down," he said. "That's what's responsible for the slight increase."
When making their predictions, Fabishak, Croysdale and Deschane relied on economic indicators such as the stock and bond markets.
ABC's McClone, however, pointed to a more immediate problem when he predicted the industry would plateau in the coming year.
"There will be a slowdown due to the lack of skilled labor," he said. "I don't know if we can keep (going at) the incredible pace that we're on."
Isaacs agreed with McClone, saying the construction market's incredible health has called on every available skilled worker. With few workers left, demand could outstrip supply and cause a corresponding lull for construction.
"All regions are running up against shortages of labor," Isaacs said.
A silver lining
If the economy slows down, Croysand Fabishak said the state's construction industry would have a few advantages over other industries and other regions of the country.
"The good news is that the construction industry tends to be more stable," Fabishak said. "It's not quite as sensitive to interest rates and overall economic health."
In the last recession 10 years ago, Croysdale said Wisconsin, as well as other states in the Upper Midwest, were somewhat insulated from market corrections because of a more fiscally prudent attitude during times of big spending. He said he expected the same thing to happen if another fluctuation uproots the national market.
"We're probably not wheeling and dealing as much as the rest of the country," he said. "It was on the coasts where most of the fallout occurred. Here in the Midwest, we'll probably come through a little better."
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