The Garrison Report #2008-12

the-year-2008-in-review

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Events during 2008 have certainly had their impact on the construction industry.

The major story during the first half of the year had to be the continued decline of the housing market. Typically, housing market slowdowns are the result of economic slowdowns, but when the housing market started slowing, the economy was booming. Therefore, to understand what occurred in the market, it's important to examine industry figures. In 2002 the national median price of a new house was $160,000, and at that price, 64.8 percent of American families could afford to purchase it. However, at the peak of the housing boom in 2005, the median house was priced at $254,000. This 59 percent increase in the median price of a house in a little more than three years reduced the number of families that could afford it to 41 percent. Since they started tracking the affordability figure in 1992, it has been in the 60 percent range.

The impact of the above figures saw a decline of new housing sales from its peak in 2005 of 1,283,000 to a 776,000 annual rate at the end of 2007. This decline caused the median new house price to be lowered to $227,000, which increased affordability to 46.6 percent. While this number is the highest since the first quarter of 2005, it is the lowest value since it has been measured, except for the 2005-2007 time period.

Through the third quarter of 2008, prices continued to decline until the median price reached $206,000. The good news is the affordability index has increased to 56.1 percent. While this value is historically low, it is approaching the lower range of historical figures. And if it weren't for the current recession, this number might be better. The impact is that housing sales are starting to improve in some markets.

During the second half of the year, the biggest story has to be the economic crisis. Nonresidential construction trucked along at a high rate through most of 2008, but the arrival of the economic crisis had its impact on the industry. In an interview with Ken Simonson, AGC's chief economist, he said that in September a number of projects were shut down because funds dried up. Contractors that focus on large projects have had less impact because they have enough work to keep them busy as long as the project's funding source didn't dry up, but the contractors working on smaller projects have seen smaller projects delayed or cancelled. Of course, designers are always the first to see a slowdown, and reports continue to come in about their decline in work. Even public works projects are being threatened as the Virginia Commonwealth announced that it was laying off workers and cutting back on capital improvements. Recently it was reported that 31 states are in the red, so infrastructure will continue to be threatened unless the federal government steps in.

The roller coaster ride we experienced with oil prices this year created its own stimulus. When prices hit $140 a barrel, energy conservation suddenly developed a sense of urgency. The environmentalists have advocated alternative energy sources and conservation for years, but the high price of oil got everyone interested. While the worldwide economic crisis has forced the price of oil down, and with it some of the urgency, it's clear the interest in conservation and alternative fuel sources is here to stay, even if some of the pressure is lost. Simonson reported that schools are considering ways to reduce their energy costs and the federal government is considering retrofitting the millions of public buildings and government office buildings. When you consider that energy consumption by buildings is the single largest source of energy use in the United States, then clearly this year's growing interest in green technology bodes well for the construction industry.

The amount of technology and collaborative projects continued to increase. The Big Three's crisis in the automotive industry illustrates an interesting point. During a recent interview with Greg Howell, cofounder of the Lean Construction Institute, he made an interesting observation. "The automotive companies that are requesting a bailout are the ones that didn't embrace lean manufacturing. Those that embraced it don't seem to need one." This is clearly a lesson for the construction industry.

One of the most exciting construction events of the year was the opening of the St. Anthony Falls Bridge on September 18, 2008. This opening was more than three months ahead of schedule and only 13.5 months after its tragic collapse on August 1, 2007. This project illustrated the benefits of an integrated approach to construction. When I asked Jay Hietpas, Minnesota Department of Transportation's manager of design-build, why they went with the design-build approach, he responded, "Because if we had used the design-bid-build approach, the day we opened the bridge we would have been going out for bids".

When you consider the cost to the Minneapolis community without the bridge was greater than $400,000 a day in extra transportation costs alone, you can understand their sense of urgency. In fact, the rapid design and construction of the replacement bridge saved the community more than the entire cost of the bridge. These types of projects highlight the need for a more collaborative construction industry. Success on projects such as the St. Antony Falls Bridge continues to demonstrate to buyers of construction services the possibilities besides the conventional design-bid-build approach.

The St. Anthony Falls Bridge and other projects demonstrate that speed of delivery creates significant benefit to the project's users and can also reduce the cost of a project. Simonson recently reported that the CPI from 2003 to 2008 was 18 percent, yet the cost of construction has increased by 41 percent during the same period. In fact, the disparity in 2008 was even greater until the economic crisis that suddenly saw commodity prices begin to fall. Currently, diesel, asphalt, steel, cement, and copper are experiencing declining prices. Continued commodity price instability and a growing interest in costs show that the trends experienced in 2008 toward integrated project delivery should continue. Projects such as the new football stadium scheduled to open in 2010 and house both the New York Jets and New York Giants would have had serious problems without an integrated approach; multiple owners in the conventional delivery method would have been simply a nightmare.

Of course, the current economic situation is a crisis; let's not kid ourselves, and on the surface it's certainly a terrible way to end the year. However, in an interview with Charlie Bacon, president and CEO Limbach Facility Services, he expressed a great deal of optimism. He argued that there are plenty of opportunities for those who know where to look. In essence, he stole a page from Peter Drucker, who claimed that crisis creates opportunities.

Simonson told me that when the construction industry revives, it will be different than it was before the crisis. This past year provides the clues to where the industry is headed, and those who take the time to understand this past year with both its ups and downs will be prepared for the coming challenges.

Happy hunting and I hope everyone will end the year on an optimistic note.

 

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