The Dodge Momentum Index report suggests that spending for commercial building may be reaching a cyclical peak, while plans for institutional building developments are supported by projects including schools and transportation terminals. Industrial development and garden apartments were both identified as “Best Bets” for 2019 in the annual “Emerging Trends in Real Estate” report by PWC and the Urban Land Institute (source), which noted that the new year may wind up as more of a plateau for construction, rather than a pull back.

Still, after years of easy money policy, rising interest rates were having an impact on construction as lenders become more selective and insurers showed more caution. Project financing in the Southeast, for instance, was becoming a lengthier process, builders say.

ACROSS THE NATION

Regionally, conversations with industry specialists indicate that the New York construction market remains hot, restrained only by labor and permitting issues as well as escalating insurance costs due to the state’s scaffolding laws. Google, Facebook, LinkedIn and Uber are all expanding in New York City (source). Conversions of commercial space in Manhattan into residential space continues.

The Southeast shows robust activity on a wide variety of projects in cities such as Atlanta, Charlotte and Nashville. In the Southwest and Midwest, the focus is on new apartments and conversions of older buildings into apartments and condominiums. Overbuilding, however, may be a growing concern in particularly active areas such as Dallas, which has been attracting employers from other regions. Overall, the high-end residential market shows some weakening. Condominiums remain strong on the West Coast. The Northwest continues to see momentum in big manufacturing plants and buildings for the technology industry. Hospital construction remains buoyant in the Midwest and Arizona, while population growth in Texas is keeping school construction active.

SKILLED LABOR CONCERNS

As the long bull market in stocks flagged, the construction industry was still dealing with the effects of the financial crisis a decade ago. A massive shortage of skilled labor sparked by the downturn following the financial crisis of 2008/2009 continues to bedevil builders, particularly in hot areas such as New York City.

One-third of respondents say worker shortages were driving costs higher than anticipated. Anecdotally, contractors say rivals have even been seeking to poach workers such as trim and framing carpenters from competitors’ job sites.

INSURANCE IMPACT

On the insurance side, while rates remain generally stable—outside New York—upward pressure is evident in auto and umbrella coverage for companies with big fleets, as reinsurers deal with auto claims reaching into the tens of millions of dollars. Builders overall were seeking higher limits. Wrap-ups, or contractor-controlled insurance programs, remain popular with more sophisticated accounts because they can provide better coverage and greater control over insurance costs. New York projects are facing significant rate increases with fewer markets willing to risk potentially significant losses stemming from the state’s liability laws.

BOTTOM LINE

The construction industry is starting the year with continued strength across residential and commercial sectors. Turmoil in the financial market and rising rates, however, are causing some spillover effects in construction, particularly in New York. In changing market conditions, experienced brokers who know the construction industry can provide the expertise to help clients build the most cost-effective insurance programs.

To learn more about construction coverage and how you can help clients better manage their construction risks, please contact your CRC Group producer.

Contributors:

• John Engeldrum is a Casualty broker with CRC based in the New York City, NY (Downtown) office.
• Emalyn Lovitt is a Casualty broker with CRC based in the Woodland Hills, CA office.
• Chad Propst is president of SCU Denver, a CRC Group Company.
• Timothy Stone is a Casualty broker with CRC based in the Norcross, GA office.
• Joe Young is a Casualty broker with CRC based in the Dallas, TX (Tollway) office.

ENDNOTES

1. Seventy-nine percent of construction firms plan to expand headcount in 2019, but most are also worried about their ability to find qualified workers, Associated General Contractors of America, Sage Construction and Real Estate, Press Release, Jan. 2, 2019
2. Seventy-nine percent of construction firms plan to expand headcount in 2019, but most are also worried about their ability to find qualified workers, Associated General Contractors of America, Sage Construction and Real Estate, Press Release, Jan. 2, 2019