Change is visible everywhere in the construction industry. Thought leaders within FMI and other places feel there will be more change in the next five years than in the past 50 years. And it will be disruptive, not incremental or cosmetic. Incredibly well-funded start-up firms are already trying to blow up the current value chains and rearrange traditional roles for their advantage. This happens as succession is occurring among senior leadership teams, as attracting true talent becomes more competitive and new technologies demand attention.
Intersecting and impacting these forces are the changing workforce demographics. Generation X, which follows the retiring baby boomers, is not a large enough cohort to provide the historic succession patterns. Consequently, millennials must take some senior leadership roles, which require accelerating their work maturity and judgment through earlier, diverse experiences; formal mentors; and tailored training. Millennials, who now make up 50% of the workforce, are digital natives– a fortunate fact as more of our building and project management tools require some technology competency. Generation Z, next up, only knows a digital life.
No construction organization can deny these disruptive trends and survive and prosper. Enlighted companies that are traditional builders are responding with a series of moves. They are forming diverse senior leadership teams, who embrace, rather than curse, these turbulent times. They turn their anxiety into action. A profile of these winners is emerging: four to six members representing the major functions. The CEO, CFO AND COO are frequently joined by the head of business development and, if large enough, by the chief technology officer and chief people officer. There is variety in age, gender and, increasingly, ethnicity. Most have degrees; many are MBAs. The median age is mid-40s. They are totally data-driven and completely aligned on strategy and culture. Their strategic direction — where they play and how they win – is developed by professional research, not gut feel or even historical choices. They are clear about their addressable market and which value proposition they must execute profitably. Their culture – who they are and how they behave – is value-based and developed by discussion and debate. Once decided, this culture is demonstrated and lived with religious fervor; the team will write a check to honor this value foundation.
These leadership teams are keenly aware of the march of technology, particularly the rapidly expanding applications for job site speed and productivity, including those enabled by AI, machine leaning and robotics. They also see the steady growth of off-site build and on-site installation – prefabrication. They accept that the next era for builders will involve “constructuring,” a blend of construction and manufacturing. Consequently, these contractors, both generals and specialty subcontractors, are assessing and researching the right role for their company and the right supply chain partners, so they can protect and grow their market share, in a world where pure technology companies, fully funded by sophisticated, highly successful technology venture funds, are beginning to enter the construction industry. Some construction firms are returning to self-perform; others (e.g., some large MEPs) are beginning to function as prime contractors, filling the traditional role of the general contractor and hiring all the other subcontractors, including a GC to manage the administrative and coordinating dimensions. Still others are acquiring design firms, as these pure technology companies do their own designs. No clear, single pattern has developed, however. Things remain in flux.
These developments are also shifting risk profiles, both for individual companies and for the industry itself. As roles change in the value chain, so do risks. And as large pools of highly risk-tolerant, experienced technology investors enter this mature, cyclical, fragmented industry, the basic risk restraints that underlie most decisions in this industry could change. A growing portion of work will not be the traditional performing contractors risking their own dollars. It will be funds which make multiple investments, underwrite big losses for many years as the portfolio company acquires market share (Amazon, Uber, Lyft), then hope for a “hockey stick” run-up in their returns, once the company is large enough, preferably dominating. This approach, still embryonic, is completely disruptive. There will probably be variations of this theme if one of these is successful. Wise teams know that responding to or leading change will be their primary work from now on. Recommit and buckle up.
CITY OF HOUSTON PERMITS
CITY OF HOUSTON PERMITS – January 2019 YTD vs. January 2018 YTD
|Jan 2019 YTD||Jan 2018 YTD||% Change|
|Total||$621,368,182||$ 376,447,377||65. 1|
NOTE: Multifamily is included in the residential numbers.
This year the data is developing slowly. The overall permit data, current only through January, reflects 2019 started strongly. Total residential permits were up 62.7%, and total nonresidential permits, 67.8%. In addition, commercial contractors, especially specialty subcontractors, are reporting multiple opportunities to bid or propose. But general contractors are seeing some projects delayed and, in a few cases, canceled. So the outlook for the year is still a bit unclear. However, a major project in the Texas Medical Center is finally moving forward, the 1.4 million-square-foot shared research facility, located in the center’s new geographic area, called TMC3, to designate it as the third coast of this internationally renowned complex. This long-awaited announcement has ignited other projects that are peripheral but integral to the concept of TMC3, including a 450-room hotel, more office space and major renovations and repurposing of older medical office buildings. The most consistent strong market is the light industrial market, driven by the Port and Houston’s increasing role as a “last mile” hub. K-12 and higher education both have decent momentum and volume. The labor shortage looms ever larger, as two large industrial projects just got underway. They are both close to Houston, one in Channelview and the other in Baytown. They total over $4 billion and will last several years. On these megaprojects the wage rates, amount of overtime available and per diem rates telegraph this tightening picture. C-3, the Construction Career Collaborative, gains support and grows, but most contractors and other employers in this state realize comprehensive immigration reform is also critical in addition to these other efforts. The educational Rational Middle video series has just surpassed 1 million views, encouraging, but legislative action is needed. Houston will also have large new civil projects starting in the next two years. Labor is the most limiting factor.