Prospect for California Contractors is Positive

Moss Adams partnered with AGC of California and AGC of America–San Diego Chapter to collect and analyze salary data from contractors across the Golden State in order to develop the California Construction Industry Salary Guide for 2015–2016. The guide covers 22 different functions and provides critical market data to help you make the right decisions for your business. This analysis ran as a foreword to that guide.

Contractors in California have experienced rapidly expanding demand for the past four years. The prospects remain generally positive for 2016 as well, but the outlook varies by location and market segment.

Although there’s no comprehensive measure of construction spending at the state level, two indicators show the extent of the industry’s rebound since 2010—and how far it has to go before surpassing previous peaks. Value added measures the contribution of each industry to a state’s gross domestic product—the value of all wages, salaries, benefits, and profit-type income, omitting purchases from other industries. From 2010 to 2014, the value added by the construction industry in California climbed 26 percent, significantly outpacing both the 17 percent growth for the rest of the state’s economy and the 21 percent rise in value added by the construction industry nationally. However, statewide value added by the construction industry in 2014 remained 21 percent lower than in 2007, even without taking inflation into account.

Similarly, construction employment in the Golden State increased by 170,000, or 31 percent, from its low in September 2010 through August 2015. That was more than twice the 15 percent growth in all nonfarm payroll jobs in the state (from a low in February 2010) and well above the 18 percent increase in construction employment nationally (since a low in January 2011). Yet the August 2015 statewide construction total was still 223,000—or 24 percent—below the state’s employment high point in February 2006.

California contractors increased their workforce by nearly 44,000 employees, or 6.5 percent, between August 2014 and August 2015. That was by far the largest numerical increase of any state and the ninth-largest percentage increase. Florida was a distant second, with a gain of fewer than 26,000 employees.

But the gains were distributed very unevenly across the state. Among California’s 29 metros for which the Bureau of Labor Statistics (BLS) provides construction employment data, 20 added construction jobs between August 2014 and August 2015, eight lost jobs, and employment was flat in Hanford-Corcoran. (Note that the BLS combines mining and logging with construction in metropolitan areas with few employers in one or more of those industries.)

Notably, the metros adding jobs were spread among many parts of the state and no longer concentrated among the big coastal metros. The largest percentage increases occurred in El Centro (a 15 percent increase, 300 combined jobs), Santa Rosa (13 percent, 1,400 construction jobs), Modesto (13 percent, 1,000 combined jobs), San Luis Obispo-Paso Robles-Arroyo Grande (12 percent, 800 combined jobs) and Merced (11 percent, 200 combined jobs). At the same time, all the big metros also added construction employees: Anaheim-Santa Ana-Irvine (9 percent, 7,500 construction jobs), Los Angeles-Long Beach-Glendale (5 percent, 6,200 construction jobs), San Jose-Sunnyvale-Santa Clara (10 percent, 4,200 construction jobs), San Diego-Carlsbad (5 percent, 3,300 construction jobs), San Francisco-Redwood City-South San Francisco (8 percent, 2,900 construction jobs) and Oakland-Hayward-Berkeley (4 percent, 2,500 construction jobs). Even Sacramento-Roseville-Arden-Arcade, which had lagged earlier in the recovery, added 1,000 construction jobs (a 2 percent increase).

Numerous factors are contributing to the upswing. State revenue has grown rapidly: 10 percent from fiscal year 2014 to fiscal year 2015 as a whole, accelerating to 14.5 percent between the spring of 2014 and the spring of 2015. Some of that money is flowing into state-funded construction; more generally, higher state spending is helping local businesses and individuals, who in turn are generating more demand for both nonresidential construction and housing.

Construction statewide has benefited from steady population growth. Unlike the nation as a whole, across which population growth tapered off from 0.92 percent per year in the past decade to 0.76 percent annually in the five years from 2010 to 2014, California’s population growth has accelerated slightly, from 0.94 percent to 0.97 percent. This has contributed to demand for both single-family homes and especially apartments, as well as to various categories of housing-related nonresidential construction.

Other contributors to construction in the state have been more localized: a surge in office construction in San Francisco and Silicon Valley; port activity in Los Angeles and Long Beach; and renewable energy projects, warehouses, and data centers in other locations.

At the other extreme, Bakersfield lost 1,200 construction jobs (a 6 percent drop), the seventh-largest numerical decline among 358 metros nationwide that have construction employment data. The downturn in construction employment in Bakersfield began in April 2015, ending five years of almost continuous year-over-year growth and mirroring the rise and then fall in oil drilling in surrounding Kern County. With oil prices unlikely to bounce back soon and Bakersfield’s agricultural production suffering from the state’s prolonged drought, construction activity there is likely to remain depressed for some time.

The drought is also taking a toll on other agriculture-dependent metro areas. Yuba City had California’s steepest percentage decrease in construction (an 11 percent loss, 200 combined jobs), followed by Napa (an 8 percent loss, 300 combined jobs), Madera (also an 8 percent loss, 100 combined jobs), Bakersfield (as described above), Salinas (a 6 percent drop, 300 construction jobs), Fresno (a 4 percent drop, 600 construction jobs) and Santa Cruz-Watsonville (a 3 percent drop, 100 combined jobs).

It remains to be seen how much the state’s economy will be harmed by this year’s fires, the ongoing drought, slower growth in China and other markets that buy California’s exports or send it visitors and investors, and possible dislocation of shipping to East Coast ports once the widened Panama Canal opens for business. But despite these clouds on the economic horizon, the outlook for California’s economy and its construction industry remains generally bright.

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Of the elements that contribute to your bottom line, there’s none more impactful, defining, or difficult to quantify than this: talent. Your people are the driving force behind your business—what clients will remember long after a project is completed. For these reasons and others, attracting and retaining top talent is critical to your success. To learn more about strategic business and financial planning, tax, and operational options in response to California’s economy, call your Moss Adams professional. If you're interested in a copy of the full report, it’s available to AGC members and Moss Adams clients at a discounted rate of $125, or $250 for nonmembers. Learn more or request a copy >