Building Momentum in the Construction Market
Source: http://www.insurancejournal.com, December 5, 2012
By: Andrea Wells
After four years of one of the most challenging construction markets, construction insurance experts are beginning to see signs of a slow recovery with some of their contractor and builder accounts.
The current opportunities are in apartment buildings, energy facilities, education, hospitals and other healthcare-related facilities.
When it comes to home building or infrastructure projects, the picture is not as bright. But even there, some brokers see things improving, depending on where in the country they are.
While few are predicting a construction boom, some think there is enough momentum building now that 2013 will be better than 2012. Maybe not a lot better, but better.
Of course, there is also some wishful thinking out there.
Mark Reagan, Marsh’s global construction practice leader who is based in Morristown, N.J., sees the three drivers for construction as education, healthcare, and energy as the market heads into 2013.
“When you look at the need around infrastructure, healthcare, education, and medical research — I don’t see that there’s any doubt that the demand is building,” he says. He predicts that by the end of the second quarter 2013, and going into the third and fourth quarters, construction activity will increase.
“I think construction has been bouncing along the bottom, but it will start to come up,” he says.
There has been momentum in big city construction project planning — a sign that growth throughout the entire construction industry is to come, according to Reagan.
“There is a lot of work — and there has been through the year — a fairly good uptick in the amount of work in the offices of engineers and architects, which is always the precursor,” Reagan says. If architects and engineers don’t have work, then there won’t be construction work going forward, he says. But that hasn’t been the case for 2012, and Reagan expects that upward trend to continue in 2013.
Marsh’s Reagan also sees education trending up some. “The headlines are always the football stadiums, but beyond the stadiums there’s laboratory buildings, residential facilities, classroom buildings,” he says.
One large West Coast broker thinks its construction accounts are getting busier.
“We are definitely seeing more work out there,” said Brian Murphy, vice president for Heffernan Insurance Brokers, North Bay branch, based in San Rafael, Calif. “For the most part our clients are increasing payroll and sales estimates upon renewal and the carriers are getting additional premium audits on expired policies.”
That’s a change from the past few years, Murphy said, when return premium audits were more the norm. Even though the backlog on construction works seems to be dwindling, clients are increasingly optimistic about new projects, he says.
One California broker even likes the housing market.
“Housing is showing some improvement due to reduced inventory, more available financing, historically low interest rates and some return of consumer confidence,” says James Knoop, senior vice president of Lockton Construction Services who is based in Irvine, Calif.
“Overall, the construction industry is improving and the insurance market remains fairly stable with ample capacity that has helped keep rates mostly in check,” Knoop says.
While there seems to be more talk about projects than a few months ago, some question if it will translate into shovels in the ground.
Carl Doby, vice president Hiscox Construction Property Insurance says the brokers he speaks with have even queried his insurer about possible projects — both new projects as well as projects that remain dormant for one reason or another.
“People are definitely talking,” Doby says. “From a builder’s risk standpoint, I’ve seen quite a few of those (inquiries) in the past two to three months. So things are picking up; it’s just hard to tell how fast.”
Doby believes people are somewhat optimistic but also worries there’s a lot of wishful thinking out there. “[I]t’s hard to tell what’s actually taking hold. Are contracts being signed? Are people actually moving forward on some of these projects?” he wonders.
Not far from Marsh’s Reagan in New Jersey, Mike Mitchell, vice chairman of The Graham Co. in Philadelphia, is not as upbeat.
“I think if you speak to most contractors in this region, they are still feeling the pinch,” says Mitchell. “You constantly hear that things are getting better. I don’t know that if you speak to most contractors, they believe that. By and large, their backlog of work is down.”
Construction industry employment data seems in line with Mitchell’s sober view.
Total construction employment levels have changed little during the past year, according to the Associated General Contractors of America (AGC). Federal data shows that construction employers added 17,000 jobs in October and the industry’s unemployment rate fell to 11.4 percent. However the AGC reports that the drop in unemployment rates stems mostly from former workers leaving the construction industry.
“Despite five consecutive months of construction employment gains, the overall employment picture is essentially unchanged from a year ago,” said Ken Simonson, the AGC’s chief economist. “Construction employment appears stuck in a state of mild monthly flux with little change to the overall number of jobs.”
There are fewer construction projects, especially fewer larger projects, today, Mitchell says.
Also, it can be difficult to make any money on the ones that do make it to build.
“For the projects that do come out, there are 20 bidders (on one project) when at one time there might have been five. The competition is stiff, and the margins are razor thin,” Mitchell says.
One of the reasons some are hopeful is that this year Congress passed a transportation bill that includes $1.75 billion in funding for transportation. Industry watchers expect that the funds will mean both public and private organizations should be able to secure additional funding for surface transportation projects.
While states and local governments have postponed infrastructure projects due to budget shortfalls for the past several years, they still need to build and repair. According to Marsh’s Reagan, this need should spur additional infrastructure construction for 2013.
“All of the erosion of infrastructure that everyone has written about hasn’t gone away,” Reagan says. “The need in the country to build, and the need to find the money for that build is clear. For a lot of the country, the window for it (infrastructure construction) being an optional spend, that window closed or is closing.” Today it’s more of a must spend in many areas, he says.
Others may agree that the need is there but question whether the funds will be.
The Graham Co.’s Mitchell says that while he saw an uptick in infrastructure work a year and a half ago, he sees the remainder of 2012, and going into 2013, slowing down in that sector. “There are not many people that are too bullish on infrastructure work. It’s just not there. The state and local governments don’t have the money. The federal government doesn’t have the money,” he says.
When infrastructure projects do take off, Mitchell says he sees more construction companies, which typically stay regional, willing to go out of state just for the work.
“Most construction companies are regional. They don’t venture too far, but in this marketplace, we do see companies coming in from other states to bid on larger projects in our region. That’s just because there’s not a whole lot of work everywhere.”
Lockton’s Knoop says right now there are just 10 high-profile infrastructure projects underway. Five of those are making progress while the other five are facing serious challenges.
One high profile project that is in limbo is the California high-speed rail. “The visionary plan was for 800 miles of high-speed rail lines connecting Los Angeles to San Francisco in less than three hours,” says Knoop. Unfortunately, the price tag was way underestimated. Cost estimates now have grown from $43 billion to at least $98 billion. A state auditor’s report noted that the largest potential funding source for the project is the federal government, and if that funding is not secured it may jeopardize the project.”
Hiscox’s Doby is one of the optimists. While infrastructure projects have slowed down in the second half of 2012, he expects a change after January. “I think we are going to see infrastructure pick up again at that time,” he says.
Apartment building has continued to grow.
“One wholesale broker commented that eight out of 10 submissions are apartments,” says Lockton’s Knoop. Apartment-condo conversions are another hot spot, he says. “Most are buying as condos up front while the rates remain competitive and for long term coverage reasons.”
Hiscox’s Doby says that apartment building where there’s a heavy focus on retail offers the best opportunity for brokers in construction.
“The lenders are looking for a sure thing; something that they know will generate the revenues they need to support the financing,” Doby says. “The lenders are only going for the best deals.”
In his view that means mixed-use projects with a really strong retail component. “We are seeing apartments and we are seeing some office space (projects), especially if it has really strong retail associated with it in a great location.”
Doby describes the current construction market as “cautious” where lenders are only moving on the deals that make sense. “I think that’s part of why things are so slow because only so many deals make the cut,” he says. And that’s a good thing. “It will mean a healthier market in the long-run.”
Another area where construction insurance specialists see opportunity is in healthcare. Hospital upgrades and even new hospital building have surged recently.
“I don’t know of a hospital of any stature that isn’t upgrading, expanding or rebuilding,” says Marsh’s Reagan. Parkland Hospital in Dallas — the same hospital where President John F. Kennedy was taken after the fatal shooting incident in 1963 — is spending more than $1 billion on new facility today, he says. The majority of healthcare systems nationwide are looking at how to spend on upgrades or expansions.
As hospitals expand so will the pharmaceutical industry. “Medical research is upticking as well,” he says.
In the west, Heffernan’s Murphy still sees money flowing into apartment projects, hospitals and healthcare, but he also has his eye on IT construction projects. “In San Francisco and the Silicon Valley we’re seeing commercial construction absolutely booming, particularly in IT-type work,” he says.
Mitchell also believes the housing construction market is slightly upticking, but nowhere near where it used to be. “A lot of people are not so sure that it’ll ever be back to where it was,” he says.
Up until now, Doby says he hasn’t heard a lot of opportunity from home builders. But even that’s beginning to change and he thinks brokers have become more optimistic about housing. “These guys are saying there is something out there. So we’ll see.”
Knoop sees new residential wrap up markets for small to large projects as a bright spot. “Most significant features include warranty coverage, low deductible and low aggregate stop loss protection,” he says.
Wherever construction takes place, the insurance construction market is ready. Rates, terms and conditions remain good but carriers are cautious, especially around catastrophe risks.
“The construction insurance market is healthy,” Lockton’s Knoop says. “The first half of 2012 proved to be more profitable in almost all aspects of U.S. property and casualty insurers. After a difficult 2011, catastrophe losses fell by almost half in the first six months of 2012, resulting in a profit for insurers and a much improved underwriting environment.”
“What we are seeing in both construction and property now is that companies are a little bit tighter and more sophisticated in how they are handling their catastrophe capacity,” Hiscox’s Doby says.
How the most recent natural disaster, Superstorm Sandy, may impact the property market, and ultimately the construction insurance market, remains to be seen, Doby says.
“People are really analyzing their books to see where they are, to see what position they are in, what position their reinsurers will be in,” Doby says. “So there’s a lot of numbers to shake out over the next six to eight months to see what position companies really are in and how that will really affect their underwriting.”
Prior to Superstorm Sandy, rates were trending up for catastrophe exposed risks and mostly flat for non-catastrophe risks, he says. “Now that there’s been this big event a lot of underwriters are hoping it will improve rates and a lot of clients are hoping rates won’t change but the reality is we don’t know and we won’t know for a while.”
The Graham Co.’s Mitchell doesn’t see much changing in 2013 for construction.
“I don’t want to be completely doom-and-gloom, but construction is not real healthy right now,” he says. “There are some sectors where you see some work. You see more apartment building going on. We see some work in higher education, some in healthcare, some in pharmaceuticals.”
But that’s not enough to change the outlook for construction, he says.
“Most people don’t see anything that’s going to change it. … some people feel that, just in terms of the construction business, their own businesses in 2013 could be worse than 2012,” he says. Construction clients’ backlog of work is down from a year ago and competition keeps getting tougher and tougher.
Still, Knoop remains hopeful about 2013.
“I am optimistic because of the construction industry’s perseverance in one of the worst economies on record. And the insurance industry has weathered it despite a protracted soft market and mediocre investment returns. Reality reveals that with increased construction in the residential, habitational and alternative energy sectors, the economy will continue to improve.”