Atlanta Business Chronicle Real Talk Blog Post by Doug Rieder
Link to View on Atlanta Business Chronicle Site: http://bit.ly/10gn9BP
While job news on the national level remains weak, we are encouraged by what we are seeing in the commercial and residential construction arena, particularly in the Southeast and Atlanta.
Data coming out over the past year has been optimistic, with a recent report indicating that construction spending rose 7.1 percent from January 2012 to January 2013. This is consistent with our clients who are commercial contractors operating in the Southeast.
We are seeing an increase in insurance exposures (payrolls and sales) and construction backlogs, an indicator of growth for future quarters. Our clients are voicing an optimism that we have not heard since the financial crash of 2008, reporting that their pipelines are fuller and that they may even be in a position to push up their margins modestly.
The hottest spots seem to be multifamily (the froth in this market has been substantial and could lead to overbuilding in the not-too-distant future if current trends continue), hospitality, industrial, food supply chain/grocery. The weakest spots still seem to be those projects funded by government, including water and wastewater projects, highway projects and retail.
On the multifamily side, developers are aggressively responding to market demand, with 4,420 units under construction in the Atlanta marketplace and another 4,702 in the pipeline, according to the April 1 edition of Haddow’s Apartment Report. Our biggest concern about this trend is that it could be an inflating bubble. Currently, many of our subcontractor clients have an unusually high percentage of their backlogs in the multi-family sector; if other sectors don’t pick up this could end badly when rents begin to respond to a glut of available units.
Another positive sign of recovery is the interest from bankers over the past 12 months. After several years of looking internally and addressing non-performing loans, most Southeast banks have gotten their portfolios under control and are now looking to deploy historically cheap capital into the market.
Bankers are more focused on the future and are looking to lend money again. We have assisted several clients with bank reviews recently and all have turned out positively, with multiple banks interested and making offers. In fact, with historically low rates we have been pleased to see that most of these deals have not even included a “floor” on what are very low rates.
Office and industrial absorption and housing numbers are also showing nice signs of life. According to Haddow’s Real News, housing permits in the Atlanta market jumped 65 percent in 2012 while the S&P/Case-Shiller Home Price Index jumped 9.9 percent. While admittedly these numbers are off significantly lower bases than in the past, these are both very positive signs. Similarly, on the office side 3.19 million square feet were absorbed in 2012 after four years of negative or minimal absorption, according to Jones Lang LaSalle.
In the industrial area, King Industrial Realty reports that industrial absorption was 5.62 million square feet in 2012 after four years of negative absorption; JLL presents a number closer to 6.1 million. While some vacancies persist, these are positive indicators that the market is turning around.
Almost every week so far in 2013 has brought the announcement of a significant new project. These include a new football stadium, new mid- and high-rise office buildings, new grocery concepts (Neighborhood Market, Earth Fare and Sprouts) and many new multi-family projects. Population trends are also positive as people continue to want to live in the southeast for its temperate climate, access to transportation and good long-term economic trends.
Unfortunately, one area which has not improved as much as we’d like is job growth in the construction industry. Though a recent economic report from the Associated Builders and Contractors noted a drop in construction industry unemployment to 14.7 percent from 15.7 percent, this may be due primarily to the marshaling of construction resources to address the Hurricane Sandy rebuilding.
We remain concerned that governmental budgetary problems will prove to be a difficult headwind in the second half of the fiscal year, as many economists have predicted. Our clients who do mainly federal work are suffering due to a significant drop in construction spending.
Additional costs arising from Affordable Care Act compliance are also having a damping effect on job growth in the industry as many small employers (of which construction companies are a high percentage) seek to keep full-time headcount at fewer than 50 to avoid the heaviest burden mandated by the new law.
Overall we are optimistic, but ongoing governmental budget challenges and the ACA rollout continue to present significant risks to a broad-based industry recovery.
Douglas L. Rieder is president and founding principal of Atlanta-based Sterling Risk Advisors and head of its Construction Services Practice. He is a board member of Associated Builders and Contractors of Georgia Inc.