Construction Industry Outlook For 2011

What's the outlook for the local construction industry in 2011? We review the key issues for the new year, and discuss which segments of the local construction industry might experience an uptick.

Guests

Marney Cox, Chief Economist at SANDAG

Borre Winckel, President & CEO of Building Industry Association of San Diego County

Scott Crosby, President of the local chapter of Association of Builders & Contractors

Lorena Gonzalez, CEO/Secretary-Treasurer of San Diego and Imperial Counties Labor Council

Read Transcript

MAUREEN CAVANAUGH: I'm Maureen Cavanaugh you're listening to These Days on KPBS. If you're in construction in San Diego or if you know a contractor or a builder, I don't have to tell you the last few years have been rough. In fact it looks as if 2009 and 2010 were the worst years ever for the local building industry. Analysts estimate that about half of the county's construction workers have been idle during this lean period. But there are some hopeful sides from both the public and private building sectors that construction work may be picking up. For the rest of the hour, we'll be talking about the forces that could help or hurt a construction rebound in 2011. I'd like to introduce my guests, Marney Cox, chief economist at SANDAG. Good morning, Marney.

COX: Good morning, Maureen.

MAUREEN CAVANAUGH: Borre Winckel is president and CEO of the Building Industry Association of San Diego. Good morning. Thanks for being here.

WINCKEL: Good morning to you as well.

MAUREEN CAVANAUGH: Lorena Gonzalez is CEO and secretary treasurer of San Diego Imperial County Labor Council. Lorena, good morning.

GONZALES: Good morning, Maureen.

MAUREEN CAVANAUGH: And Scott Crosby, president of the local chapter of the Association of Builders and Contractors. Scott, thank you for coming in.

CROSBY: Good morning.

MAUREEN CAVANAUGH: I want to encourage our listeners to join the conversation, especially if you are in the building industry or a construction worker, give us a call with your questions and your comments. Our number, 1-888-895-5727. Marney, give us an idea of how much of a falling off there's been in construction activity in San Diego over the last couple of years.

COX: Yeah, let me give you a couple of examples of that. First of all in terms of jobs because that's really an important part. We peaked at about 96000 jobs in about 2006, today and we're down to about 58000. So 40 plus percent decline in jobs in San Diego. Another way to take a look at it as sort of an indicator of future growth might be building permits especially on the residential side. And they actually peaked in 2002, fell every year through this most recent one. We expect this year, 2010, to actually be slightly above 2009. But they dropped from about 18000 all the way to about 4000. So it's a huge decline. Typically San Diego acquires somewhere between ten and fifteen thousand new permits each year in order to accommodate its growth. So we're way below the trend line.

MAUREEN CAVANAUGH: Now, a lot of the work local contractors did get in recent years since this decline was from public projects, government projects. Private work has dried up. Do you expect that trend to continue.

COX: Yeah, and in fact, it got a shot in the arm through the federal spending stimulus program too. Unfortunately the spending at the federal level, it's taken a long time to get those dollars actually on the ground. A lot of projects weren't what they call shovel ready. Meaning that they're on the shelf, you can pull them off the shelf and start the project, say, within 3 to 6 months of it's very difficult to do. The other ones that have worked out well for us are some projects that were funded by local sales tax money, which is what the San Diego Association of Governments uses for its funding. You could see those projects out there, a lot of them on the arterials and freeways. And then the other group that's been a little active is the military. They have had not only construction ongoing, but there's in the process now a movement of troops from the east coast to the west coast. In order to prepare for all that, they're shoring up the facilities and expanding the facilities they have here. And they started that construction process.

MAUREEN CAVANAUGH: Is there anything you can point to, Marney that might be slowing down a recovery in construction.

COX: Well, I think a couple things. First of all, despite low interest rates on the residential side as well as commercial, which might qualify you for a loan, the standards at which you qualify for those loans have gone up dramatically. So fewer and fewer people today are able to actually qualify for a loan. So that's difficult. The second thing is that a lot of people during low interest rates refinance their homes, and when they refinance those homes even if they don't take cash out, they're able to reduce the monthly payment, which frees up money that can be spent on other things getting the economy back on course. Unfortunately fewer and fewer people are able to qualify for those loans again, because the standards have risen.

MAUREEN CAVANAUGH: And of course they don't do any remodeling then.

COX: Correct.

MAUREEN CAVANAUGH: Yes. Exactly.

COX: Correct.

MAUREEN CAVANAUGH: Now, Borre Winckel, as I said, you are president and CEO of the Building Industry Association of San Diego. Tell us how members of the building industry have been coping during this downturn.

WINCKEL: Well, Maureen, let's first preface any of my answers that there are 40000 construction workers and building industry people out of work today in San Diego. Comparably, 25 to 30 percent of the entire unemployment that we suffer through here in San Diego. We lost half of our membership, we used to represent about 1600 companies. 800 companies remain standing. How do they cope? That's a tough one. Most of the people we know and represent have been looking for work for 3 to 4 years. And why is that? Because today a house in the resale market is selling for less money than it takes to build a new house. So as long as we face that inverse relationship, it's very tough to come up with a financing proposition to build a new house. There is demand, though, but as Marney, the economist has just told you, it's an issue of the banks coming back to lending after the great -- what did we call it? The stupid money that went into the market through the sub primes and the repricing of those that has led to such great foreclosure amounts. Banks are still shy lending. And we hear anecdotally from many of our friends and workers that they can't get a loan even though they never defaulted on anything. And then there's the permit level. There's just no construction activity out there.

MAUREEN CAVANAUGH: Let me stop you for a minute, though, because you said that your membership has declined so dramatically over the last few years. Are these companies, these workers, who have basically gone out of business?

WINCKEL: Indeed they have. It's a mixed bag. It's companies that have folded, went bankrupt. And then there are those who in the subs and the contractor world, simply there is no work. I mean, I came to the studio today, and I noted with some joy to see the cranes up, but those are the types of jobs that most of our members don't get to do. Those are generally subbed out to the large general contracting firms and these are jobs that our members typically don't get.

MAUREEN CAVANAUGH: So what kinds of contractors do you -- does your Building Industry Association represent primarily?

WINCKEL: Maureen, you think of a house and anything that goes into the house, those are the people we represent. Whether it's in the yard or house or painters, dry wallers, the small remodeler, the custom home builder, the very large builders, the national public builders and then the private builder.

MAUREEN CAVANAUGH: Now, I want to ask you, Borre, you mentioned permitting, and I know that's a big focus of the Building Industry Association. Tell us some of the issues that you're going to be working on to get those permits moving.

WINCKEL: We need to have a dialogue with local government, and in our view, they hold the key. Construction costs have come down 25 to 30 percent on average for the larger public infrastructure that we're always part and parcel of, because no house just builds the house. The house also builds the community, the school, the parks, the water, the sewer facilities, the open space, what have you. The dialog that we need to have with local government is you have got to drop your impact fees, the mitigation fees, which stand for the mitigation of the impact of the single house and its occupants on the community. Those fees have never come down. They average between 50 to 75 thousand dollars per house. We think there's an argument to be made that those fees can be adjusted based on the facts that construction costs have come down. So when we can do that, it opens up some financial wiggle room to jump start a project here and there.

MAUREEN CAVANAUGH: I see. So you're not arguing that they shouldn't have any mitigation fees. Just that they should keep pace with the reduced price of real estate.

WINCKEL: That's correct.

MAUREEN CAVANAUGH: Let me reintroduce my guests. I'm speaking with Marney Cox, chief economist at SANDAG, Borre Winckel is president and CEO of the Building Industry Association of San Diego. And I'd like to also reintroduce Lorena Gonzales, CEO and secretary treasurer of San Diego Imperial County Labor Council. And Scott Crosby, president of the local chapter of Association of Builders and Contractors. And also, welcome our audience if they'd like to get into this conversation about construction in San Diego to give us a call at 1-888-895-5727. You know, the last time we had a representative of the Association of Builders and Contractors and Association of the Labor Council in San Diego, we were talking about prop A, that was a measure to ban project labor agreements in San Diego County on the November ballot. But that is an issue that's been decided by the voters, and I'd really like to hear both of your take on what the construction industry is facing right now. So Scott, I know your organization represents nonunion contractors. They have been -- have they been slashing prices as the work drives up?

CROSBY: I wouldn't call it slashing prices, it's more adjusting to the market. As we're seeing, there's a lot more bids now on public projects and private projects than there used to be. And that drives competition down.

MAUREEN CAVANAUGH: Okay. So what can, however, the consumer who's trying to find work in this market to get their home remodeled or to even build a home, can they get a deal on construction that they couldn't get before?

CROSBY: Well, I'd defer that to Borre. His contractors build the houses. ABC represents mostly commercial industrial, do a lot of public works as well.

MAUREEN CAVANAUGH: Uh-huh.

CROSBY: But I'd like to just say, it's I great time if build if you're looking to build anything right now because the competition is so fierce if you're looking to build a new school or build a new house, it's a great time to do that.

MAUREEN CAVANAUGH: Well, why is -- I mean, since the competition is so fierce, you mean a lot of low bids will come in?

CROSBY: Correct.

MAUREEN CAVANAUGH: And Borre, let me ask you then, for the general, just the individual consumer looking for a remodel or something, is this the time to do it because of bargain prices.

WINCKEL: Yes, certainly. Clearly costs have come down. And that's probably the problem. The costs have come down so far that it doesn't offer an employment scenario for all. So as Scott mentioned, multiple bidders, single projects. Guess what? The winner gets it, losers go home and try to go for another job. And that is why our unemployment rate is so tenaciously high.

MAUREEN CAVANAUGH: Lorena, tell us about how union construction workers have been coping with this downturn.

GONZALES: Well, again, union construction workers in San Diego County are primarily commercial public works workers. And so what's happening in the housing industry, although it affects all workers isn't really of our greatest concern. It would have been nice, I think all along if the housing market and the prices of housing as that increased, if wages had increased. I think a lot of what we're seeing now, why the banks won't loan and why we have problems is because wages were stagnant during a time that we had economic growth for contractors and for those who held wealth, and as a result of the recession, of course, our wages are going down, and it becomes even tougher. But as far as construction, union construction, even nonunion construction in the public works, we benefited greatly from the economic stimulus package, from Obama's economic stimulus package. We have some possibilities I think that we're looking forward to. We're looking forward to some growth, a billion dollar project on the Chula Vista bay front. We're looking - if you read the UT this morning, great progress being done on the north embarcadero visionary plan. The convention center expansion, we have the $1.9 billion sunrise power link. So we have a lot of opportunity in commercial and public works that we haven't seen in the past. All of the growth in the construction industry last year came from public work so it's really important that we continue to invest in that. But while we do it, we have to make sure that we're actually gonna affect the unemployment rates in San Diego. And the way you do that is through local hire. Every one of those projects that is moving forward, that we've been able to move forward has been with cooperation of labor and business and the environmental groups, and everyone who can come together and agree that we're gonna hire people locally. That is the only way that we're gonna really affect the unemployment rates here in San Diego County.

MAUREEN CAVANAUGH: But even so, even though that union contractors generally work on public projects and public projects have been fueling whatever construction's been going on in San Diego in recent years, still hasn't there been a higher amount of unemployment among union construction workers lately?

GONZALES: Oh, absolutely. I mean, the union construction workers, I think, mirror nonunion construction workers in unemployment rates. The unemployment rates have been tremendous. One of the reasons is, though, as the competition, I guess, increases and you really have this goal to get to the very bottom line, is you have a lot of contractors, union and nonunion, who are willing to bring people in from out of the area. It's cheaper labor cost to bring somebody from Arizona or from Nevada, or bring them up from Mexico. As a result we're not affecting the unemployment rates here in San Diego County. And that's one of the reasons that the labor council and the construction buildings trades council have been so far out there on trying to require local hire on local projects. If we're putting taxpayer money in, we should ensure that the workers are coming from San Diego County.

MAUREEN CAVANAUGH: We're taking your calls at 1-888-895-5727 about the construction industry in San Diego. And David is on the line. He's calling from San Diego. Good morning, David, welcome to These Days.

NEW SPEAKER: Good morning. Thank you for taking my call. It's funny, I actually called with a comment about -- a question and comment about banks and lending, but that last comment about getting, you know, local talent to actually -- to be in a position to be hired as opposed to cheaper outside labor, that is a huge issue. I am a licensed contractor. I was in top two percent income bracket last -- about five years ago. Today I'm out of work. I'm actually falling back on other -- I'm trying to produce, you know, break into other industries with my equipment, with my talents. Construction is dead. It seems to me that with the taxpayer paid for stimulus publics to the banks that they owe us to -- something along the lines of 0 percent lending for construction.

MAUREEN CAVANAUGH: Uh-huh.

NEW SPEAKER: Same thing for housing. If people can't qualify for a loan to buy a house, there's not gonna be any remodeling. All you're gonna have is more and more houses coming up foreclosures, empty, no one's gonna qualify to do anything. If bank investors are making, you know, huge profits, which we know they are, how can -- I don't even understand how this can be when we just -- the taxpayers from our pockets gave them money and they're not gonna turn around and help us out.

MAUREEN CAVANAUGH: David, thank you. Thank you for your comment. I think a lot of people who are in the construction industry probably share your views. Borre, let me get your reaction to that.

WINCKEL: Wouldn't we all want to have 0 percent construction loans? Unfortunately the builders and the developers don't work with construction loans at that cost. They work with private equity, they deal still with double digit interest costs. I really do sympathize with the caller when he makes his observations. The issue of local hire, we have to come to terms with the fact that we have a state wide issue here. It's a national problem with California leading the pack in the doldrums of our economics. We lost about 80 percent of construction workers in the entire state. Our output as an economy, as a housing industry, went from $37 billion in 2005 as a total economic output, to $11 billion. Conveniently between those two numbers lies the entire state deficit of $26 billion. I am not suggesting that the state deficit budget-wise is made up by these numbers but it is no coincidence that we have that discrepancy.

MAUREEN CAVANAUGH: I have to stop you right this. And you can continue when we come back. We have to take at a short break. When we return, we will continue our discussion about the construction industry in San Diego. And continue to take your calls. You're listening to These Days on KPBS.

I'm Maureen Cavanaugh. You're listening to These Days on KPBS. My guests are Marney Cox, Borre Winckel, Lorena Gonzales, and Scott Crosby, and we are talking about the construction industry in San Diego. Taking your calls at 1-888-895-5727. And also, your comments online at KPBS.org/These Days. I had to interrupt you, Borre Winckel, would you finish your thought on that?

WINCKEL: Yes, I would. I mean, I don't see that the banks are universally the solution to the plight we have. What we're suffering from, I believe, is over regulation. We just have too many new rules and regs coming about that have nothing to do with the market. On the first of January of this year, the average construction cost of a single house has gone up by another $20,000 on average per house. It's the green building codes, the new fire sprinkler mandate, the new rules and regs concerning stormwater run off regulations, so when we have homes that continue to cost more to build than what one can achieve by purchasing a house in the resale market, it keeps people unemployed. And as long as unemployment keeps so stubbornly high, we're not gonna get back to an economy that we're used to in California.

MAUREEN CAVANAUGH: And Marney Cox, we had a bit of a heated discussion during the break about whether or not we can actually achieve local hire when it comes to public construction projects here this San Diego. That is, of course, hiring construction workers who live here locally to work on those projects.

COX: Yeah. Part of the problem is that for -- you try to hit in a direction of making sure that your own workers in your own area receive the benefit of expenditures in your area. The difficulty in that is is that you never ever widen the competition out wide enough to make sure that you're getting the best deal for the taxpayers' dollar. And I think that's, in light of the conversation that's going on broadly in the United States today about public expenditures and whether or not they're too high from wages and perceptions and stuff like that, if we start narrowing the competition so that you only include workers or companies in your own area, and don't broaden it out to enhance the competitive nature of the market place, you're likely to end up paying higher prices. Not that you would, we don't be that for sure. But it's possible that you would. So we have rules and regulations put in place that prevent us from doing that.

MAUREEN CAVANAUGH: Some municipalities though, Lorena, have made it a point that public works in a particular community should be worked on by local construction worker right?

GONZALES: Absolutely, the city of Los Angeles just passed a local hire ordinance, the redevelopment agency in Los Angeles has passed one, the school district there. San Diego school district was very forward looking in passing a local hire ordinance. San Francisco has it. So San Diego puts itself at a disadvantage, when it doesn't have this type of protection for the tax payers who are actually paying the taxes into a government for those public projects. That tax money should be reinvested in our community by way of wages by way of spending and revenue, tax revenue that it regenerates by people actually taking their money and spending it here locally. I think that we've addressed this problem completely wrong in San Diego. And one of the problems is, we are so close to Arizona, and so close to Mexico where labor is so much cheaper, and it's so easy to hire labor from outside of San Diego, and then they go home and spend that money outside of San Diego. We need to reinvest our tax doctors right here at home with the taxpayers who are paying those taxes.

MAUREEN CAVANAUGH: I'm wondering, Scott Crosby, what does the American Builders' and Contractors Association, where do they stand on the issue of local hire?

CROSBY: Well, it's interesting, we do support local hire if it makes sense and like is being talked about here, it has to make sense from a competition standpoint, but it's important to note that the San Diego Unified school district's latest numbers that came out on local hire have been dismal. They didn't meet any of their goals. And when we look at the city of San Diego, actually, I know there was legislation proposed that would have asked for 70 percent local hire. When we looked at the numbers, actually, they achieved 90 percent. So in fact, we would have been going backwards had we enacted an ordinance with 70 percent. So local hire works, but it works on its own. And the City of San Diego is doing a great job right now of keeping things local. And the school district though has not met any of their local hire goals.

GONZALES: And Scott knows this is untrue, of course, he's willing to put that out there. The City of San Diego only has data on prevailing wage jobs. When you have a prevailing wage job, the standard is set. The cost for labor is set. So there's no incentive to hire down into higher lower labor cost. So the only data they have is for prevailing wage jobs. Now, with those jobs, they could say, yes, there's been local contractors, there's been local hire. We think that should be extended to all projects, because of course, City of San Diego being a charter city, the ABC works really hard to get prevailing wage out of our cities, but City of San Diego, being a charter city, only has prevailing wage on certain projects. Storm water projects over $10 million --

MAUREEN CAVANAUGH: Gotcha. Let's move on, Lorena. I understand. Let's move on. We have a caller on the line. Andrew's calling us from Encinitas. Good morning, Andrew. Welcome to These Days.

NEW SPEAKER: Thank you, Maureen.

MAUREEN CAVANAUGH: Yes, hi, how can we help you?

NEW SPEAKER: Hi, well, I just had a comment regarding the prior caller who complained that banks are making profits and that they should be lending out at 0 percent. And I just find that comment to be really scapegoating of the financial industry. Yes, you know, we got into a mess because there was, you know, too much incentive to lend at -- with bad practices and low rates in the past through, you know, adjustable rate mortgages and ballooned payments and all that kind of stuff, which basically created an unrealistic level of demand. So to then turn around and say that the banks should continue to do that now seems like the wrong kind of solution.

MAUREEN CAVANAUGH: Andrew, thanks for the call. Thank you very much for the call. I want to get in Jennifer from San Diego. Good morning, Jennifer. Welcome to These Days.

NEW SPEAKER: Hey, good morning, this Jennifer Bairsley at the electricians' union. And I just wanted to weigh in that, you know, employment has been devastating for electrical workers in San Diego and Imperial Counties. While it's horrible for us here, it's a little bit less horrible than in most of the rest of the country because of our region's commitment, and some of the organizing that we've done here to bring what people are calling green jobs. So electricians here are putting solar panels on roofs, you know, where con -- constructing fuel cells and the like. So I think the more we can focus on expanding this area of our economy, and creating sustainable careers in this area, looking at long-term jobs like manufacturing not just short term construction jobs, the better off we'll be. One of the problems I see, and this is my question for Mr. Cox is that especially in places like the Imperial County, as unemployment has been prolonged, the underground economy has really proliferated in construction. So we have unlicensed contractors, people working for cash pay under the table. And things like that. And I was wondering, in Imperial County for example, we would have no way of even measuring what it would look like if there was full and legitimate appointment because so much happens under the table in construction. And I was just wondering if Mr. Cox had taken account for the underground economy in any of his --

MAUREEN CAVANAUGH: Right. Thank you so much, Jennifer. So is there an underground economy because of this economic downturn? People basically getting paid under the table?

COX: Yeah, absolutely. And I think to keep in mind why the underground economy starts, it's because you need a job, and you're willing to offer your services at a level that's below what the going rate out there is, going rate in terms of how much a person needs to pay you the wage plus benefits and all those other things which are normal. But you need to work. And so you're offering your services for less than that of it just simply says it's supply of people out there who are looking for jobs greater than the demand. One other part about trying to hire locally, part of this comes to, what's locally? Is it the City of San Diego versus the County? So you can't take somebody from San Marcos? Does it stop at the imperial county border? Does it stop at the Riverside county border? And Riverside has been hurt worse than San Diego. The number of unemployed construction workers in Riverside is probably 30 to 50 percent higher than San Diego. So each time a job opening or project is bid, they're also bidding on those projects. So what exactly do we call local? It just becomes very difficult to administer that kind of a program, very messy.

MAUREEN CAVANAUGH: I want to hear from all of you in answer to this. I want to start with you, Borre. Has this hit that the construction industry has taken in the last couple of years, do you think that's gonna have a lasting impact on construction here in San Diego.

WINCKEL: Yeah, absolutely. We have -- we're in survival mode. And we wish we could say with the advent of a new year, thank heaven for 11, but we're not sure we're gonna be dancing the dance of joy the first two quarters. So we've been struggling so mightily, that I could see a very tepid year this year, which I hate to break to the listeners, because I'd like to bring some hope here. The coastal residential construction markets benefitting from their location will do better. Although I might quickly add that the sum total of cities on the coast have probably build no more than 30 homes in the last three years. Which is such a pathetic low level that that doesn't give anybody any great comfort. So we're gonna be bumping along the bottom for a while. Housing recovery has got to lead the national economy. Every economist agrees with that. I sure would be sad if the discussion we're having is the recovery centers around prevailing wage issues. That is not the solution. And I totally agree with the comments that Marney Cox made. He said, where do you draw the line on local hire? Why wouldn't you allow a contractor from Orange County who has a great bid to come into San Diego and offer a lower price for a product? Doesn't at the end issue the consumer benefit from the lower price?

MAUREEN CAVANAUGH: Scott, let me ask you, what do you perhaps see as the lasting impacts, if any, of this recession, this economic downturn on construction in San Diego?

CROSBY: Well, as I tell my contractors that this is kind of the new economy. So we've kind of moved past the dismal numbers, and we're looking forward to, well, how can you get work? And that's really what ABC does. We try to get our contractors work, and we try to protect the work that they do get. Backlog looks pretty good, it's 7 to 8 months right now in the west coast. But what I tell my contractors is they have to be engaged, they have to get involved, they have to build a network, they have to build their relationships. And now more than ever, having a relationship with a general contractor and owner or developer is more important than it's ever been. So looking forward, I just urge everyone to get involved and get active either in ABC or BIA or ADC or any of the other great organizations around town, so --

MAUREEN CAVANAUGH: I'm wondering, Lorena, do you see the lasting impact as affecting wages? Do you think people are gonna be able to make a good living as a construction worker anymore?

GONZALES: I'm very hopeful. I think that Jennifer brought up, the caller brought up a good point. And that's that we're gonna see a kind of shift in the type of construction that's being done. And if you look at Jerry Brown's economic plan basically to increase 20,000 megawatts of renewable energy by 2020, he says that's gonna create 500000 jobs. I think that's a huge boom, and as long as we're taking workers, training them properly, retraining them, those who have been out of the work force for a while now. A mass number have actually left construction because of the last three years of recession. But bringing them back, having apprenticeship programs that train workers in this new kind of green economy, we have the ability to really look at a future that will not only provide a better future for our children and a better environmental situation, but also good paying, good jobs.

MAUREEN CAVANAUGH: And Marney, the last word on that.

COX: Yeah, you know, there's been a lot of studies recently show that the longer people remain unemployed, the more difficult it is for them to get back in the work force. And as Borre pointed out, the brunt of the unemployment has been born by the construction industry. And they're also the group that's having the longest lay time before they get back into the work force. It's possible that the skills and requirements that they have, the ability to actually work the entire day as they did originally, would be somehow hampered by the time that this economy turns around and starts to employ them again. So we could run into some substantial problems getting the construction industry back off the floor that's it's in today and integrated into a normally functioning economy.

MAUREEN CAVANAUGH: Well, thank you. We had a really wide ranging discussion here today. I really want to thank you. Thank my guests, Marney Cox, Borre Winckel, Lorena Gonzales, and Scott Crosby. And there were a lot of people on the phone that we couldn't get on the air. Please go on-line with your questions and comment, that is KPBS.org/thesedays. Stay with us for hour two of These Days coming up in just a few minutes right here on KPBS.