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LAS VEGAS — One of the first sessions at the 42nd International Risk Management Institute Inc. Construction Risk Conference in Las Vegas on Monday addressed the question towering over a crowded ballroom of those managing risk and insurance for the post-pandemic, recession-wary construction industry: what will an economic recession mean for current and future projects?
At center, it’s a labor problem — but not exactly in the sense of numbers of workers, said presenter Chris Daum, president and CEO of FMI Corp., a consulting and investment banking company that works with builders.
While hiring and managing a construction workforce has been an issue in construction over the past decade, expertise in navigating the “endless” operating challenges that come with an economic slowdown will be a core issue moving forward, he said.
Right now, the construction industry is “busier than ever,” he said, adding that the building industry lags 12 to 24 months behind the economic reality, as buildings are planned in contracting phases before reality sets in. And because the degree and the duration of a recession is unforeseen “it’s going to make everything harder to predict” for the industry.
Topping the list currently are supply chain issues and labor, both of which are results of the shutdown of the economy in 2020 as the result of the COVID-19 pandemic and the influx of stimulus money that followed created a demand for durable goods. The effects of both remain as millions of workers have yet to return to the workforce and supply chain challenges are just “beginning to untangle,” he said.
Add to that reversal of a so-called “zero interest” environment of the past decade that helped borrowers borrow on the cheap, and fuel what Mr. Daum referred to as “bad ideas” in business.
Construction is already seeing a depression in residential construction — often the first to take a hit in a recession — and office and commercial construction, as workers continue to demand the hybrid, work-from-home arrangements that Mr. Daum referred to as an irreversible post-pandemic work trend.
Another hit for the industry will be Inflation. Even the $1.2 trillion federal infrastructure bill — passed one year ago on Tuesday — will not help, according to Mr. Daum.
“Most of (the federal funding from the Infrastructure Investment and Jobs Act) has not hit the street except for the fact that much of those dollars are going to discreetly fund things that were underfunded or needed to be funded,” he said. “The sad part of this whole story is all $1.2 trillion of that is consumed by inflation; even (with) your most moderate assumptions of inflation over the next five to seven years that all gets eaten up.”
To manage the challenges, the industry will need to lean on those who worked through the last recession, many of whom are retiring, leaving the “burden to the millennial generation,” he said. “We’re 10 years behind the curve in a generational transition,” he added.
“This is the biggest risk to the construction industry,” Mr. Baum said of the generation that was in college when the industry last grappled with a slowdown. “In the next five years… how do people who are running out the door… transition all their know-how on how they worked through the last downturn that was 10 to 14 years ago?”
“You know what to do, you know how to coach and mentor,” he added. “But you’ve been so busy on cruise control, or putting work in place, that you haven’t taken the time to have those conversations and develop pre-thought contingency plans that if this happens, this is what we’re going to do.”