Ground Breaking: Utah’s construction industry is facing challenges and growth in equal measure
If you look out your office window in downtown Salt Lake City, chances are you’ll see some type of construction—like steel beams outlining the structure of a new office building or the beginnings of what will be a bustling apartment complex. And this isn’t just happening in Salt Lake, either. Almost anywhere in Utah, particularly the Lehi, Farmington and St. George areas, you’ll find new commercial developments rising from the ground.
The demand for new construction is high, but so are the salaries of those doing the work. Even though the cost of construction labor has gone up, that’s not slowing construction down in the state. What are the factors leading to these increased labor costs? And why is this sector strong enough to overcome them?
A lack of manpower
Rob Fox, vice president at Brahma Group, Inc., says if you look at the labor force right now, about 40 percent of the skilled craftsmen are over the age of 45.
“What transpired when the Great Recession hit was you had those older demographic retire,” he says. “They saw the work drying up and they moved to an early retirement. You also saw a number of them being displaced from the market, so they tried to find work elsewhere. To compound that issue, the younger craft workers coming out of high school were not incentivized and didn’t see a future in it. They were essentially discouraged from entering the labor force.”
Not only did the aging workforce leave the construction industry, but those who could have returned never did. John McEntire, CFO for Okland Construction, says he’s not sure where all those skilled trade workers went, but he saw a considerable outflow of skilled construction workers leave the market during the recession and not come back in.
“There are also a lot of workers who have gone away from the commercial market and gone to residential, or I’ve even seen cases where they see an opportunity as an entrepreneur to start their own business,” he says.
As a result of the worker shortage, subcontractors can’t man all the projects that are slated to begin. “There are all these projects being asked to bid, so subcontractors are increasing their price on projects they know they can’t man, but hoping they don’t get it,” McEntire says. “If they do, then they have enough money to get enough people. But contractors are saying, ‘I’m booked out through 2017 and I can’t do it.’ But the client market says you have to get so many bids, and it’s competitive. That is driving up the overall cost of projects because the labor isn’t there to do the work.”
McEntire has even seen bids where contractors are too busy to do the work, so their bid will be two times higher than another contractor’s.
Bryan Webb, executive vice president for Layton Construction Company, says on the flipside, right now is a great competitive environment for employment. Subcontractors are trying to steal workers from each other, which means they have to be competitive with pay to keep people. “You’ve got to pay them to keep them,” he says. “[Workers] will jump for a dollar more an hour, and as an employer, you have to pay them more than the competition.”
That demand for higher wages is happening across the construction board, says Slade Opheikens, president and CEO of R&O Construction. “It’s not just the construction industry that has a shortage,” he says. “Manufacturing, industrial—even Hill Air Force Base is looking for engineers, and there’s not enough people to replace everybody who left.”
Fox says Utah’s construction industry has essentially been in a rebuilding period since the recession, so those who did stay in the crafts were expecting and demanding higher base wages. “We saw wages go up between 10 and 14 percent in that time period, and it has maintained that 10 to 14 percent even today,” he says.
McEntire adds that most people won’t even look at a career in construction as a viable occupation that can feed their families and support their lifestyles. “The lack of workers has pushed up the need for all crafts,” he says. “Subcontractors and general contractors have to increase labor rates to attract and keep the workers. There’s not enough manpower and too much work, which drives up the cost.”
Fox says the federal government plays a big role in construction industry costs. One factor that has been huge in recent years is the enactment of the Affordable Care Act.
“By now we’re all well-versed on the ACA, but for construction companies that weren’t offering benefits because of seasonal labor, we were tasked with being ACA compliant,” he says. “Not only that, but administering a complex statutory scheme is confounding to a number of construction companies. Brahma, for example, in order to do our 2 million man hours, we have to process about 4,000 different employees. Imagine the administrative burden it is on construction companies when it comes to being compliant with ACA.”
Fox adds that in a number of states they’ve done business in, there have been additional legislative mandates, such as prevailing wage requirements and safety training, which has also increased costs of labor and construction.
In addition, Webb says during a political year like 2016, some companies like to wait and see what the new president’s stand will be on things like business and tax codes. Though it’s not necessarily related to an increase in labor costs, it’s something many construction companies tread lightly around.
Another factor is the lack of interest in the construction field. Opheikens says several construction companies are making a good push to get back into high schools and let students know the construction industry is a good place to work. “The industry became tainted,” he says. “Kids were told, ‘Don’t even go into the industry or you won’t have a job when the next recession hits.’ But this last recession was much deeper and hit much harder.”
Fox says at Brahma, employees are routinely paid six figures—and many are making a better living than most college graduates. “We need to figure out how we can encourage Millennials to join the trade,” he says. “As a state we need to find initiatives to various trade programs to incentivize our young people to join this part of Utah’s economy. Someone needs to crack the nut on that.”
A strong market—and future?
Because of the Great Recession, Utah is now cashing in on the pent-up demand for new construction. McEntire believes the state is in a catch-up period, where a lot of private developers are moving ahead with projects. In addition, the economy is strong, unemployment is low and businesses are expanding.
Fox says the rebound is being furthered by incentives offered by the state of Utah, and low interest rates are continuing to help builders make economic sense with their projects.
“All of a sudden everyone is confident again and wants to start the projects they didn’t start four years ago,” says Spencer Bradley, vice president of business development at Wadman Corporation. “We’ve got some big projects happening now—like the airport expansion, the new prison project and a massive power plant in Green River.”
McEntire believes once the pent-up demand subsides, construction across Utah will begin to level out, and maybe even decrease. He expects that boom to last into the beginning of 2018.
But Opheikens warns that while there’s a lot of opportunity along the Wasatch Front and other areas of Utah right now, things will fall again. “I don’t know if it’ll be in two or five years—but nobody can see that far out,” he says. “The next two years look healthy. At some [construction] conventions, people talk about the next recession and when it’s going to happen, but I’m not sure if that’s based on fear or actual data. It’s different everywhere. We also work in Nevada, and I’d say Nevada is trailing at least a year or year and a half behind Utah.”
Opheikens adds that labor costs can’t continue to go up at the rate they are now, or jobs will basically stop because it won’t work for owners’ budgets. “We’ll have to see a leveling of labor,” he says. “I expect it will kind of balance out sometime this year, and next year get back to normal. The market can’t sustain this increase, and everybody needs a return on the development they put in.”