The health of the construction industry is typically defined by the status of starts, employment, and spending. But one factor that has failed to enter the limelight could be just as telling as the other data sets. That oft-forgotten figure is the number of construction firms in the country, and how it has changed throughout the past decade.
How we got here
The Bureau of Labor Statistics tracks the number of construction establishments during each quarter. As expected, the number of private construction firms saw a steep drop during the recent economic recession. During what many consider the true duration of the recession — 2007-2009 — the average number of construction establishments throughout the year fell from 891,032 to 831,969, a 6.6% drop. (The BLS tracks construction establishments, or fixed business locations. Industry experts use this data, as about 99% of construction firms have only one establishment.)
However, as the economy struggled to slowly recover from the recession, the number of construction establishments failed to bounce back. In fact, 2014 was the first year that saw a rebound in the stat. The most recent BLS data available reveals stats for Q3 of 2014. The full drop in the number, which occurred between 2007 and 2013, saw firms fall from an average of 891,032 to 743,452, a whopping 16.6% loss.
Ken Simonson, Chief Economist of the Associated General Contractors of America, said: "For construction, there was even more of a downturn than the overall economy. It started sooner and it lasted longer."
Construction spending, one of the most common indicators of industry stability, peaked in 2006 — even before the start of the overall economic downturn. And it only got back into positive territory in 2011, well after the general upswing across other industries, according to Simonson.
In 2014, the industry saw a hint of hope as the pending average number of establishments rose to 751,085, inching up 1%. But that slight bump hasn’t offered the sense of improvement industry members desired.
Impact on construction companies
This severe drop was the result of construction firms both going out of business and merging with others in an attempt to stay afloat, according to Robert Dietz, an economist with the National Association of Home Builders.
Some companies failed to endure the "lean years," while others pivoted to other sectors of the industry, including remodeling work and commercial construction, Dietz said. Fortunately, a significant segment was able to stay in business and now has the opportunity to grow in less-challenging times.
Thomas Schleifer, a management consultant and research professor at Arizona State University's school of construction, said he believes the recession had the greatest impact on mid-sized contractors. As margins for contractors fell, closely-held and family mid-sized businesses struggled to keep up. "The small contractors will always be here. The really big ones are growing bigger at the cost of the middle-sized contractor," he said.
The shrinking number of construction firms also forced failing companies to lay off their workers. And now, those former employees are taking their time to re-enter the industry. The construction labor shortage has been an ongoing concern, and it seems likely to remain a problem in the foreseeable future. A survey from the NAHB found the cost and availability of labor as builders’ chief concern for 2015.
"That’s part of the fallout of losing more than a million workers on the residential construction space," Dietz said. "It’s going to take some time to attract those young people and to bring back those workers that left the sector."
Due to this lack of qualified workers, firms have found creative ways to get by — similar to their creative tactics needed to survive the recession. Many have substituted offsite manufacturing and prefabricated building for human labor. And others have utilized Building Information Modeling, or BIM, to streamline the scheduling process and improve overall management of workers, Simonson said.
"I think for the most part, companies are coping by getting more hours out of the workers they already have, or hiring workers with less skill than they’d like, and having to spend more on training," he said. "Projects probably are facing delays because of a shortage of workers."
The sharp decline of construction firms reflects the overall industry necessity to "rebuild its infrastructure," Dietz said. Experts often look to the construction industry and housing market as indicators of economic stability. However, disappointing numbers have left many wondering when the true rebound will occur for an industry that desperately needs it.
Dietz pointed to necessary improvements of "rebuilding mode" as increasing the size of the labor force, growing the number of firms, and improving lot availability.
Schleifer said he has seen a rebound in the amount of work for construction firms, but not in their margins. NAHB data found builder profits have slightly increased, but not to their pre-recession peak. Schleifer emphasized the uniquely slow nature of the industry's recovery after the recent recession. "It's not near as fast a rebound as prior downturns have been," he said. "Until we get some real rebound and start to head back to the size the industry was in 2007, it’s going to be tough."
The slight bump in the number of construction establishments in 2014 could point to the industry revival everyone has been hoping for and many predicted. Experts say they are optimistic going forward that the numbers will pick up steam.
Schleifer said: "I'm really optimistic about 2016. I think we'll finally get some traction. By the end of 2016 I’m really hoping the industry’s back pretty much on an even keel."
Simonson agreed, but emphasized that growth will likely be slower than industry members want. "I think that we will see gradual growth in the number of construction firms. There's a tension there between having a lot of construction firm owners who are reaching retirement age versus the industry now finally looking like an attractive place to invest and set up a new business," he said. "It's still a very uneven picture with a lot of weak spots."
Although the number of construction establishments rarely reaches the headlines, it has been an accurate reflection of industry recovery both before and after the recession. And as the construction industry continues to climb out of the immense gap left from losing so many firms, overall recovery will likely follow.
"You can’t have that kind of decline without losing a lot of the sector’s infrastructure, and it’s got to be rebuilt," Dietz said.