By Rebekah Morris and Roland Murphy for Arizona Builder’s Exchange
Has the Construction market in AZ fully recovered from the 2008-2009-2010 crash? If you’re like us, you’re likely out and about, talking to clients and connections constantly. Almost everyone replies, “Busy!” when asked how things are going.
Many of our clients are experiencing record-setting years, again and again. Does that mean we’re at a level of activity similar to the peak of 2005-2007?
Anecdotal statements of “Busy!” aren’t going to cut it for the data geeks like us, however. Using a combination of sales tax data and employment data from the state, we can get a much more accurate picture of the current level of construction activity in Arizona.
Worst. Roller Coaster Ride. Ever.
Construction activity in Arizona peaked in 2006, with a total volume of $21.67B, and bottomed out at $8.44B in 2010. This dramatic drop off was more than 61 percent of the total market volume across all sectors.
Here’s the kicker – the market hasn’t entirely recovered since the low point of 2010. It’s true we haven’t experienced another year as low. In fact, in 2014 there was a bump, where the total activity hit $11.184B. While that’s a respectable 32.6 percent off the low point of 2010, it’s still a significant 48.4 percent off the high point of 2006.
Last year (2016) construction in Arizona totaled more than $9.433B. Sadly, that’s only 11.8 percent higher than the low point of 2010, and less than half our 2006 peak. While it’s not reasonable to think the market should aim for the 2006 peak, it’s also disappointing to realize how far the market has dropped.
That peak was an artificial one, overheated by many forces all at once. Most notable was the frenzy of residential construction in 2005-2007. In 2006 the total residential volume was $9.74B, more than the total annual volume in years 2010, 2011, 2012, and 2015.
Total Employment Rides Similar, Rocky Road
Employment shows the same dramatic rise and fall, peaking out at 240K construction employees in 2006, then cutting nearly 54 percent of the workforce to a low point of 110.9K total employees in 2011. Employment has gained more than 21.2 percent from the lowest point. At the end of 2016 Arizona had a total construction workforce of 134.5K.
Taxable Sales = Construction Activity
Construction is a taxable activity in Arizona, so the term ‘taxable sales’ is equivalent to total construction activity. The notable exception is construction on tribal lands for tribal entities (not for a federal agency like the Bureau of Indian Affairs), where the state doesn’t levy sales tax. Otherwise, sales tax is a very accurate measure of statewide total market activity.
The state uses NAICS codes as a basis for the classes of taxable sales, which are generated from the U.S. Census Bureau. While they don’t line up exactly to our descriptions of market sectors, it’s certainly a start to explaining what lies beneath the numbers. Below are layman’s definitions for five of the classes of TPT, which together represent approximately 90 percent of the market:
Contracting Unspecified – revenue that doesn’t fit into one of the other categories below. This comprises approximately 9 percent of the total market activity since 2004.
Residential Construction – includes new single family residential construction, all residential remodeling, and all multifamily. Since 2004, this category represents approximately 1/3 of the total market.
Nonresidential Construction – includes all commercial, industrial, public spaces and general building construction. Does not include the subcontracted value of buildings. Since 2004, this category represents approximately 18.5 percent of the market.
Heavy Construction – includes roads, highways, water systems, parks and trails. This sector is approximately 6.6 percent of the total market. This category also includes specialty trade revenue specific to this sector, i.e. highway striping and traffic signal installation.
Specialty Construction Trade – includes subcontract values and specialty trade work performed direct for owners. This sector represents approximately 21.3 percent of the market since 2004.
2017 & Beyond
In the first four months (most current data available) of 2017, the total market activity is trending at 13.59 percent above 2016 levels. This is most notably found in residential construction (+31.56 percent) and the specialty construction trade sector (+19.61 percent). This makes sense when considering that multifamily construction is staying strong (18,960 units under construction in Phoenix and Tucson, according to ABI Multifamily), and single-family residential construction is increasing (21,200 permits projected for 2017 by Belfiore Real Estate Consulting). Belfiore projects 2018 permits to be 25,300 and 26,000 in 2019. His report also states that construction costs on new single-family residential have increased by 25-30 percent over the last two years.
Sectors of nonresidential construction and heavy construction are down ever so slightly year to date: -1.20 percent and -1.49 percent respectively.
Publicly funded construction is poised to increase rather substantially for the next 24-36 months: tax revenue is climbing, and that is translating to increases in 5-year Capital Improvement Plans. The 5-year CIP is the primary planning document that identifies major capital projects for public agencies. Additionally, tax measures such as T2050 at the City of Phoenix are realizing new revenue that is earmarked for transportation and transit projects. Across the Top 10 largest public agencies, preliminary 5-year CIP totals are up 10.14 percent from 2016, and last year saw an 8.98 percent increase over 2015.
So, everybody is busy and most sectors are showing year-over-year improvement. That’s great.
As shown above, it’s not as great as seems, however, when you take a look at the big picture. At the height of insanity in 2006, the Arizona Construction market was $21.67B, performed by a workforce of 240K strong.
When the sky finally stopped falling, it was $8.44B in 2010, and employment ultimately ended up at 110.9K in 2011.
Last year, it was $9.433B with 134.5K people.
We’re all busy, but we’re only doing 44 percent of the work we were in 2006, and we’re doing it with only 56 percent of the people. That indicates the number of jobs created by the volume of construction is declining. In school we were taught that for each $90K in construction work performed, one job was created. In Arizona, that’s trending significantly down – that metric held true for 2006, but in 2010 one job was created for every $77K in work, and at the end of 2016, one job is only equal to $72.3K of contract activity. That might be explained by a few things: wages are going down; it takes more workers to do the same amount of work, or the work the market is doing is comprised of less materials and more manpower.
In the end, the takeaway is this: While the world didn’t end with The Crash, it certainly shrank.