Posts Tagged ‘AEC’

Multifamily-for-Rent Market on a Sustainable Roll [As Seen in PSMJ Newsletter – May 2018]

Wednesday, May 30th, 2018

[The following article led the May 2018 issue of PSMJ Newsletter. For subscription information or to learn more about the 2018 A/E/C Firm U.S. Market Sector Forecast, go to psmj.com.]

In March 2018, analysts reported that rents were rising nationally at a rate unseen in two years. This could signal an extension of the long bull market for A/E/C firms in this space, as rising rents typically indicate room for growth in new apartment construction. Ostensibly, if landlords can raise rents, then vacancy must be low enough to support these increases without triggering competitive moves such as contract concessions and rent decreases.

By all indications, the multifamily apartment market is still strong. As 2017 turned to 2018, the term “multifamily boom continues” appeared in headlines coast to coast. Record-setting numbers of construction cranes dot the skylines of major metros from Boston to Denver to Seattle, according to Rider Levett Bucknall’s RLB Crane Index.

PSMJ’s 2018 A/E/C Firm U.S. Market Sector Forecast notes that multifamily-for-rent has been a leader among A/E/C firm markets for nearly a decade and is likely to maintain this status through 2018 and beyond. “A joint study by Hoyt Advisory Services, the National Multifamily Housing Council and the National Apartment Association found that the U.S. needs to add 4.6 million apartment units through 2030 to keep pace with population and demographic projections.

“Alex Carrick, chief economist for ConstructConnect, predicts a 28 percent gain in the residential construction market from 2017-2021. Even at this rate, however, the market would still fall short of the 1.4 million units he believes is needed annually to keep up with demand,” the Forecast states.

Despite the positive outlook, the first quarter saw apartment vacancy rates nationally continue the trend of slow, steady upticks, according to real estate data firm Reis. At the same time, while new multifamily permits have eased since the peak in 2015, construction activity remains strong. Contrary to other indicators, this combination often precedes a dip in demand.

Which is it? Does the multifamily market have a few strong years left, or is this the beginning of a hard fall?

One theory is that developers are too focused on luxury properties, leaving low- and mid-range renters with fewer choices and higher payments. While the number of new apartment units set records in 2017, researchers estimate that three-quarters to four-fifths of these were in the upscale category.

This lean toward luxury is driven as much by financial factors as by demand. The increasing expense of land, materials and labor impact construction costs relatively equally across all market segments, so developers are opting for the greater yields and higher values of upscale properties.

This results in low- and mid-range renters taking the brunt of rising costs as demand in these segments outpaces supply. “While the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle- and working-class renters, let alone those with very low incomes,” said Christopher Herbert, Managing Director of Harvard’s Joint Center for Housing Studies, in a CNBC report from February 2018.

In that same report, Toby Bozzuto president and CEO of multifamily management and development company The Bozzuto Group, said residents in his primarily high-end portfolio of 70,000 units spend a relatively low percentage of their income on housing. “It is a tale of two cities,” he adds. “In the middle-income and the lower-income markets, people are spending proportionally more on their rent — so much so I believe there’s an acute crisis headed our way.”

The takeaway is that demand should continue to drive the multifamily market in desirable locations, but that the focus may need to shift toward the middle- and lower-end markets if it is to sustain its roll.– Jerry Guerra

A Trillion Short on Infrastructure Plan

Wednesday, December 13th, 2017

It is safe to say that the Trump presidency, thus far, has been a disappointment when it comes to infrastructure investment. Trump, the candidate, promised a $1 trillion, 10-year program to address some of the massive needs of our transportation, water/wastewater and other infrastructure systems. Trump, the president, has failed to deliver on it.

Worse, the centerpiece of Candidate Trump’s plan — which was that private investment would increasingly supplement (and possibly supplant) public money — is at odds with comments made by President Trump to a group of Democrats and Republicans at a meeting in late September.

Even worse, Trump’s first budget sought to slash transportation and environmental spending, with the US DOT’s discretionary budget dropping by 13 percent and the EPA losing more than 30 percent. The House and Senate have since passed their own versions, which aren’t nearly as damaging, but the intent is still clear, as evidenced by this passage: “The Administration’s goal is to seek long-term reforms on how infrastructure projects are regulated, funded, delivered, and maintained. Simply providing more Federal funding for infrastructure is not the solution. Rather, we will work to fix underlying incentives, procedures, and policies to spur better, and more efficient, infrastructure decisions and outcomes, across a range of sectors.”

As noted in PSMJ’s 2018 A/E/C Firm U.S. Market Forecast, industry trade groups and advocates aren’t happy. The American Road and Transportation Builders Association (ARTBA) reported that OMB Director Mulvaney said, in a conference call with them, “People might say, well, goodness gracious, that doesn’t line up with what the president said about a commitment to infrastructure. That was done intentionally. What we’ve effectively done is try to move money out of existing, more inefficient programs, and hold that money for what we expect to be more efficient infrastructure programs later on.”

In a statement, ARTBA said, “While ARTBA continues to support and advocate for a large infrastructure package along the lines of what the President promised on the campaign trail, we do not support cutting current infrastructure investment as a down payment to some future infrastructure measure. While Director Mulvaney is suggesting the funds will be used later for the infrastructure package, we should be clear his proposed infrastructure spending reductions would be used now to supplement increases in defense and security spending.”

With public-private partnerships apparently out of the picture, other issues taking precedence (tax reform, health care), and Trump’s difficulty in rallying his own party to pass legislation, it will likely be some time before any kind of infrastructure package is passed. Moreover, the Democrats — smelling blood after making gains in November and yesterday’s Alabama special senate vote — are unlikely to cooperate and hand the Republicans a win with the midterms less than a year away.

Sometimes forgotten in the talk about the Trump Trillion is that Congress passed and President Obama signed the FAST Act in December 2015, so enabling legislation is in place through 2020. Nonetheless, the high hopes the industry had after Trump’s unexpected win in 2016 are fading fast, likely signaling a return to the battle for sufficient funding to repair, maintain and improve the worsening U.S. infrastructure system.

One saving grace is that many states and metropolitan areas have passed laws providing new sources of funding for infrastructure projects. In other words, they’re not waiting around for the federal government to come through. This issue is examined extensively in the Forecast, which you can purchase at http://store.psmj.com/2018-a-e-c-firm-u-s-market-sector-forecast/.

Highway Trust Fund reauthorization in limbo

Tuesday, January 5th, 2010

On December 19, President Obama signed a third extension of the Highway Trust Fund legislation that would otherwise have expired on September 30, 2009. The latest extension is through February 2010.

This is the same exercise the legislative and executive branches go through every time federal surface transportation funding comes up for reauthorization. That we’re used to it now doesn’t make it any less painful or troublesome to the industry.

In my recent report, PSMJ’s 2010 AEC Firm U.S. Market Sector Forecast, I noted in the chapter entitled “10 Issues Likely to Affect Your Firm in 2010” that the reauthorization issue was also on the list in the 2009 edition, adding, “[Let’s] hope it doesn’t make the list next year as well.”

Here is an excerpt from that section of the PSMJ Forecast:

[Last fall,] Rep. James Oberstar (D-Minnesota) attempted to pass a $500 billion, six-year transportation plan that was eventually set aside amid the health care and climate change debates.

[Immediate Past President of the American Society of Civil Engineers (ASCE)] Wayne Klotz says the reauthorization issue is critical for firms across the industry, even those not in transportation, as its effects reverberate throughout the AEC professions.

“If they let the legislation expire and pass a continuing resolution, as they did at the end of the last bill, people will lose their jobs all around the country,” says Klotz. “It happened last time. That’s why we’re making such a strong push to get this done.”

A lack of authorizing legislation could handcuff departments of transportation, forcing them to delay work on large, long-term projects. “Under our own state laws, DOTs can’t commit to a project unless they can show a revenue stream to fund it,” Klotz says.

The length of the delay will make a big difference in its impact on the industry, Klotz adds. “If they negotiate and can come up with something in March or April, that’s one thing,” he says. “But if it gets tied up in mid-term elections and shoved out until 2011, that’s a horse of a different color.”

Which is it going to be? Klotz says he has no idea. But, he says, the industry can’t even maintain the current, insufficient level of activity without a transportation funding mechanism in place.

Predictably, other AEC industry organizations are lining up to support passage of the new legislation. In a position paper, the American Council of Engineering Companies (ACEC) (Washington, DC) says, “While ACEC supported the investments for transportation in the American Recovery and Reinvestment Act, that funding has largely been directed to simple resurfacing projects, and much more needs to be done to address the serious backlog of more significant improvement projects.”

ACEC says that a new surface transportation bill, with dramatically increased multi-year funding guarantees, is necessary to allow states to invest in major design and construction projects.

The group cites a National Surface Transportation Policy and Revenue Study that says a minimum $225 billion in annual investment from all sources (including federal, state and local) for the next 50 years is necessary to upgrade existing systems to a state of good repair and create a more advanced surface transportation system. “The U.S. currently invests $85 billion annually from all levels of government, less than 40 percent of what is necessary,” ACEC says.

Oberstar’s bill would be a step in the right direction, but it won’t be an easy fight. For the transportation industry’s sake, we hope it won’t be a long one either.

Available now! PSMJ’s 2010 AEC Firm U.S. Market Sector Forecast

Friday, November 13th, 2009

For the second consecutive year, PSMJ asked me to write a forecast book for the AEC Industry. PSMJ’s 2010 AEC Firm U.S. Market Sector Forecast offers AEC firms a look at trends, key issues and expectations for what is likely to be an evolutionary, if not revolutionary, year for the industry.

The book is available now, in time for AEC firms to plan for 2010.

Chapters include “Ten Issues Likely to Affect Your Firm in 2010,” U.S. and world markets overviews and sector-by-sector forecasts for AEC firms in 2010. It also provides a prediction of the best and worst markets for 2010, as well as recommended success strategies.

Here’s the introduction:

In the late summer and early fall of 2008, as the AEC industry looked hopefully ahead for signs that the recession would be short and mild, the U.S. economy took a series of body blows that sparked talk of a modern-day Great Depression. Bank failures, rampant inflation, unstable pricing and the ever-worsening housing slump had the nation and the world reeling.

These dire predictions, it seems, were overblown. By the third quarter of 2009, the economy had halted its freefall and emerged from the recession, prices had stabilized and even single-family housing showed sparks of a recovery.

Despite the recent positive signals, 2009 has been a challenging year, both for the economy as a whole and for many firms in our industry. Unemployment continued to rise, eventually clicking over the 10 percent mark in November, even as the economy jolted back to life. In 2009, we witnessed massive layoffs and hiring freezes, canceled and delayed contracts, withering numbers of opportunities against greater levels of competition, price wars and firms selling out or closing.

Yet, amid these hard times, some AEC firms thrived. With all that’s stacked against them, how could these companies enjoy fast-rising revenue, better-than-average profit, stout backlog, and record growth? What did they do right that many other firms did not?

There is no single answer. Some success stories are from firms positioned in a favorable niche – health care or the federal government, for example. Other winning firms are diversified enough to withstand the downturn in a few market sectors, or they have such rock-solid client relationships that the little work being done is still going to their shop. For some, success is simply a matter of operating at a level of efficiency that allows them to weather even the worst of storms. More than likely, it is a combination of the above.

This brings us to 2010, a year that most economists and experts view as one of slow transition back to a robust economy and a healthy industry. Some pain will continue, they tell us, particularly in non-residential construction sectors such as office and hospitality. In its 6th Annual Construction Web Event, market research firm IHS Global Insight said the nonresidential construction market will drop 25 percent in 2010. Other markets won’t suffer as badly, they say, but the boom times are still somewhere off in the distance.

Knowing where the experts see the markets heading is valuable information, even if much of it is conjecture. Firms with insight into the direction their primary markets are going – up, down, or sideways – can better hone their planning process as they allocate marketing and production resources for the coming year. This knowledge, and the actions it inspires, can be the difference between being a casualty or a winner in 2010.

What this information should not do, however, is send firms scurrying after the latest hot market while they abandon sectors that have cooled. As firms succeeding in the downturn have proven, it is best to capitalize on current conditions – whatever they may be – by leveraging and improving upon your strengths as a professional services provider.

Also, while this book focuses almost exclusively on 2010, it is important to keep long-term trends in mind. Predictions that health care and K-12 will be off their games in 2010 may prove correct, but demographics and other drivers indicate that both are good long-term bets.

At the same time, the American Recovery and Reinvestment Act (ARRA) stimulus package may be propping up some market sectors. When it goes away, markets benefiting greatly from ARRA could dry up unless a new source of revenue has filled in to replace it.

ARRA is a recurring theme in this book. Though it didn’t live up to initial expectations, ARRA still played a major role in revitalizing the economy and the AEC industry. Expect more of the same through most of 2010, just to a diminishing extent with each passing quarter.

Finally, this is not a book by economists, but by researchers. It is the product of conclusions drawn from interviews with industry practitioners and experts, vast amounts of secondary research on the industry and its markets, and the projections of the industry’s most respected economists.

We hope you enjoy this publication and, with its help, you have a successful 2010.
— Jerry Guerra
November 6, 2009