Some thoughts on economic turnarounds

[rockstar.esq]

The construction market in my area (metro Denver) is in bad shape right now.  Everyone is pounding out bids trying to land work, but there just isn't much to go around.  What little we have, is predominately government funded and isn't slated to start until Summer.  I've heard from people working the plan review desks for large cities who've had nothing to do for weeks at a time.  Even lighting reps who are guaranteed to sell their products no matter who wins the bid are complaining that they haven't actually sold anything in months.

Yet there are all kinds of encouraging things going on in the stock market.  Not only are the stocks doing better, but consumer and investor confidence is at all-time highs.  All of that would lead me to think that a change must be on the way.

I read several trade publications which track both Architecture and Construction firms for project starts.  Bad news gets little press in trade publications so it takes some digging to discover that new Commercial project starts for Architects declined to nothing last June.  Things got progressively worse until the end of November when it looks like things turned around.  Most of the reports suggest that there has been steady improvement for Architects since that time to the present.  Further digging on the contractor new commercial starts reveals a decline over that period.

Trade publications offer observations on the statistics.  It's only through careful reading that you'd find a subtle but incredibly influential change in their reporting.  Back in June the publications were saying that the dearth of commercial work was concerning because Architects lead new construction by approximately 6 months on average.  Now that makes sense because it obviously takes the architects some time to develop the plans, get through zoning and permitting processes, etc.  The December publications are now trumpeting the return of commercial project starts for Architects and they're talking about the greater stability in that sector.  As part of their explanation, they are now saying that Architects lead new construction by an average of approximately 12 months.

Back in June/July  2016 I was reading the reports and thinking about what events might signal a turnaround.  I thought the election results might influence the decisions of entrepreneurs who were taking a "wait and see" approach to their new construction projects.  Assuming they were happy with the election results, the Architects would get green lit in early December which put the new commercial work out to bid by June 2017.  Since bidding precedes construction by a few months, it looked like our annual pattern of winter starvation might be ended for 2017.

However, if we take the new quote of 12 months at face value, we won't see the majority of our work improving until December 2017 which means we won't see any improvement until 1st Quarter 2018.

It's difficult to overstate how significant it is that Commercial Architecture went idle for six months.  Now that they're finally getting work, they're planning to take an additional 6 months developing their projects.  If we take everything at face value, we've lost an entire year of construction projects.

I don't believe things will be that bad and I have a few reasons for it.  First off, I think the Architects quoting 12 month lead times had more to do with cashflow and uncertainty than anything else.  They haven't had a privately funded paying project in ages.  Architects contract on an hourly basis until the project goes to construction contract, after which they are paid as a percentage of the total construction costs.  That means they have an incentive to take longer in design.  They also have an incentive to increase the project's budget.  This contract standard is easily the most counter-productive thing in our entire industry.

Clients who may not have the budget to build can still afford to pay for design.  Architecture firms that have starved for half a year, need to make up some ground.  I think they're holding up the progress because they're not sure they can replace the jobs in queue.  During this recession most of the market has been geared towards developer-driven and public works projects.  The common denominator in most of this is "central planning" which greatly reduces the risk by making the entire process less flexible.

Entrepreneurs who decided to move ahead with their projects last November are likely an entirely different type of client.  Many fortunes have been made by being the first firm to market.  By comparison the "me too" companies stand to make much less.  That got me to thinking about what it takes for a market to shift into "boom" time.

I suspect there's no universal way to tell otherwise there would be no reason to have economists.  I think that economic prosperity is incontrovertibly linked to the populations enthusiasm and optimism.  Much of our individual enthusiasm and optimism comes from witnessing the examples of others.  In some ways the "genius" of a pioneering entrepreneur is determined by how much enthusiasm they generate in the entrepreneurs who follow their lead.

Bringing all of this back to construction, I think the Architecture industry isn't aligned to the needs of quick-to-market entrepreneurs.  Those brave few who are trying to get their business built are in for a longer slog than they deserve.  Most Architects won't respond well to normal business requirements like punctual deliveries, adherence to budgets, and meeting recognized standards on their first try.  In the decade I've been doing this job, I've only seen the highest echelon of Architects capable of operating at that level.  

As I consider all of that, I think about what signs would signal a major market shift.  Since the "boom" doesn't get real until the me too's are multiplying, it seems reasonable to think that the first vanguard will arrive later than we'd hope.  The second and third generation of entrepreneurs won't have the patience to endure construction delays.  I think they'll start to look for better delivery methods and I think they'll find them in younger Architecture and construction firms that haven't accrued the recession debt. 

All of which could happen in rapid succession provided some bright lights make the connection between performance and profitability.

That transition is likely to involve some collateral damage to the companies on today's market.  I can think of quite a few established firms in my market that routinely under-perform.  It won't take much to starve them in a market where what you can do  is more profitable than who you know. 

As for what to do today, well that's a complicated problem.  Most of the work to be had is Government funded, and much of it is riddled with incompetence for all concerned.  The competition is fierce because there's no barrier to entry which makes profitability difficult.   The scheduled duration of these government projects are getting longer all the time.  Landing a profitless job to get you by in a slow period becomes dead weight when it won't end during peak season.  Most of the invitations to bid aren't mentioning the schedule because it's bound to drive cost up.  Perhaps the government funded work schedules are increasing because the people in charge know they won't have much to do when the project is done?

Anyone who can hibernate their business right now would probably find themselves well positioned to re-emerge when the boom finally comes to town.  For everyone else, it's a frustrating balancing act between necessity and desperation.  Chart the path of minimal harm is the best direction I can offer until the new work emerges on our horizon.  I realize this could be read as a pretty bleak forecast, but that's not my intention.  We've been supported by the hype of hot-air for a really long time now.  The net result has been an unprecedented loss of skilled tradesman.  We can't expect new recruits to endure regular layoffs that prevent them from accruing the hours to take a license exam.

Any turnaround will immediately call the tradesman shortage to national attention as never before.  I think it's reasonable to expect the proposed "solutions" to include the old roster of nonsense that hasn't worked in the past.  Meaningless certifications taught by professional obstacles who aren't connected or even committed to benefiting the industry aren't going to work.  That's just another HR driven effort to giver Higher Ed something to sell.  You can't become an electrician in 6 weeks at home any more than you can become an astronaut by attending a correspondence school.

It's well past time that we align individual success with what people can actually do.  Graduating a program is a proxy for knowledge or skill that rewards the gatekeeper regardless of graduates abilities.  Applicable skills based testing would reward what works for those who are willing to work. 

It would reduce the "time served" for capable individuals who could immediately fill vacancies, and it would simplify what  apprentices needed to improve.  All of which puts an incentive on developing what's actually needed.  We have a National Electrical code, so it's obviously possible to have one set of standards for the entire country.  It will be interesting to see if any of these ideas gain traction when the existing supply channels fail to supply sufficient man power in a boom.

 

 

[Jackdawg]

You dont have a national electrical code? Wow. I'm sort of speechless at that.

 

[rockstar.esq]

Jackdawg

There is a national electrical code, there is no national electrical license.