California Construction Outlook: Moving Ahead Despite Gradual Downshift

Moss Adams partnered with Associated General Contractors (AGC) of California and AGC of America, San Diego Chapter, to collect and analyze salary data from contractors across the Golden State to develop our 2019 California Construction Industry Salary Report. The guide covers over 20 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.

Going into 2020, California contractors continue to outpace their counterparts nationally, even in the face of rapidly decelerating population growth and a slowing economy. In general, contractors should be able to maintain growth in 2020, but at a slower rate than in recent years.

Following are prominent construction-industry growth trends and state developments impacting construction companies in California.

Growth Trends

So far, the industry deceleration in California has been modest. In the summer of 2019, seasonally adjusted construction employment in California topped 900,000 for the first time in 12 years, increasing by 4% or more in June, July, and August, compared to the same months in 2018. Seasonal adjustment is a statistical method to remove the influence of regularly occurring monthly differences, such as holiday- or weather-related variations, to make underlying economic trends more evident.

These growth rates are well above the national rate of construction employment increase. Nevertheless, employment growth in California—and nationally—was slower than in any year since the industry’s recovery began in earnest in 2012.

Employment

Growth was well balanced across construction segments in 2019. Employment increased by 3.5% from August 2018 to August 2019 among residential building contractors, 6.2% in nonresidential building firms, 2.5% for heavy and civil engineering construction, and 4.4% among specialty trade contractors. Additionally, growth in 2019 was geographically widespread, in contrast to earlier years in this decade when little construction occurred outside of large coastal areas.

Each month, the Bureau of Labor Statistics (BLS) reports on construction employment by industry in 29 metro areas, including multiple divisions of the Los Angeles–Long Beach Anaheim and San Francisco–Oakland–Hayward areas. For most metros, BLS reports construction combined with mining and logging to prevent disclosure of data about industries with few employers. Because construction is the largest portion of the combined employment, changes in combined employment provide a reasonable approximation of the actual change in construction alone.

In most of 2019, construction employment increased in all but three metros, compared to the same month of 2018. The only areas experiencing a downturn were San Luis Obispo–Paso Robles–Arroyo Grande, Vallejo–Fairfield and a very small decline in Riverside–San Bernardino–Ontario.

Expansion Opportunities

Contractors remain optimistic about the amount of work available for bidding. In a 2019 survey conducted by the Associated General Contractors of America, 77% of 85 respondents who listed California as their principal state for operations said they plan to hire hourly craft workers for expansion in the next year.

That response exceeded the number of national respondents planning for similar expansion—with 72% saying their firms planned to hire for expansion—and nearly matched the 83% of California firms that planned for expansion in the 2018 survey. In addition, 61% of Californians surveyed in 2019 said they expect to hire salaried field personnel, and 58% plan to hire salaried office personnel.

State Developments

Optimism among California contractors appears to be well founded. The state’s economy remains generally healthy—a condition that supports many categories of construction.

Transportation

Transportation projects are moving ahead at a fast clip, following passage of statewide and local ballot measures and the November 2018 rejected attempt to roll back the 2016 fuel-tax increase.

In addition to developments in highway, transit, and airport projects in the largest metros, there’s also prospects of the long-planned Gold Line light rail extension from Pasadena to Claremont and a high-speed rail line from Victorville to Las Vegas. These proposals now appear more likely to come to fruition than the north-south high-speed rail project.

2028 Olympics

The awarding of the 2028 Olympics to Los Angeles is also starting to bring forth numerous construction plans, some of which should turn into project awards in 2020. These plans range from sports venues to hotels to infrastructure.

Housing Demands

Construction is picking up in the smaller and inland metros as the extremely high housing costs and congestion of the large coastal areas drives more residents to look for homes and employment farther east.

However, finding the personnel to build these and other projects will be challenging. Two-thirds of California AGC survey respondents said it will continue to be hard, or will become harder, to hire hourly craft workers over the coming 12 months.

Hiring Trends

There are several reasons for the gloomy hiring outlook. With the overall national unemployment rate reaching a 50-year low in September 2019, nearly every industry is hungry for additional workers.

In addition to competition from other industries, contractors are finding it hard to find qualified craft personnel because, according to 80% of AGC survey respondents, the local training pipeline is poor or fair. An increasingly restrictive immigration policy has reduced the pool of non-US-born workers, which has historically been an important source of labor in construction, especially home building and improvements.

Population Decline

Another factor that may limit the supply of workers and the demand for public and private projects is the exodus of working-age adults from California. The state’s population growth rate has slowed sharply in recent years, falling from 0.8% in 2015 to 0.4% in 2018. This decline is largely due to greater numbers of working-age adults moving out of the state and relocating to the Pacific Northwest and Rocky Mountain states.

The US Census Bureau reports state population as of July 1, 2019, late in December, so the 2019 estimate isn’t available as of this writing.

Looking Forward

With low unemployment, an exodus of potential hires to other states, very limited immigration, and an unsatisfactory training pipeline, it isn’t surprising that 38% of California firms in the AGC survey reported that projects took longer than anticipated in 2019. Additionally, 46% reported that projects cost more than anticipated. Unfortunately, it appears that none of these labor-supply pressures are likely to abate in the near future.

That said, the US economy will likely continue to expand in 2020—although more slowly than in recent years—and manufacturing may shrink. However, California is less dependent on manufacturing than many other states, so the state and its contractors should remain relatively healthy.

We’re Here to Help

To learn more about these trends or how they may impact your construction company, contact your Moss Adams professional.