How the Recession Has Affected the Commercial Construction Industry

For some time, I have asked myself (and others), “What was so great about The Great Recession?” This economic crisis has been deemed by the International Monetary Fund (IMF) as the worst world-wide recession since World War II. Its impact has been felt in nearly every industry imaginable, and particularly in the construction industry. It ran its course for 18 interminably long months, between 2007 and 2009; the worst period occurred at mid-year, 2009.

How did it affect the commercial construction industry and what has/will be happening nearly 5 years after the official “end” of the Great Recession?

What happened?

The construction industry is accustomed to cyclical changes but the Great Recession was hardly a typical downturn or cyclical change. No sector of the construction industry was spared from the harsh impact of the Great Recession; not residential, commercial, industrial, or heavy and civil engineering.

One aspect of the recession that is not often mentioned is that the cyclical boom of the construction industry was followed directly by the recession, leaving a large glut of residential and commercial real estate on the market.

As the recession deepened, homeowners were defaulting on their homes, others were not buying homes as they had planned, and investors were being extremely cautious in financing new construction projects.

2012 – 2013 was predicted to be a period of growth and non-residential construction activity was expected to continue its recovery. Once, again, there were recovery delays, fueled in part by government and financial institutions:

A federal budget sequester resulting in scaled back government spending.

A federal government shutdown.

Credit restrictions placed on construction projects, home loans, loans in general.

Increasing long-term interest rates based on expectation of the government reducing its stimulus program.

Those factors, and the extremely slow recovery of the world economy, certainly had a direct and negative influence on the construction industry.

Moving into 2015

So what is the state of commercial construction in 2014 and beyond? Recovery is happening, but not at an increased pace. Factors that (according to industry observers) influenced growth in 2014:

Weather-related delays on projects at the start of the year.

Ongoing sluggishness in the institutional market and lowered construction spending projections.

Financial institutions continued their restrictive lending practices.

Is there any good news? Yes! Let’s look at some of the more favorable changes in 2014 and some positive indicators going into 2015:

Some easing of lending restrictions; loans rose 4 percent in the second quarter of 2014, most of it related to the commercial real estate industry.

Commercial construction projects are rapidly increasing in several regions of the U.S., particularly in Texas (Houston) and the southern region in general, and New York (Rochester and New York City), Massachusetts (Boston), and Louisiana (New Orleans).

Consumers are “cautiously optimistic” and spending is up, as is the increase in jobs.

The commercial construction industry was, and continues to be deeply affected by the Great Recession. But industry watchers, like consumers, are cautiously optimistic (with more emphasis on cautious than optimistic) that the industry is slowly and steadily moving forward.

How the Recession Is Affecting the Commercial Construction Industry

The ‘Great Recession’ theoretically lasted about 18 months, from 2007 to 2009. Recovery has been agonizingly slow in many industries but we are now in 2015 and the construction industry is more rapidly shrugging off the residual effects of the recession.

How Bad Was It?

Even though construction industry is cyclical and recession typically follows a boom period, nothing could have prepared it for the harsh and widespread reach of the recession:

Residential: Homeowners defaulted on homes and others delayed buying homes, leading to a glut of residential real estate languishing in realtors’ inventory.

Commercial: Commercial construction also was hard hit, severely impacted by the federal budget sequester and eventual-but-temporary shutdown, followed by scaled back government spending, and sharply reduced lending practices.

Institutional: Institutional construction remained stagnant, affected by the same limitations and funding problems that the commercial construction sector faced.

How Were Construction Workers Affected?

Nevada, California, Florida, and Arizona are typically areas with plenty of construction work. But the recession changed that:

Nevada employed an estimated 146,000 construction workers at the peak of its construction boom. That number was reduced by 59 percent.

Arizona’s construction employment dropped 50 percent from its pre-recession industry peak.

Florida was close on the industry-related unemployment heels of Nevada and Arizona, losing 40 percent of its construction workforce.

California fared better but still recorded a 28 percent drop.

According to the U.S. Bureau of Labor Statistics (BLS), approximately 2.3 million construction workers lost their jobs in the recession (nearly 30 percent of the total number of lost jobs).

The overall construction industry has an estimated 1.4 million fewer construction workers in 2015 than it did in 2007.

The Construction Outlook in 2015 and Beyond

Happily, the U.S. and its construction industry continue to move away from the harshest effects of the Great Recession. Industry observers expect to see these improvements:

Non-residential construction: picking up and looking more solid, especially with the expected 2.6 percent real GDP growth in 2015. This sector may rise by 8 percent with growth in office buildings, hotels, and industrial facilities.

Single family housing: expected to increase by 11 percent in the number of residential units, thanks to easier access to home mortgage loans.

Manufacturing plant construction: will probably drop about 16 percent after huge increases of 2013 and 2014.

Institutional construction: expected to continue its moderate upward trend and increase 9% over 2014 results.

Residential construction: called the potential ‘wild card’ of 2015 because of rising interest rates. Existing home sales may climb toward 10 percent.

Public construction: growth will remain low due to ongoing federal spending constraints. However, transportation spending is expected to grow by about 2.2 percent.

Ironically, construction workers may not be rushing to return to new jobs. Many left the industry altogether, retraining for other employment.

Texas and North Dakota both show significant increases in construction employment. North Dakota now needs to recruit construction workers. Texas’ construction employment is up 10 percent, nearing its pre-recession peak.

Economists don’t expect the construction industry to return to its peak level (2006) until 2022 or later. However, the BLS anticipates that the fastest-growing jobs now and 2022 will be in healthcare and construction.

So while the Great Recession did a considerable amount of damage to the overall economy, individual incomes, and morale, 2015 and beyond are looking considerably more favorable in the commercial construction industry.

The Importance of Construction Industry Solutions

It has been said that the average construction project suffers cost overruns and completion often takes longer than expected. Thanks to Pegasus this should never have to be a problem again.

By using the right industry software you will always be able to complete projects on the scheduled time and within your budget. The industry software that I am referring to is Construction Industry Solutions. With this software you will have complete management control over contracts and sub-contractors as well as effective cash management.

Businesses need to track the costs of purchases and may have sub-contractors who require payment under HMRC’s construction industry scheme regulations. You need to keep on top of payments and always remember that effective cash management is key to making a profit. Construction Industry Solutions was written for SME contractors in the construction and allied industries. It was designed to give instant up-to-date information so that you know exactly what is owed and to who as well as knowing when different payments are due.

Cash management is an essential feature of the construction industry and can make a serious difference to the profit of a contract. Construction Industry Solutions captures all of the relevant contract information across all stages of a job so that the statuses of contracts are immediately available.

One of the key features of Construction Industry Solutions is the contract sales ledger. This maintains the details of current payment applications. It allows current and cumulative revenues together with retention, main contractor discount, etc. Also with contract sales ledger payment, when it is received, can be entered in batches and allocated to one or more applications.

Another key feature that will benefit your construction business is contract purchasing. The purchase order processing system allows the costs of a contract to be monitored by raising purchase orders against a specific contract. As deliveries are received and invoiced, the purchase order is updated.

Contract purchasing is integrated with stock control, allowing stock to be ordered from suppliers against a contract. This feature of construction industry solutions allows you to allocate, reserve and issue stock to a specific contract.

This piece of Pegasus software gives you complete control over all aspects of contract management including payment applications, VAT invoicing and cash receipt matching. It is also fully integrated to sales, purchase and nominal ledgers as well as cashbook and payroll. Construction industry solutions also conform to the requirements of HMRC’s construction industry scheme.

The requirements within the construction sector are highly specialised and Pegasus recognises these complex business requirements within the construction sector. Construction industry solutions also integrates with Opera II, sage line 50 and sage mms.