A few years ago, a small group of general and specialty contractors and I attended the World of Business Ideas (WOBI) Innovation Forum in New York City. The theme was “Disruptive Innovation.” One of the most emphatic statements, repeated by most speakers, was disruptive innovation is radically different than incremental innovation. Incremental innovation is part of the “continuing improvement” mindset, taking the existing processes and methods in the current value chain and finding new and better ways to do them. By contrast, disruptive innovation was defined as “creativity purposely applied to explode (disrupt) the current value chain and rearrange it for the benefit of the disruptor.”
Clearly, technology is disrupting many traditional industries. Amazon, Airbnb and Uber are examples. But where does the construction industry stand? Observation suggests three clear camps: Enthusiastic Embracers, seeing it as a source of competitive advantage; Accepting Adapters, realizing it is clearly “the price of poker” for better jobs; and Reluctant Resistors, fighting it, decrying it.
For those who are accepting adapters, they appear to have all administrative paperwork digitized, plus they have BIM, lots of applications that allow digital input from phones or iPad, drones, and various devices that sense hidden conditions. Most use virtual and augmented reality. Many have BIM-enhanced project management systems, like Assemble, that integrate all contractor models and produce a record file for the facilities manager. The enthusiastic embracers have even more. They use wearables with safety and health sensors, X-O suits for lifting; they have all plans on their phones (Project Atlas) accessible in one interface and able to be manipulated to the finest detail. Both categories also have countless ways for the field and office to communicate visually; crawling drones with 360-degree cameras are increasing in use for this.
While exciting, none of this is truly disruptive. At the same time, prefabrication is growing each year. Most traditional specialty contractors have enlarged their off-site facilities to expand their capacity; many owners, such as hospitals, are specifying multicraft prefabrication, renting warehouses to enable it. Prefabrication allows processes that must happen sequentially at the job site to happen in parallel, positively impacting schedule time and productivity costs.
Other technology trends are gaining momentum. 3-D printing, several years old now, is being used for larger structures. This truly disruptive method was recently used to build a house in Japan, a bridge in the Netherlands and a building in Europe. The Chinese, with their growing urban population, are leading the exploration of faster construction methods.
Finally, Construction Dive, a respected construction publication that covers technology, reported that Katerra and FullStack Modular recently formed technology companies designed to prefabricate all parts of the building, having attracted major venture and private equity money.
This whole area is moving extremely fast. I am delighted to see FMI start a technology practice headed by tech-savvy, distinguished Air Force veteran Jay Snyder, well-qualified to guide the CEO and senior leaders through the confusing array of options. While no technology has truly been a “disruptive innovator” yet, many are working to become that. We should know soon.
Houston’s Monthly Metrics
The latest Texas Workforce Commission employment numbers show a stronger than expected 2017. After adding only 18,700 jobs in 2016, Houston rebounded with a healthier 46,000 employment growth December over December, thanks, in large part, to Harvey recovery efforts. Construction employment, which was trending to be down 10,000 jobs for the year pre-Harvey, ended the year only 800 jobs below December 2016. Patrick Jankowski, vice president of research at the Greater Houston Partnership, feels that his employment forecast of 45,500 for 2018 may be too low if oil continues to hover around the $60 mark for the first half of the year. While benchmark revisions in March will adjust these numbers, the trend is right.
And oil producers have certainly gotten more efficient. As shown in the chart to the below, while the number of rigs has been reduced by half, our production levels in Texas are relatively equal to our previous peak.
In a recent meeting, a representative of Halliburton felt the rig count was no longer a good indicator as companies drill longer and increase fracking. He noted that the drilling length is 30% more than in 2014, and the amount of sand pumping has increased 50% and that, while fully staffed on the rig, there is a shortage of fracking crews. Additionally, Halliburton is projecting investments in U.S. shale to grow 18% year over year through 2020, reaching $150 billion. For Houstonians, it will be a bit longer before we see the impact. Companies like Halliburton are hiring in the field but not yet hiring in their Houston headquarters. Taking a more disciplined approach to their spending, they are focusing on their shareholders first. Interestingly, Jesse Thompson, business economist at the Federal Reserve Bank of Dallas, Houston Branch, noted that while the East Houston petrochemical construction has begun to wind down, refineries are ramping up along the Gulf Coast and is expected to increase over the next five years globally.
Turning to construction, single family is expected to increase its home starts this year, with the busiest communities along the Grand Parkway to the west and north. There are reports of builder cycle times increasing one to two months due to workforce shortages, and there is a trend toward smaller lots as developers try to offer affordable housing options. Multifamily will have a weaker year when looking at new units delivered and anticipates negative absorption for the year as Harvey victims move out of their apartments and back into their homes. The office market, according to CBRE, saw a bump in demand as sublease space starts to burn off and still sees a lot of outside investor interest in coming to Houston. For our full Houston forecast for 2018, please email firstname.lastname@example.org.
Material costs continue to escalate on a national scale. The Associated General Contractors of America (AGC) is tracking price increases for rebar, wallboard, glass fiber, cement board and more. Future prices for copper, crude oil and diesel have also hit multiyear highs repeatedly in recently weeks, according to Ken Simonson, chief economist for the AGC. Labor costs are also escalating. The Bureau of Labor Statistics reported a record high number of construction job openings in December along with the lowest December number of unemployed jobseekers whose last job was in construction. Combined, these suggest that construction firms are looking to hire more workers but having difficulty finding them. It also supports the increased discussion around prefabrication and technology, as contractors find ways around the workforce shortage.