The 2011 edition of our Survey of Northeast Ohio's Construction and Real Estate Industries seems to be pointing to a brighter future for many of those in the construction industry. Survey respondents are more confident about opportunities in the Northeast Ohio market, have seen increasing job sizes and are finding financing somewhat easier to come by. While there were many positives in this year’s survey, competition is still keeping margins very tight and obtaining bonding remains a concern.
Opportunities on the Rise
Perhaps the question that best judges the mood of our 2011 survey would be “In the next three years, do you see your business having more, less or the same amount of opportunities in Northeast Ohio?” This year, 38% of respondents believed that there would be more opportunities. That is a return to 2008 levels after only 27% and 32% felt there would be more opportunities in 2009 and 2010, respectively. Although this does not reflect strong optimism for growth in the Northeast Ohio market overall, it does indicate that we are moving in the right direction. Much of this optimism is due to several large-scale construction projects like the Innerbelt bridge, the casino project, Medical Mart and the East Bank of the Flats.
Also of significance, only 22% of respondents felt that there would be “less opportunities” in the next three years. This was even lower than the 2008 level (36%).
Another sign that opportunities are on the rise is the response to the question, “What do you see as the biggest threat to your business over the next 12 months?” There were two significant changes in the responses this year versus the past two years. First, although it remained the number one response, “lack of work” was the number one response of only 57% of respondents compared to 81% and 69% the last two years, respectively. Also, possibly driven by increasing opportunities, this year, “labor costs” was named by 11% of respondents compared to only 3% and 2% each of the last two years, respectively.
While these numbers mark an improvement over the past couple years, the majority of respondents still see lack of work as the number one concern they face. One respondent stated, “I’m optimistic about the upcoming work in northeast Ohio over the next 3-5 years, but the global impact on the cost of fuel and materials concerns me. Higher interest rates and inflation seem eminent as the politicians become more pre-occupied with the 2012 elections.”
In addition to seeing more opportunities in the market, respondents also saw an uptick in the average job size they are bidding on. This year, 28% of respondents said that job sizes increased and only 39% said that job sizes decreased. Each of those numbers was an improvement on the past two years of survey results.
Financing May be Easier to Come By
Financing is still clearly a major concern for the construction industry. It was the number two concern listed as “the biggest threat to your business over the next 12 months” with 17% of respondents listing it as their top concern. However, things do seem to be improving.
While only 4% of respondents said their ability to obtain financing has “increased,” many fewer respondents saw their ability to obtain financing decrease this past year. In last year’s survey, 65% of respondents said their ability to obtain financing decreased “slightly” or “significantly” and in 2009, the number was 78%. This year, that number dropped to only 33%. This is a good indication that we may have seen the bottom of the credit crisis and are working our way back up.
In terms of where construction companies are obtaining their financing, regional banks still are preferred by 38% of respondents. However, that number dropped from 46% in 2009. Also, community banks, preferred by 30% of respondents in 2009, dropped to 25% this year. National banks have been on the rise. Chosen by 14% in 2009, the number is up to 29% this year. Presumably, this is due to the fact that the larger national banks have more capacity for managing risk compared to the smaller community and regional banks.
Over the past several years, slightly more of our respondents have had to find bonding for jobs on a more regular basis. This year, 23% of respondents said that more than 80% of their work requires bonding. This is the highest percent since the launch of the survey in 2008 when only 15% of respondents had more than 80% of their work require bonding. This higher percentage of work requiring bonding is in part due to the fact that institutional and government work remain among the most plentiful types of construction available. This year, they were first and second, respectively, as answers to the question, “Where do you see your potential construction opportunities in the Northeast Ohio market the next five years?”
While it seems as though more companies are finding bonding required more often, bonding may be more difficult to come by for some of the companies in our survey. This year, we asked for the first time, “What is the current outlook on your bonding capacity?” Forty percent of respondents felt that it would be more difficult to obtain bonding in the future while only 8% felt it would be less difficult.
Competition and its Impact on the Industry
According to this year’s results, competition was somewhat lower than last year, but is also still a chief concern of survey participants. This year saw 29% of respondents typically competed against only 1-4 bidders on projects. This was up from 18% last year. While 37% of respondents saw 10 or more bidders on average per job in 2010, the number dropped to 22% this year.
While the numbers above indicate that this slight drop in competition may leave some room for increased profit margin, the comments in this year’s survey clearly indicate that heightened competition over the available jobs is a real concern.
- “Despite the high rate of business failures, competition is tough and margins are low.”
- “Owners believe that there is a benefit to bidding to many contractors, when in fact it is of my opinion that they are being very irresponsible to themselves and the economy. They are bidding to trades that have no relevant work experience and suffering the consequences of poor craftsmanship, timeliness, lack of manpower, and potential loss of revenue from missed schedules due to companies going out of business.”
- “I believe the practice I call sub-prime bidding is at the forefront of our self-inflicted wounds. This is the practice of bidding below your costs to obtain the job, hoping to make up the difference through change orders or buying out the project. Any of us in the design-bid-build arena have seen this over and over. There are 20 to 30 bidders to start with, and invariably, one or two bidders will be significantly lower than the costs of the other bidders.”
Other Issues of Interest
Material prices are always a concern in the construction industry. The materials that respondents are most concerned with each of the past four years have been petroleum (first each year) and steel (second each year). For each of the past two years, “equipment” has been the third most concern to our respondents. This is most likely due to the fact that new equipment purchases were neglected during the downturn and replacing older equipment is becoming more of a priority. Green building materials have remained least important to our respondents for the past two years. One respondent summed up the materials issue by saying, “The year has potential, but oil will play a big part in everything that happens.”
In terms of overhead expenditures, an equal number of respondents (38%) said that their overhead expenses increased vs. decreased over the past year. Over the next 12 months, about the same number expect an increase again (37%) while only 13% expect a decrease. This could be seen as a sign that many of these companies have made all of the cuts that are available to make and companies expect to ramp up with more opportunity in the short term.
Finally, the survey covered two recent trends in construction: green building and Building Information Modeling (BIM) software. It seems that for the past two years, green building has affected more than half of respondents. This year, the number of respondents that said green building had “no impact” on their business rose from 35% to 40%.
BIM software currently has “no impact” for 68% of respondents, although 57% of respondents think it will have at least some impact in the “near future.”
With large projects on the horizon, such as the Medical Mart, East Bank of the Flats and the casino project, many in the construction industry have reasons for optimism. 2011 will tell if the recovery goes beyond the large projects and continues for the foreseeable future.