If the Dirt Flies, the Recession is Actually Over
Not unlike the DJIA, construction data reflects both the emotions and economy of the times. So when I see headlines proclaiming, "The Recession is Over" and "Hospital Budgets Back to Pre-Recession Levels", I pause and turn to the construction surveys for validation. After all, if the economy has really buried its financial woes, then surely the hardhats and the shovels are out and the dirt is flying.
Reed Construction Data and McGraw-Hill Construction are both leading sources of economic data for the construction industry. They keep a watchful eye on national building trends, materials costs and (perhaps of greatest interest to CFOs) hospital construction trends. But this isn't information that CFOs should only look to when they are contemplating a build. No; this is information they should look to in order to accurately foretell economic trends in their own areas.
This week Reed Construction Data released data that looked at construction activity for 20 key states. Why only 20 states? Well, the 20 states selected make up approximately 75% of the U.S. construction market. According to the data compiled by Reed, California makes up 12.4% of total U.S. construction, and construction starts are down 4.4% over last year at this time. Similarly, Florida, which comprises 8.1% of total U.S. construction, has seen a construction starts drop 10% this year. The folks in the Midwest are faring about the same as the west and east coasts, though their share of U.S. total construction isn't as large.
These stats aren't really all the surprising, but they serve as a good touchstone for CFOs who may be pondering building in their area, because to truly determine if the time is right to build, you must have a pulse on whether your region or state economy is rebounding from the recession.
Of course you should look at hospital construction trends, but that will only tell you what your peers are doing across the country, and not if the time is right to build in your area. Ideally to actually see any benefit from the down economy, your goal should be to get in just before or just as your area is starting to rebound. In this way, you can take advantage of the current savings on material costs, labor, and real estate, and stay ahead of your market demand and facility capacity.
There's more to construction trends than what you see at first glance, so I reached out to Jim Haughey, Ph.D. and Chief Economist for Reed Construction Data to tap into his expertise on the recovery of the construction market nationwide, and more importantly what it means for hospitals.
Q. Many CFOs certainly watch the hospital construction reports to determine if the time is right for them to move forward with their capital construction projects, but how does the national construction landscape impact them?
A. Hospitals are a big market, but they are only a small part of the overall market. If the rest of the market is strong, hospitals are going to have to pay more to build their hospitals. The construction costs during a very intense construction period can jump 10%–12% in a year; that adds up to a lot of money. The national construction trends can still be a good indicator of whether your community is growing in terms of population, and if you're a hospital CFO that's going to help you determine if there's a need for more capacity.
Construction [materials] prices are a bargain right now. As we move ahead into next year and beyond you are going to see a renewed rise in construction costs and you will likely see a rise in credit costs, as well. Credit costs are unusually low right now because few people want to borrow money on the bottom of a recession. When borrowing comes back; when retailers accumulate inventory; when manufacturing wants to expand facilities, and when home owners start buying more homes, then people need capital. That's when costs will start going up. So, if there's a need [to build at a hospital] which can be accomplished today, it's better to do it now or early next year rather than waiting another year and half because it will cost a lot more to build then.
Also, contractors in some areas are hungry to build, while in other parts of the country the contractors who build hospitals have never stopped being busy—that's because hospital construction is a very specialized field. However, for hospitals that are in depressed areas, it may be the perfect time to do your building or your maintenance because the contractor need work and may give you a deal. Overall, prices won't get any better.