It’s been a good last few years in the construction
industry, certainly here in southern California. Most contractors have been reporting year
over year revenue growth and strong profits.
Most contractors in the 10M to 25M revenue range have taken advantage of
the recent law change allowing them to report taxable income on the cash basis
method helping them boost cash reserves.
Larger contractors are generally ensuring their job budgets include
contingencies resulting in conservative profit estimates. Times are good.
Looking ahead, we see strong backlogs for most
contractors. We can already see a strong
schedule through 2020, with many booking work in 2021 and some projects
scheduled in 2022 as well. Of course
committed backlog isn’t a guarantee of precisely when that work will actually
occur, however the backlogs we are seeing look good into the near future. Many here in southern California point to
some large scale events that will be visiting our region in the coming years as
support for our market. These include
the following:
·
Super Bowl, being hosted in SoFi Stadium in
Inglewood in 2022 (construction ongoing)
·
World Cup Soccer in 2026, Rose Bowl among the
U.S. venues. Canada and Mexico will each get 10 matches in this tournament as
well.
·
2028 Summer Olympics, Los Angeles is the host
city. The events will use many venues
already built or under construction, with a new arena in Inglewood proposed for
construction for use by the LA Clippers.
There are many infrastructure
projects on the boards for the LA area in anticipation of this event.
In addition to the work that will need to be done in
anticipation of these events, there are many projects starting
or proposed here in southern California.
Even if you aren’t associated with any of the big event projects cited
above, construction resources will be utilized by those projects taking supply
out of the market. This should help with
both opportunities to win new work as well as bolster pricing.
The rising tide doesn’t necessarily float all boats,
although it does for most. If a
contractor isn’t making money in the last year or two, likely the issue is
company specific. Boats with holes don’t
float in any tide. We have seen a few
cases where contractors in the market are having some challenges, however we
can usually identify key areas they need to address.
Examples include not dealing directly with personnel issues (poor
execution in their roles) including challenges with transitioning the business to
new leaders. If an owner is looking to
pass the baton on to the next generation, s/he must make sure that the new
leadership has a good grasp on that baton before letting go. Labor is always the most difficult variable
to manage, across all levels of the organization. Be sure to address, in a direct and timely
fashion, any issues your business may be encountering. If one can’t make money in these times, it
won’t be any easier when things slow down.
In summary, the outlook remains bright for at least the
near term. The hope is that the activity
southern California will be enjoying over the next several years will continue
to support the market. As we know, it’s
a cyclical industry and we are bound to see a slow-down at some point. The last recession we saw 10 years ago was
the “Great Recession” and was painful for many.
The next recession likely won’t be as deep or as long however it will
still need to be managed. For now, enjoy
these good times and as always, have a plan ready for when things get slow.
