Moss Adams partnered with Associated General Contractors (AGC) of California and AGC of America, San Diego Chapter, to collect and analyze salary data from contractors across the Golden State to develop our 2018 California Construction Industry Salary Report. The report covers over 20 different functions and provides critical market data to help you make the right decisions for your business. This analysis ran as a foreword to that guide.

California contractors head into 2019 with confidence and bulging order books, but there are reasons to worry that the expansion they’ve experienced for the past seven years may not remain as strong.

Seasonally adjusted construction employment in California bottomed out at 554,600 in April 2011, just three months after the turnaround in construction employment began nationwide.* By July 2018 employment totaled 851,200, a gain of nearly 300,000 jobs over seven years. That amounted to a compounded annual growth rate of 6%—more than double the growth rate for total nonfarm US employment.

Moreover, in a survey the Associated General Contractors of America conducted in the summer of 2018, 83% of the 127 respondents who listed California as their principal state for operations said they plan to hire hourly craft workers for expansion in the next year—a strong vote of confidence regarding future workloads. In addition, 70% plan to hire salaried field personnel and 58% plan to hire salaried office personnel. Those percentages top the shares planning to expand among the 2,552 respondents nationally: 76% for hourly craft personnel, 59% for salaried field personnel, and 52% for salaried office personnel.

Yet the picture may not be gleaming as brightly in the Golden State as these figures suggest. Despite the ongoing year-over-year employment gains, seasonally adjusted monthly employment declined in four months out of five between February and July 2018. In addition, population growth—an important contributor over time to both demand for construction and supply of workers—slipped from above US rates in 2011 through 2015 to a bit less than the US rate in 2016 and 2017.**

Several factors may be taking the shine off the state’s construction prospects. California is notorious for high house prices and rents as well as some consumer costs such as gas prices. While these aren’t new issues, they may be pushing more people out of the state—or keeping them from moving in. For instance, the Federal Housing Finance Agency’s Home Price Index rose 48% in California over the past five years through the second quarter of 2018, far outpacing the 33% increase nationally.

The new caps on mortgage interest and state tax deductions for federal income tax purposes levy a double blow on California homeowners, since the high house prices mean higher mortgage interest costs and higher property taxes than elsewhere. State and local tax burdens also have been rising.

The increasing severity, frequency, and extent of natural disasters such as wildfires, droughts and landslides may also be sending more residents packing. And immigration policy isn’t only holding down the number of people coming into California—both authorized and unauthorized—but also leading more foreign-born residents to leave, either voluntarily or otherwise.

Each of these factors is ultimately a negative for construction demand. However, some of the influences may actually boost demand in the short term. For instance, the tax increases that voters approved in 2016 are funding transit and rail construction in Los Angeles and elsewhere. The higher after-tax cost of home ownership may add to demand for rental—mainly multifamily—housing. And the devastation caused by fires and floods generates demand for replacement properties and measures to prevent future damage.

Finding the workers to perform that construction is likely to be a challenge. Four out of five respondents nationally in the AGC survey and nearly as many in California—78%—said they were having a hard time filling some or all hourly craft positions, while 56% nationally and 68% in California said the same about salaried positions. As for the outlook for filling positions in the next 12 months, roughly three-fourths of respondents nationally and in California expect it will be as hard or harder to fill hourly craft positions; two-thirds have those expectations about salaried positions.

Despite these headwinds, California contractors appear justified in their overall optimism about the year ahead. The US economy continues to expand in a relatively balanced and measured fashion, with few signs of overheating or speculative building. There’s plenty of public work underway, with funding in place for more. The major concerns are finding the workers and anticipating costs correctly.

*Seasonal adjustment is a statistical method to remove the influence of regularly occurring monthly differences, such as holiday- or weather-related variations, to make underlying economic trends more evident.

**The U.S. Census Bureau reports state population as of July 1 late in December, so the 2018 estimate isn’t available as of this writing.

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The 2018 California Construction Industry Salary Report contains more in-depth insights into these trends. To learn more or purchase a copy of the guide, visit our dedicated webpage. For any additional questions, contact your Moss Adams professional.