Thursday, October 10, 2019

2020 Construction Industry Outlook (So Cal Edition)

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.