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As the economy goes, so too will the construction industry. It always helps to learn about economic trends and their likely impact on construction. Niladri Sannigrahi is the Senior Director of Product Management at Liberty Mutual Surety, and his passion is economics. He'll join The Huddle to talk about interest rates and their impact on developer-driven construction, the likely impact of the 2024 election on the construction economy, and many more topics to help you plan for what's ahead.

In this episode, we'll debunk myths around government contracting, navigate the challenges of transitioning from commercial to government work, and uncover hidden opportunities in this dynamic sector. The stories and insight provided by Eric Coffie, founder of Govcon Giants, promise a thought-provoking journey into the world of government contracts. Join us for an enlightening conversation that might reshape your business strategies!

For any business, cash is crucial to health and success. Employees and vendors must be paid, or the whole thing comes to a halt. Contractors, in particular those who must purchase materials for installation, face a high-risk environment dependent on their customers’ timely pay. Scott Peper from Mobilization Funding has a front-row seat to the unique cashflow challenges faced by contractors, and he joins The Morning Huddle to discuss the topic and share strategies for maintaining a healthy cash position.

$7M in baby boomer businesses will sell by 2030. Many of those will be building contractors. Whether you’re in the market to sell or potentially buy one of these firms, or you simply want to understand the changing ownership landscape of the construction industry, join us for this episode. We have Eric B. Pacifici, Partner with SMB Law with extensive experience with acquisitions joining us for the discussion. He is leading small to mid-sized businesses to get smart about buying and selling in this dynamic market.

Economic uncertainty has become normal for all of us. Contractors who are busy today are just waiting for the music to stop. While nobody can predict economic conditions with certainty, smart companies pay attention to the trends and plan accordingly. Nobody may be better at reading the tea leaves for the construction economy than our guest, Anirban Basu.

Anirban joins The Morning Huddle a second time for a fun and enlightening discussion about the latest economic trends impacting the construction industry.

Join The Morning Huddle for a timely discussion about laws governing how we hire and pay our construction workforce.

Workers are misclassified as 1099 when they should be legally W-2. Subcontractors are hiring labor subs to augment their workforce or, in some cases, to replace them altogether. These labor subs have a varying level of commitment to following the law, and now their prime subs and GCs are on the hook for their mismanagement.

Millions of dollars of penalties have been paid by contractors in the Metro DC region. Attorney General Karl Racine's office appears to be committed to pursuing more wage theft infractions in the city.

No matter where you live, take the time to hear from Hillary Ghent about how Davis Construction has reacted to the heightened focus on this issue and the recommendations they have for the entire subcontracting community to achieve compliance in a manageable way.

Transcript:

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00:01
Speaker 1
All right, it's morning huddle time. Good morning. I'm not saying it works. I wish you God speed, Godspeed with all of that. I think that's really nice. You know, I'm not sure what kind of success you're gonna have with that today because the world, my friend, has changed. Right. A lot of American construction workers, they have different needs. They have completely different needs.

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00:22
Speaker 2
These awards have a huge, like, criteria that you have to fill out and they usually have a community service or community.

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00:32
Speaker 3
You know, the most productive with a high performance value. And, you know, sometimes it's 11 o' clock at night.

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00:41
Speaker 1
Funny, isn't it? Yeah, not for me.

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00:44
Speaker 3
Not for me.

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00:44
Speaker 1
At 11 o' clock, I am guaranteed to be snoring.

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00:47
Speaker 2
So.

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00:57
Speaker 1
It's morning huddle time. Good morning. I'm Chad Frinke. I'm here with Stacy Holzinger, as always, and our guest, Hillary Gent. Stacy, how are you this morning?

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01:06
Speaker 2
I'm doing good. How are you guys?

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01:09
Speaker 1
Doing good, Doing well.

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01:10
Speaker 3
Thanks for having me.

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01:12
Speaker 1
Thank you so much for joining us, Hillary. So Hillary is in house counsel with Davis Construction, James G. Davis Construction here in the D.C. metro area. Hillary, tell us just a little bit about Davis, terms of like location, size, yada. Give us a little bit of background on the company that you work with.

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01:36
Speaker 3
Sure. So Davis is a general contractor. We're based mainly in the D.C. metro area. Our office is in Rockville and we do work in the Northern Virginia, D.C. maryland area. We also have a Philadelphia office. We're about 400 or so employees and we've been around for more than 50 years. And yeah, awesome.

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02:00
Speaker 1
Certainly in this area, known for doing some of the best looking and highest quality award winning projects. And so kudos to, you know, James G. Davis and all the work that you guys do. I think, you know, also lots of my friends and clients, you know, in the specialty contracting community have really positive relationships with Davis by and large. So you're doing something right overall when you can have a whole bunch of work and subcontractors like you.

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02:31
Speaker 3
Well, that's great to hear and certainly value our partnerships with subcontractors.

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02:36
Speaker 1
And we are going to get into some subcontractor chat today in terms of some of the stuff that we're dealing with. But before we do, I just give a little bit of background. Hillary, how long have you been with James G. Davis and exactly what is your role in that environment?

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02:55
Speaker 3
Sure. So I've been with Davis eight years. I am in house counsel. So one of two attorneys that we have at Davis. Before coming to Davis, I worked at a small construction litigation firm. I worked on a big case for Davis, so got to know our general counsel, my boss now and some of the people at Davis and had an opportunity to come work in house at the end of that case about eight years ago. So in my role, one of the main things I do is contract related. I negotiate and deal with all of our prime contracts so with the owner and then manage subcontractor issues. I work on compliance like for example, wage theft that we're talking about today and just try to hold Davis's hand through all of our various legal issues that come up.

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03:44
Speaker 1
Awesome. So, so let's start to pivot toward our topic today. So wage theft, which is something that you have been kind of, I don't know how willingly I'll be interested in that, but thrust into the public eye here in the past few months, I've certainly gotten a chance to actually see you speak about this and hear you speak and see you speak about this and it's part of what really, you know, Drew, Stacy and I to having you on here because it's, it sounds like just like a, I don't know, ho hum legal issue. It's not, it's big and multifaceted and complicated and so Stacy, you know, I'm going to put you in your role as per usual engaging with the audience here on chat.

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04:39
Speaker 1
But let's make sure that we take some specific questions from, from our audience on, you know, ways to navigate some of these changes. And I should also make sure that I'm giving Hillary the space to provide a legal disclaimer which is yes, Hillary is an attorney, yes, she is an attorney specifically for Davis. But Hillary use the specific language that should be used in this situation to.

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05:09
Speaker 3
Make sure ye just basically I'm not an expert employment lawyer. So you know, I know enough to be dangerous and probably put my foot in my mouth a little bit here. But you know, anyone that has specific questions related to your company and your employment issues, you should really seek out a expert employment lawyer, which I am not.

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05:30
Speaker 1
So very good. All right, good. So there's the legal disclaimer. With that said, we're going to have the opportunity, I think, to talk about, you know, if you have specific questions, we should talk about them. Just understand they're not legal advice and that you should seek legal advice specifically from your attorney. All right, good. Let's, let's get rolling, Stacy. We'll see you in a bit.

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05:51
Speaker 3
See ya.

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05:53
Speaker 1
So, Hillary, I think one of the things that drew me so much into this topic was the fact that the way this law is being, I don't know if there's been a, you know, fundamentally a change in the law or really just an enforcement of a law that's been in place for quite some time, but that the change that it would really kind of force or that it is forcing in the industry is, it's pretty seismic. So take a moment, if we can, and just describe a little bit what is wage theft as it relates to, you know, the construction industry and maybe answer that question about is this a new set of laws or these laws that have existed, you know, how, what's happening right now?

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06:47
Speaker 3
Sure. So wage theft is really just a failure of an employer to pay amounts that are legally due to their employees. So that could be, you know, if minimum wage is $15 an hour and you're paying a worker $10 an hour, you're stealing $5 an hour, you know, from that worker that they're legally due. Failure to pay overtime is another common example. And then another area of focus, I think by the jurisdictions is failure to provide paid sick leave. So I think in the construction industry, one of the main ways that this becomes an issue is in the context of worker misclassification. So for an independent contractor, so the things I just mentioned, you know, overtime, minimum wage, sick pay, that all implies applies to employees.

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07:45
Speaker 3
So the workers working for an employer that are classified as employees, an employer does not have to provide those same things to an independent contractor. So, and the other big difference is withholding taxes. So for an employee, the employer is required to withhold and pay taxes for their employees. Not so for independent contractors. Independent contractors are obligated to file and pay their own tax returns. So the issue really comes up in the construction industry where a company hires somebody as an independent contractor, but that worker works legally, qualifies as an employee, and so should be paid minimum wage over time, sick pay, have their taxes withheld, et cetera.

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08:35
Speaker 1
Yep.

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08:36
Speaker 3
So in the construction industry, long standing industry practice has been to classify workers as independent contractors when legally under, you know, long standing legal principles, they should be properly classified as employees. So that hasn't changed. I think what has changed more recently in the wage theft context is the enforcement of the issue and the roll up of liability from the company that itself is misclassifying its workers to a higher tier subcontractor all the way up to the general contractor. So in. This is recent, in the last couple of years. This exists in D.C. maryland, Virginia and not every state across the country, but it's, you know, continuing to roll out in jurisdictions across the country. So states or jurisdictions themselves are creating laws flowing up that liability and then also giving the workers themselves.

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09:45
Speaker 3
It's not just enforcement by the government agency, they're also giving workers them that ability to seek remuneration up the chain, not just from the company that hired them as well.

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10:00
Speaker 1
Excellent. So that was a phenomenal description. I think. You know, I've been around this now for at least six months where I've been doing lots and lots of research and reading about. I think you just put it so extremely succinctly and I think. Can I just repeat back to you in simple terms how I understand it and then you make any corrections?

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10:23
Speaker 2
Sure.

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10:23
Speaker 1
I think what you're saying is that there. So the first question perhaps is am I actually hiring an independent contractor or is this person qualified, legally qualified to be a W2 employee? And the answer to that I think in most cases now is if that person is out on your job site. Right. If that person, if that person is working for. If that person is working for a company on a job site that they are in most cases legally classified, you know, qualify to be W2 at this point. Not.

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11:06
Speaker 3
Yeah, generally if they're doing the work of your business. So like for example, if you're a painting company and you've got your own employees that are out there painting and you need some additional labor and you go to a, you know, a lower tier and you say, I need some additional labor and they come out and they're painting, then those people, generally speaking should be qualified as employees, not as independent contractors.

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11:32
Speaker 1
If they come out to, if they come out to fix the painting company's trucks, then that would be a subcontractor. Right. That. Or sorry, that would be an independent contractor. That would qualify as that. But if they come out the paint, they're doing the work of the company. Okay. So that's one classification. And, and I think that has been, you know, a hard fought discussion, but one that's largely settled law at this point. Yeah, it's.

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11:59
Speaker 3
Yeah. And I mean it's not that you can't ever have somebody legally qualify as an independent contractor. I think just in the industry, the reality is that generally speaking, if you have somebody out there doing the same work that your company is doing, they should be classified as an Employee.

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12:19
Speaker 1
Yeah, I heard in one of the forums that I sat in on, I heard the speaker who's an employment lawyer say, say guys, if there's somebody working out on the job site doing the work of your company, they really need to not be an independent contractor at this point. That's just something you need to be, you know, as a general rule be thinking about. So then the next piece of this is the as you said, long standing norms. And I think I found in different market sectors it's more, you know, common than in others. So in wood frame multifamily as example, it's really common that, that the vast majority of the subcontracting community is using very few of their own in house labor, if any. And they're really leveraging third party, right.

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13:13
Speaker 1
A lower tier subcontractor that was really there to provide the laboratory on that job. And so that's been their business model. You know, that's been, it's really been the way that they've been running things for a long time. So all of a sudden the ability to not just punish the lower tier subcontractor for violating wage theft by, you know, and again, how does that happen? Paying people a piecework that maybe doesn't ultimately add up to minimum wage. Whoops, that person worked slow. So it didn't add up to minimum wage. Paying people piece work and they are putting in 12 hour days and it doesn't add up to minimum wage plus at least overtime. There's another opportunity. Right. So, so exactly as you described it.

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14:03
Speaker 1
But now these companies, these entire companies who, you know, this electrical contractor who has very few actual electricians on their team, but mostly just kind of employs, you know, management level folks, project managers, estimators, and then you know, maybe foreman and superintendents, they, how are they supposed to get these people out on their project? You know, how are they supposed to staff their projects when they don't actually have internal staff? So you as Davis, why did you make the decision to start, you know, kind of requiring that your subcontractors do this? And, and I'll say you're pretty early on in that, right? Like it's, they're not every GC is, has embraced this idea. Why did, why did Davis say guys we're not just going to let the law handle this, we're going to handle this, we're going to write it into our contract?

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15:01
Speaker 3
Well let me just clarify one thing. You said it's not that you can't use labor subcontractor. You don't have to. You know, we're not saying that, you know, a company has to have everyone on their payroll. If you use a labor subcontractor, their workers need to be properly classified.

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15:23
Speaker 1
Thank you. And that's something that I should have said that I'll take 20 seconds and clarify that for me. What I'm, what I'm specifically talking about is a norm that has been created where those labor subcontractors tend to pay their employees as independent contractors, and that the prime subcontractor who hires that subcontractor is doing nothing wrong by hiring that subcontract. By hiring that labor sub. But now that prime subcontractor, as well as the general are liable for that. For that labor subcontractors, wage theft violations, if they should occur, which they probably are like, occurring. Just, just based on the fact that they're misclassified.

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16:11
Speaker 3
Yeah. Yeah. So why did David, you know, why is Davis doing this? I think several reasons. One, you know, the flow up of liability. It's, it's added risk to Davis. So there's that. There's the fact that not only is there added liability, but it's massive added liability. So it's not just the amount of the wages that weren't paid, it's three times the amount of the wages that weren't paid, plus other penalties and things like that. Then there's the fact that this is continuing to be enforced. You've seen, you know, other general contractors have been targeted by the D.C. attorney General. Davis and every other general contractor in the area has been sued civilly for this issue. And if you haven't yet, you will. So, you know, there's a lot of legal focus, legal reason for this.

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17:14
Speaker 3
And then there's also, you know, we've been hearing clients asking about it. We've had clients say, you know, we're hearing about this wage theft issue. We want all the workers on our job sites to be paid correctly. You know, what are you doing, Davis, to ensure that they're being paid correctly? And there's the, you know, the moral aspect on our end as well. You know, you're working on a Davis job. The workers that are working hard should be paid appropriately. So, you know, there was a lot of different factors. This issue has been, you know, kind of bubbling for a couple of years, and we've made a push in the last year to really make this an area of focus for us corporately.

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17:58
Speaker 3
We've, you know, we rolled out a new subcontract exhibit that doesn't really say anything different than what our subcontract has already said. Yeah, I mean what it says is you have to comply with employment laws which you know, you're already legally obligated to do that regardless of whether Davis or any general contractor tells you and you need to maintain records to show compliance. And then if there's not compliance and you know, Davis gets tagged for something that was caused by you or your lower tier, then you're, you are responsible to Davis for that. So you know, that's what the rider says, which is pretty much what the subcontractor already says. Just expand it a little bit. And then, you know, like I said, it's been an area of focus for our company.

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18:44
Speaker 3
So we've updated our pre qualification form to you know, ask some questions about how do you, as a subcontractor that's going to work on a Davis project, how do you hire people, what do you do subcontractor to look at your lower tiers and how they're classifying their workers. So you know, we can, that gets factored into pre qualification for working on Davis jobs. And this is really a top down issue at Davis. You know, we, this is coming from, you know, the very top at Davis that this is an important issue for us. We've rolled out company wide education as well.

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19:26
Speaker 1
So I, I, I, you know, like it or not, the stepped up enforcement and this rollup clause, right, that they're, that, I mean it's really creating change and I applaud you guys for not waiting to be, you know, not waiting for this to be a problem but instead, you know, working to get out in front of it. You're not alone, but you are leading in that area. So what does this mean fundamentally to the industry and to your subcontractors? What, what do you imagine happening and what are you already hearing? This is, you know, it's relatively new, but you have been doing it. What, what's, what's the feedback so far?

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20:15
Speaker 3
So through abc has held a couple of seminars on this issue. One kind of, you know, targeted to general contractors, another to subcontractors. And then we had sort of a joint session, you know, for everyone to sort of talk about. I think the hope, the goal is that the whole industry, you know, moves in a new way to no longer misclassifying workers on the job sites, having the workers be paid the legally due, you know, benefits and payment that they're entitled to. But I think it's a difficult issue. It's been long standing industry practice, as you said, you know, people built their business model and you know, in a different way. And so it's a big ship to turn. But we are trying, I think, you know, sort of step one is education.

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21:12
Speaker 3
I think not, you know, mal intent or not, I think there's a lot of people out there doing things that this is the way it's always been done and they, you know, they think that it's normal and they don't necessarily know that there's anything wrong with the way that they have been doing business. Certainly, you know, there are bad actors out there, but there's probably a lot that didn't appreciate the issue. So trying to get the education piece out there and hope that as more people understand the issue, you know, there's change.

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21:48
Speaker 1
I think, you know, it bears calling out the elephant in the room with the whole why people have been 1099. Right. Like overall and certainly not, you know, hard and fast rule. Right. But overall, isn't it fair to say that the majority of the labor subcontractors who are 1099 ING people and who are the potential root cause. Not, you know, I'm not saying they have been doing things wrong.

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22:20
Speaker 3
Right.

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22:21
Speaker 1
But they're the potential root cause of these wage theft issues. The reason these people are 1099 is because they can't be W2 that in fact they're an undocumented worker class. That the entire construction industry, certainly in our region and I can only imagine in other regions across the country has become completely dependent on to perform the work in the field, which is again, it's an undocumented, primarily Latin American workforce that is 1099 because they don't have legal status in the US when you think about that, what is, you know, what are companies actually able to do to get into compliance here? What, what are you know, how do you navigate that? Hey, everybody now has to be W2. You know, all these people throw up their heads and say, like, how do I w to somebody that isn't documented? What do I do?

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23:28
Speaker 3
Yeah, well, there's two pieces to it. One is, you know, by law, a, you have to, you can only hire people that are legally authorized to work in the U.S. so that's one way to put people on W2. You know, obviously, I think it's known, as you said, in the industry, there's undocumented workers. And that's just not going to happen, that everybody is going to be legally authorized to work in the industry. So the other way that I understand that, you know, companies have worked towards the W2 compliance, not necessarily legally authorized to work in the US compliance, but is that the workers can get an ITIN, which is an individual Tax Identification Number, and that issued, that can be issued to an undocumented worker.

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24:25
Speaker 3
And that allows the employer to withhold taxes for that and pay taxes for that worker and also gives the workers themselves certain benefits. Like, for example, in many states having an. It allows you to get a driver's license and open a bank account and send your kids to the local schools and things like that. So what we are seeing, some of the companies that are working to solve this wage theft issue, they have converted to ensuring that all of their workers have these itins. They are all paid W2 and, you know, taxes withheld and paid. And so, you know, that is one way towards dealing with the misclassification and wage theft issue.

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25:23
Speaker 1
Yeah, man, this, the labor force, that takes a leap of faith for the, for that worker, right. For that worker to have the guts to put themselves on the radar if they're currently undocumented. I, I, you know, I don't, I know you're, I'm, now I'm putting you in a situation, you don't have answer to this question. But my, you know, this is as I start to imagine what this is going to look like at scale, so that, not only does Davis do it, but that, you know, and the handful that have already done it, you know, made the same kind of move to say, hey, this is how we're doing it moving forward, folks. And if you're not in compliance with this, then you're out of compliance with us. There's going to have to be a sea change with those employees.

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26:18
Speaker 1
Now, do you think that there's a strategic advantage for the subcontractors who don't comply, you know, on projects, obviously they're not going to win work with Davis, but in other environments, you know, where somebody isn't. So let's say subcontractor A is working really hard to get all of their, you know, labor subs on W2 and make sure that everybody is doing things in this really official and legal capacity. Subcontractor B is gambling. Do you think there's a strategic advantage for subcontractor B in the short term. Oh, did I. Sorry.

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27:00
Speaker 3
So from what we've. You were a little delayed chat.

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27:06
Speaker 1
Oh, my fault.

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27:07
Speaker 2
We can hear you. You're good.

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27:11
Speaker 3
Okay, good. From what I have heard from the subcontractors that we work with that are putting measures in place to ensure their lower tiers are complying, some of the challenges that they have faced are having the workers say, you're going to make me get an ITIN and withhold my taxes. And I don't want to deal with that. I'm going to go, you know, work for another company that isn't going to do that. And so the hope is that the more part of the change here is that if everyone is requiring the ITIN process or making sure that everyone is paid W2 as opposed to independent contractor, that there's not going to be the other company to go to that's not doing it. You know, that's not requiring that.

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28:06
Speaker 3
That everyone will require that, you know, level the playing as far as, you know, an advantage for the people that are doing it right from. Again, what I've heard from our subcontractors is, you know, yes, there's an aspect of it that is more expensive and that, you know, the worker who was making $20 an hour without taxes withheld, they still want to get their, you know, at the end of the day, net $20 an hour if you're going to withhold taxes. So you're having to increase their what they were paid hourly. But, you know, they have seen some efficiencies in, you know, now I'm paying attention to when everyone clocked in and when everyone clocked out.

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28:50
Speaker 3
And you know, I'm seeing the actual hours worked on the job site and maybe I was overpaying before, you know, for paying for hours that weren't actually worked. But now, you know, I know you were there from, you know, seven to three or you know, whatever it is. And, and that's what your paycheck is for. So, you know, we. That benefit.

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29:15
Speaker 1
So. So one thought that I have on this is that, you know, maybe the, the subs that continue to kind of be on the wrong side of the law here will have a strategic advantage once until that general contractor ends up getting nailed for a lawsuit because they hired that subcontractor and that subcontractor was using labor brokers that hadn't gone through the process of securing ITINs vetting their employees, yada, yada. And, and so, you know, it's, they might be lower this time, but once that, you know, once the treble damages and the fines come in and, you know, everybody's, you know, written a seven figure fine, you know, check what you thought you saved went away really fast.

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30:08
Speaker 1
And, and so it speaks to what you're saying, Hillary, about the whole idea that we're, we're trying to, it needs to be kind of a movement and people do need to get on board with this. And it's happening, it's absolutely happening, particularly in the district. I imagine that it's going to be happening outside the district. I already know I have clients that are in the southwest and that are in the south, where it's starting to happen in those markets. This is going to be more than just a localized issue. And I know it already is a localized issue. You know, you look at New York City, you look at, you know, down in Florida, I know that they're enforcing this in Miami. So anyway, we have a couple of questions here.

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30:52
Speaker 1
And I know, Stacy, you're a trooper, you, but you're super under the weather today, so I don't want to make you overdo it. So I'll. All right, you got, you want to take a shot at Ike's?

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31:06
Speaker 2
Well, you can take a shot at Ikes. I think that's more in your. And then I'll get to Josh.

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31:11
Speaker 1
All right, very good. So, so Hillary, Ike Casey, who is the president of the associate, the ASA, right. The American Subcontractor association in D.C. he asked a question where he said, I understand someone Maybe in the D.C. aG's office has hired 40 Spanish speaking people to visit construction job sites to entice workers to file claims. Do you know if this is true and if so, what do you recommend to your subs to address this? And I'll maybe just add like a couple of seconds of clarity for the audience on this.

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31:49
Speaker 1
The idea would be that if you can, as Hillary mentioned, if the individual on the job site actually has the ability to go and file claims themselves and you're able to identify somebody that, who says, yes, I'm not being paid appropriately, then that person can, you know, go to the boss or, I'm sorry, can literally go to a lawyer. Right. Or in file suit against the people who've hired them, thus, you know, starting to snowball this situation. So that would be theoretically the motivation of the DCAG's office, if in fact they're Hiring Spanish speaking people to go out, visit job sites and say, hey, how you being paid? And hey, you know, that's illegal and you can file a suit. So there's a little bit of detail for the audience on it. But Hillary, back to the question. I've not heard this.

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32:43
Speaker 1
Have you heard this?

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32:45
Speaker 3
I have not heard that either. Yeah, I haven't heard that. I wouldn't be surprised if that was true, but I haven't heard that. And I think at least from the civil service civil lawsuit side, where the workers themselves are filing lawsuits, putting aside the ag, it's really a plaintiff lawyer's dream because just need to convince someone you're going to get what you weren't paid times three. And you can sue your direct employer, you can sue the person above them and all of them are jointly and severally liable and they have to pay your attorney's fees. So it's a plaintiff's lawyer's dream. And I'm surprised that there haven't been more lawsuits than there already are on this topic. But I guess as far as what do we recommend that subcontractors do?

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33:41
Speaker 3
I mean, I think if the, you know, if the jurisdiction is entitled to send people to the job sites, there's not a whole lot that can be done about that. So I guess my recommendation would be make sure everyone's being paid correctly and then you don't have a problem.

‍ ‍

33:58
Speaker 1
Yeah, I was just going to say I think that the way that they're setting this up is that the only way to do this is to get in compliance. You've got to get in compliance. And, and so if you're not, you're, you are going to be a target, particularly inside Washington, D.C. but definitely, you know, also in Maryland and also in Virginia. But, you know, for sure, you know, if, as if we needed more reasons, as if subcontractors needed more reasons to be afraid of working in D.C. there's another. So. All right, Stacey, I think we have one or two other questions.

‍ ‍

34:39
Speaker 2
Josh was curious. How are contractors vetting the labor brokers?

‍ ‍

34:47
Speaker 1
That's a good question.

‍ ‍

34:48
Speaker 3
So I don't know. Yeah, I don't know what, I don't know personally what, you know, many different subcontractors are doing. I know, you know, some of the ones that we've talked to, they sort of have trusted brokers that they work with that they've, you know, put them through training and sat down and said, you know, this is what we are going to require of you know, if you want to work with us. And so it's really kind of establishing that relationship and having that education and those discussions. I've also heard this is one thing that Gilbane, I believe is doing is they have expanded their pre qualification process beyond just their first tier subcontractors. They've started pre qualifying the next tier down.

‍ ‍

35:34
Speaker 3
So I'm not sure what that process looks like, but that is something that another general contractor is doing as far as looking at this issue.

‍ ‍

35:44
Speaker 1
I love that. That's great. That's. And that's a really interesting thought that the general contractor is taking on that extra step. I wonder what that looks like in terms of actual overhead and enforcement and how plausible that's going to be to, you know, how sustainable that'll be at scale and whether, you know, I'm sure Davis is looking at it saying how's it going? Should we be doing something similar?

‍ ‍

36:10
Speaker 1
But you know, I think frankly in the short term, while the violations would, I mean again, this is anecdotal, I don't have hard stats, but I just know, I just know that it's a staggering number of companies that are currently out of compliance on this that I would say if, you know, in the short term it probably does pay to be hyperventilated, vigilant and just, you know, really not in a putative way, but really in kind of like. And I know this is a part of what you talked about as well, right? It's about helping your subcontractors to figure this out. And it's about the subcontractors helping their labor subcontractors to figure this out. And it's about everybody kind of pulling together and doing it, you know, in lock step.

‍ ‍

37:01
Speaker 1
Ike said something in response which I thought he said, you know, but the employer spends a ton of money defending him or herself. Right? So he said, good answer. But, but the, you know, back to this thought of the AG having 40 Spanish speaking people out there trying to drum up lawsuits. I'll just say that one of the things that's on my mind is if I were a labor subcontractor or if I were a subcontractor, prime sub, I might, you know, proactively brand on and message on how we are solving this problem, you know, kind of, you know, putting it out there in the public sphere, being really proactive about like branding and marketing my business on. We are, you know, super proactive about making sure that our subcontractors are this and that, our employees are that and we never, you know, misclassify.

‍ ‍

37:51
Speaker 1
It's not going to be, it's not going to be like a, you know, a defense against all. But I think, you know, if you can brand your company in a way where the AG's office or whoever. Right. Looks at you as one of the good guys, you maybe do deflect some of the pressure, you know, that way. So anyway, good guys, I think we're, we're over on time and I, I knew that would happen, but you know, fascinating conversation. Stacy, do you have any other follow on questions?

‍ ‍

38:26
Speaker 2
I don't know if we could sneak this in real quick, but just to follow up with Joshua, he was also curious what happens if one of the non compliant employees gets injured on the job?

‍ ‍

38:38
Speaker 3
Well, I'm well in my wheelhouse there. I mean, I would think workers compensation would kick in, but I'm not sure how that works. If you've got somebody misclassified, if that's another hole there, I, I don't know the answer to that question.

‍ ‍

38:58
Speaker 1
We had a guest, we had a guest last year, Oscar Garcia. Who is he? He owns a consulting firm that really helps companies to, helps contractors to make it a more Latin American friendly environment. You know, inside the, in one of the things that he said without hesitation, he said, you know, a lot of it gets swept under the rug. A lot of it is, it's, you know, vastly underreported the number of incidents that happen to undocumented misclassified workers. And it's a part of what, you know, people need to be vigilant about and look out for, is that, you know, the safety of that community is really tied into all of this. Right.

‍ ‍

39:51
Speaker 1
So, so without question, Josh, you know, solving this problem, while it's a huge pain in the butt and a very legitimate one for the people who are trying to say, like, man, this totally changes my business model and I don't know how to navigate this. I think short term pain, long term, it's going to be a big win for the industry. I really do think that through this process we become a more humane, better place to be for employees, regardless of their background. And I'm again, you know, kudos to Davis, kudos to you, Hillary, for, you know, fearlessly participating in the public square here and trying to, you know, help people through what is a very painful process.

‍ ‍

40:45
Speaker 1
But, but you know, hopefully one that creates positive change in the industry, which is, you know, Again, I don't know if that's the motivation from the AG's office. I think the motivation might be tax revenue. But there's a, but there's a. You know, the side benefit is maybe it becomes, like I say, a happier, more humane place for people to work.

‍ ‍

41:06
Speaker 3
So, yeah, certainly the hope.

‍ ‍

41:09
Speaker 1
All right, awesome. Hillary, any final words before we part?

‍ ‍

41:14
Speaker 3
I don't think so. Thank you all for having me and giving us a platform to continue the conversation. You know, as you said, Chad, I think it's a really important issue. And Davis is certainly not perfect. You know, we haven't, we don't have the silver bullet. We're, you know, we're still trying to figure it out too, but you know that we appreciate the opportunity to continue to spread the message and hope that catches on.

‍ ‍

41:36
Speaker 1
So, yeah, keep making those honest, good faith efforts. That's, that's all anybody can do. That's all anybody can do. So good for you. Thank you so much. And, and you do officially win the award for the most beautiful actual background. Well done. Here, here. Oh, Hillary, if people wanted to reach out to you, how would be the best way to do it?

‍ ‍

41:59
Speaker 3
Sure, It's H G H E N t@davis construction.com.

‍ ‍

42:06
Speaker 1
All right, great. H LinkedIn. Yeah, or on LinkedIn. Okay, good. So either place@davis construction.com or on LinkedIn. So h gent@davisconstruction.com or LinkedIn. Thank you, Hillary. We appreciate you. We'll see you soon, I'm sure.

‍ ‍

42:23
Speaker 2
All right.

‍ ‍

42:24
Speaker 1
All right, Stacy, let's talk a little bit about next week and what we have coming up. Before we do, I wondered if you have a steel toe Communication marketing tip of the week.

‍ ‍

42:37
Speaker 2
Sure. I wanted to talk a little bit about repurposing content. I get a lot of questions. People run out of ideas on what to post about. Think about, you know, any webinars that you did throughout the year. That's a great place to find little nuggets of information or go to your YouTube channel, really review any of your analytics to see what key points people are, you know, looking at your videos and cut them down into little clips. Same with any other channels that you're working on. Review your content every three to six months and repurpose, repost things that people already find popular. Just, you know, work smarter.

‍ ‍

43:24
Speaker 1
Stacy, that tip is so smart, but it also stresses me out and makes me realize that I probably need to hire you. You okay? It's like I don't have the time to do that, but it's great. And I. I totally agree. So next week we have Greg Stone, who is another attorney, actually, funny enough, not planned, but Greg's actually going to be on talking about something that I didn't know was even a thing, which is intellectual property. Right. Intellectual property in the construction industry. And. And, you know, there are so many things that we haven't even, you know, considered as contractors and, you know, that are means and methods and specific strategies that we've been using to create efficiencies and things like that in our business.

‍ ‍

44:09
Speaker 1
Some of that stuff actually might be protectable intellectual property information that you can keep employees from leaving and taking and bringing to your competitor and things along those lines. And yet it is one of the spaces where the fewest intellectual property support is in place. So Greg is going to talk about some of the things that you can legitimately do. So first off, how to identify what intellectual property you have, and then second, what you can legitimately do to protect that intellectual property as a construction business. It should be, at the very least, a conversation where you learn a ton and I'm sure, very interesting as. I'm sorry, entertaining as well, because Greg is hysterical and he's a really great guy. So I look forward to. To that discussion. Stacey, anything else before we wrap up?

‍ ‍

45:02
Speaker 2
Yes, I did want to announce that we got Amy Marks, the queen of prefab, to our show, and she'll be joining us October 25th. So excited for that.

‍ ‍

45:13
Speaker 1
That is going to be awesome. Yeah, that was like. It was like a negotiation between our people and her people. It was.

‍ ‍

45:20
Speaker 2
They all just went to the big auto desk conference, which I heard was great.

‍ ‍

45:25
Speaker 1
So that. That will be fantastic. So that's in a couple of weeks, so keep tuning in, folks. Be live, check us out. If you can't check us out live, catch us wherever you catch your podcast. And you know what, do us a favor and tell somebody this week about the morning huddle. Help to spread the word and, you know, help us to. To try to create this, you know, maintain this platform where. Where people can talk about positive change that they're bringing to the industry. We'd really appreciate it.

‍ ‍

45:54
Speaker 2
Thank you.

‍ ‍

45:55
Speaker 1
See you.

‍ ‍

45:56
Speaker 3
Have a great morning.

‍ ‍

45:57
Speaker 2
See you.

‍

Topic: Economic Trends Impacting Construction in 2022

Transcript:

So it's morning huddle time. We'll give everybody a minute or so to. To get live with us. But, Anubon, you were just telling me you started your morning. You got in last night at what. 

S

Speaker 2

00:13

Time I got in last night? It's about 1am from Las Vegas via Detroit. But that means bed at 2am so that's. It's too much. I'm too old for this. I don't know if you remember those Lethal Weapon movies, but I think Danny Glover had a quote that he said repeatedly, I'm too old for that. And I. And I am. 

S

Speaker 1

00:40

Yeah, now I get it. I. For whatever it's worth, I'm too old for that too. And I don't think that's, you know, technically I shouldn't be able to say that, but I think I'm too old for that. I had a week a few weeks back where I was in, what was it, Houston and then Louisiana, and then New York, and then had to speak the next morning at 7:00am in Baltimore. And after I got home from New York and I thought I got home on that afternoon and just kind of cried. It was like, that's it. I can't do it. 

S

Speaker 2

01:15

I just want to be in my house. I wanna. I would like to tend to Marlon Humphrey's injuries if I could, if they would allow me to just fix him up for week 14 or 15 or something. But, you know, I have an economist. 

S

Speaker 1

01:27

Somebody's got to. 

S

Speaker 2

01:28

Somebody's gotta do that. Somebody's gotta fix that gentleman up. 

S

Speaker 1

01:33

All right, let's. Let's jump in. So. Good morning. Welcome to the morning huddle. I'm Chad Brinky alongside my co host and friend, Stacy Holzinger. Stacy, how you doing this morning? 

S

Speaker 3

01:44

Good. I'm doing great. 

S

Speaker 1

01:45

Awesome. Glad to hear it. Stacy, what's something good that's going on in your world this week? 

S

Speaker 3

01:50

We have all our holiday parties in the next couple weeks, so that'll be fun. 

S

Speaker 1

01:54

Have you gone to any this week? 

S

Speaker 3

01:56

No. Tonight as W. Yeah. 

S

Speaker 1

02:01

Nice. That's awesome. So you said American Subcontractors association of Washington, D.C. Correct. Wonderful. All right, good. I won't be at that one. I want to be at that one. But, you know, we all have our limits. I'll be around next week, though. Good deal. So I want to introduce our guest, Anibon Basu. Aniban is the CEO of Sage Policy Group, an economic advisory firm in Baltimore that helps clients around the country. Anibon is the chief economist of the Associated Builders and Contractors, along with several other associations and is extremely well versed in the building industry and looked to as an authority in the industry, certainly by me and many others. He is a storyteller extraordinaire and has a knack for really making complex economic concepts attainable for the likes of me. 

S

Speaker 1

02:57

And therefore, I hope you I'm pleased to share with our audience as well that Sage Policy Group works in partnership with my firm, well Built Construction Consulting, as we collaborate to help one another's clients to build their strategic business plans, making data backed decisions for how and where and when to invest in growth. So with that as kind of the intro with so much to discuss and so little time, let's get to it. Anibon, thanks so much for joining us. 

S

Speaker 2

03:28

Oh, my pleasure. Absolutely, Chad, this is great. 

S

Speaker 1

03:31

So let's get right down to it. You know the question that's on everyone's mind anytime that they talk to you, which is what can we expect, you know, as we look ahead and you know, when we look into 2022, what do you see coming for the building industry? And let's focus first on the hottest and coldest market segments, you know, the sectors of the economy that we expect to be, you know, hotter and less hot when it comes to the building industry. 

S

Speaker 2

04:02

Well, I think the obvious answer in this case because we just passed this major infrastructure package, this Infrastructure Investment and Jobs Act, $550 billion of new monies on top of what had already been authorized to be spent, is that it's public segments that will lead the way going forward. We'll start seeing some of that activity next year, perhaps more of it during the second half of the year than the first half of the year. But segments like roads and highways, water and sewer, I think school construction, some of these segments are going to be red hot. Another couple of segments, but more private sector and orientation that will be hot. Data centers and fulfillment centers that also is obviously backbones of the e commerce economy. 

S

Speaker 2

04:42

And then finally, I think one of the dark horse candidates for a really strong segment next year in terms of construction is multifamily. And I would not have expected that. The pandemic has cost us today 3.9 million jobs, shrunk our labor force. So one would think that the apartment market would be in pretty bad shape, especially after all those units we constructed during the previous decade. But I am seeing pretty significant interest right now in apartment construction. So I think that'll be one of the segments that'll be pretty strong too. 

S

Speaker 1

05:11

So infrastructure, multi, residential the multifamily space. Why is it surprising to you that has demand? Why is that, you know. Yeah. Why is that a shock? 

S

Speaker 2

05:30

Oh, it's a shock to me because the fuel for leasing activity is job creation and we've lost jobs during the pandemic. And as I say, we built a lot of apartment units, very nice ones, by the way, high end units. You can see them in downtown Baltimore, but elsewhere during the previous decade. So one would think that market would be pretty well saturated. And also during the early stages of the pandemic, rents collapsed in many communities. Less in Baltimore than, let's say in Washington or New York. But it is still the case that rents were under some pressure. But right now there's so much liquidity working its way through the economy. So many people looking for yield in the context of a 10 year treasury that closed yesterday, a little bit above 1.4%. 

S

Speaker 2

06:09

And one of the segments that's been identified by investors is that multifamily segment, a segment that generates income. People are looking for income. And so that's, among other things, is translating into more apartment construction. 

S

Speaker 1

06:21

Got it. So more of a. This is a really good place to put your money to continue to get a return in comparison to other options in the market. Is, is what may be fueling the continued multifamily investment. Is that what I'm gathering? 

S

Speaker 2

06:39

Yes, that's right, Chad, but it could be a bad bet. In other words, when you look at a lot of these investments, these investors are scooping up apartment buildings at extraordinarily low cap rate. So they're paying a lot for the income that's being generated by these apartment units. And then in many cases, investors are also financing the construction of new apartment units. And one of the reasons this has worked out so far is the economy has come back in large measure. Also, home prices are so expensive that many younger families can't find homes that they can afford in their various communities. And so they're leasing up apartments, often very high end apartments, because they're trying to mimic the lifestyle of home ownership. So a number of factors here, but I suspect that we're going to ultimately get to an overbuilt multifamily market. 

S

Speaker 2

07:25

But again, I've been surprised with the strength thus far and the way that occupancy rates have held up in the face of job loss. 

S

Speaker 1

07:32

So a couple of follow on questions. One, I want to talk about affordable housing. To what extent. This is something I've been reading a lot about that seems to Me, like, as much as we've done to keep up with or maybe even, you know, overbuild a demand for apartments, we still haven't gotten up to the point where there are enough affordable homes available in areas of all types, but particularly in urban areas. Is that, is that the same thing you're hearing? Is that, you know, what do you anticipate for the affordable housing sector? 

S

Speaker 2

08:17

Yeah, that's what I'm hearing. It's what I'm seeing. There is not enough affordable housing in this country. So what that means is that many American households spend well over 30% of their incomes on housing and in many cases over 50%. And there's a structural issue here. Policymakers don't want to necessarily do what's necessary to create the opportunity for affordable housing. Now the, you know, Department of Housing and Urban Development, you know, helps subsidize developers often to site affordable units, but it's never enough. I mean, there's almost an infinite amount of demand for affordable units in many communities. In other words, if a developer successfully cites affordable housing, a community, it will almost immediately be leased up. And I think that's going to persist because there just isn't enough interest from the private sector and providing affordable units. After all, where's the margin? 

S

Speaker 2

09:04

It's the most high end units and there's lots of zoning restrictions and other restrictions on density, for instance, that make it impossible to really create more affordable units. 

S

Speaker 1

09:14

That HUD money is absolutely necessary to fuel that type of development, otherwise it just simply doesn't happen. Politically, do you think there is the will to make those types of investments over the year ahead, in the few. 

S

Speaker 2

09:31

Years ahead, there is the will to stop those types of investments. So many communities are really restrictive in terms of development. In fact, even single family home builders building three bedroom or four bedroom homes with two and a half baths, that kind of thing, they meet resistance from communities. You know, people say, we don't want any more growth. We didn't come to this community for, you know, a suburban lifestyle. We want it to maintain its rural character. All those things. I'm not saying those considerations are not valid. This is democracy. People are entitled to their opinion, but often the approach is we made it to Howard county, now let's lift up the ladder because we're the last ones in. Or we made it to Queen Anne's county or we made it to Talbot county and that's it, no more development. 

S

Speaker 2

10:12

And, and policymakers are elected. They hear that kind of, of expression and so they institute policies that keep, you know, keep there from being more development, including of highly dense units. 

S

Speaker 1

10:26

Wow. And this is the term we hear, nimbyism, right? The not in my backyard thing. 

S

Speaker 2

10:33

Yeah, yeah. Not in my backyard. Now they moved into somebody else's backyard often, but now that they have that backyard, they don't want anyone to move into theirs. And so it's really deeply unfair because what it does is that it's one of the factors that keeps America very disparate in terms of income and wealth inequality because the first movers end up having all the gains. I mean, think about all of the housing equity created during this pandemic. Home prices have shot higher. Who benefits from that? Homeowners. Who's the loser? People who would want to aspire to homeownership. And so that's one of the factors that's further widened the socioeconomic disparities. 

S

Speaker 1

11:12

Awesome. I mean, I see that you've helped to make it more clear and I appreciate that. So the second thing that I want to get into related to multifamily is the, you know, remodeling of existing spaces. I would imagine that with all the new construction that has occurred, that there's got to be a lot of pressure on existing units to become more competitive. Right. Existing properties to make investments to become more competitive. Otherwise it's going to be, you know, this massive gap between the new place around the corner and our 20 year old apartment complex that is paling in comparison when it comes to amenities and things like that. We're not going to be able to, you know, get the kind of rates that we need. Are you seeing, do you have any input on that sort of remodeling market? 

S

Speaker 2

12:10

Yeah, I mean, the remodeling market is hot during periods like this. And you're right, there are those competitive pressures. So if there's a new building, for instance, at 414 Light street at downtown Baltimore, an owner of a competing property might feel the need to try to upgrade their units. But here, Chad, it's not so obvious what's happening because this, there's price differential. So, you know, I may not be competing for the same kinds of tenants that you might get at, you know, at Anthem or 414 Light street or some of these higher end, newer developments. I might be trying to attract a more income fixed or income constrained crowd. In other words, if I put too much money into my units, I'm going to have to raise rent to make money. 

S

Speaker 2

12:53

And it may be that I'm trying to attract a group of renters who don't have that much money. And so my point is that this is part of the bifurcation of the country. You see it in the quality of the housing stock as well. You've got these shiny brand new units, beautiful with views of the water. And then you've got these other units where the H VAC systems don't work very well. There might be a rodent issue, so on and so forth, but that's where you get your affordable housing often is through that lack of investment. So it's a real problem. And again, to the extent that our socioeconomic disparities are widening in this country, you'd see that in the housing stock too, wouldn't you? And in fact, that's exactly what we observe. 

S

Speaker 1

13:32

Makes total sense. Yep, got it. Let's. I want to push pause here real quick. I didn't do a good job in my haste to get rolling. I didn't do a good job reminding our audience to please fire in your questions through the chat. We are going to take the Last minute, last 10 minutes or so of our time this morning together to get your specific questions answered. And Stacy is there to field and organize and, you know, prepare your questions for us in that last 10 minutes. So please, just an encouragement to get those typed right into the chat and we will get to addressing those throughout the course of the conversation. I'm going to shift gears with you on Iban to the underperforming market sectors. What do we, what do you know? 

S

Speaker 1

14:15

If, if were gonna, you know, try to, if I was heavy in these markets, I'd be diversifying in 22. What are some of those market sectors from your perspective, that are going to be kind of slow? 

S

Speaker 2

14:30

Yeah, I think there's three that come to mind. First, we had a wave of retail bankruptcies and store closures during the pandemic. Of course, you know, the likes of True Religion, Pier 1 Imports, Neiman Marcus, JCPenney, Brooks Brothers, Lord and Taylor all went bankrupt. Francesca's Guitar Center. So we have this wave of vacated retail space. I think that's one of the more challenging segments, therefore. And of course, under constant pressure from Amazon and other e commerce giants, Amazon continues to scoop up market share. Best performer during the pandemic thus far in terms of retail sales. Worth has been the Internet. And so that's one segment that's problematic in my mind. Second office. And what is the reason for this? Well, we've lost jobs as part of it. But the more important factor is the way in which people choose to work. 

S

Speaker 2

15:17

So one of the things that we've learned during the pandemic is that many people are as productive or more productive working from home than in the office. But who cares about productivity? Employers. But who has negotiating power? Right now it's employees. We only have about 75 unemployed people for every 100 job openings in this country. So it's really the employees who got the negotiating leverage. And many of them are saying, we prefer to work from home. We don't want to go into the office, we don't want to commute, we don't want to see our colleagues. We don't like our colleagues. In fact, we don't even like our job. But at least it's tolerable if we're at home with our cat and a computer, of course. And so that's not good for the office segment. 

S

Speaker 2

15:52

In fact, a survey came out recently indicating that 68% of Americans would prefer to work remotely. Third, the hotel sector. Now I'm not talking about high end resorts. The rich got richer during this pandemic. And so high end resources will be fine. But those hotels that address the commercial or business market, where there's a lot of space for meetings, for instance, business gatherings, you know, business increasingly is conducted by Zoom and GoToWebinar. And here we are on LinkedIn, so on and so forth. And so one's got to think that's a weak segment. In fact, if you look at the 16 major categories of non residential construction, the one that suffered the most in terms of new construction investment has been the lodging segment. Again, new hotel room construction. 

S

Speaker 1

16:35

So retail office hotels, if you're heavy in those markets, you might be thinking about creative ways to, you know, diversify in the year and in years ahead. Let's talk about geographical winners and losers. We have, you know, our audience comes from all over the place. Yes, you and I are both based here in the mid Atlantic, but our audience is all over the country. So. So who are some of the geographic winners and losers and why? 

S

Speaker 2

17:04

This is South. The south wins. It's Florida, it's Georgia, it's Texas, it's Arizona. These are some of the states that are performing the best during the pandemic, but they also have the most favorable long term demographics. Baby boomers are on the move. Of course, many of them have retired. Many of them retired early during the pandemic. As it turns out, about one and a half million of them. And there's another wave of baby boomers set to Retire. And let's face it, a lot of people like warmer weather. It's good for the joints. And so when you look at states like Florida, Georgia, cities like Nashville, Austin, Charlotte, Tampa. Tampa is booming. It's blowing up the, you know, that Tampa, Orlando corridor. It's fantastic economically. 

S

Speaker 2

17:44

If you like growth, if you like growth, if you like stagnation, you know, if you like stagnation, then there's probably some markets in the Northeast that can probably satisfy your desire for a lack of activity, and you can just watch the grass grow. But if we're talking about geographic advantage in terms of growth, it's the American South. 

S

Speaker 1

18:00

Wow. Yeah. So I. And. And I do know several companies in. In this market and also in other markets across the country that I work with that are making investments and into pushing south because they're seeing an unmet need. 

S

Speaker 2

18:17

So. 

S

Speaker 1

18:18

So that's. That's happening. No question. All right, shifting gears another time here. Between the two of us. Let's. Let's talk about materials prices. What the hell's going on? 

S

Speaker 2

18:31

Unbalanced global economy. So we, you know, shut down the economy, of course, globally. In America, it begins in March and April. That's shut down. And so what happened is, Chad, that a lot of firms, sensing that this could be a very lengthy episode in American economic history, shut down their capacity. So they laid off tons of workers. Some of those workers, by the way, asked to be laid off so they could collect more generous unemployment insurance benefits, set that aside. But they might have mothballed ships, they might have shuttered factories, including sawmills, whatever it happens to be. And then all of a sudden, after we lose all those jobs In March and April, 22 million of them nationally, we reopen the economy and fits and starting in May of 2020, the economy comes roaring back. Demand comes roaring back. 

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Speaker 2

19:16

With all the stimulus, the supply is not there. So what do you get? You get shortages of goods, shortages of inputs, and much higher prices, you know, across the board, including with respect to materials prices, whether it's natural gas or other forms of fuel, whether it's steel or aluminum or copper. And, of course, softwood lumber has attracted much of the attention during the pandemic for various reasons. And so now software lumber prices have come back down a bit, but they remain well above what they were pre pandemic. So it's the reopening of the economy, it's the stimulation of the economy, and it's the fact that the supply chain has not been able to rise up to meet that challenge in Part because the labor market is supplying fewer workers right now. Our labor market has shrunk over the course of the pandemic. 

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Speaker 2

19:54

For instance, in the US we have a shortage of 80,000 truck drivers in this country. So all kinds of factors at work, but that's what's happening. 

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Speaker 1

20:00

To what extent does consolidation of providers in the global supply chain contribute to an opportunity for a relative few competitors to control the market? 

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Speaker 2

20:16

Oh, yes, absolutely. Another factor, which is market concentration. So, you know, for instance, back in 2017, a group of global shippers came together to form a consortium. And even though there were only like 10 or 12 of them major shippers at that time, they further consolidated the market effectively. You know, we know that we have OPEC and OPEC plus, we have a limited number of oil producers. So we've got real concentration in certain markets. You know, you look at the American airline industry, for instance, four major airlines. It's much more concentrated than it used to be. And almost every segment, you see private equity and others trying to roll up firms and consolidate and create market power. You've seen this massive mergers and acquisitions market for years. 

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Speaker 2

20:57

And so we have really gigantic businesses, and they have market power, and that usually causes prices to remain higher than they otherwise would be. So that's part of this inflation story. 

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Speaker 1

21:08

Yeah, yeah. I don't think you or I are going to get to the bottom of it, but I wonder if there are some really fascinating discussions that happened, you know, six months ago, eight months ago, nine months ago that really helped to fuel a massive price increase that time that the market has had to absorb. So, you know, we're already there with 10 minutes left, and I can't believe it. But I do want to open up the conversation for questions from the audience, so I am going to pull up. Stacey, Stacy, if you could help us to organize the discussion here. Questions that are coming in from the audience and audience, please keep firing those in. We'll do our best to get to as many of them as we can in the next 10 minutes. Stacy, what do we got? 

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Speaker 3

22:00

Sure, we have one question here. Supply chain issues are currently the single biggest impediment to maintaining construction schedules. When might you predict the supply chain pressures will ease? That's a tough one. 

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Speaker 2

22:13

That's a tough one. It's speculative, but I think some point later next year, you'll start to see some semblance of normalcy. Now, you know, we've got this Omicron variant now floating around. It's highly transmissible, and so it would happen sooner, but for that. But I think sometime later next year and there probably will be some interruptions in supply chaining disruptions into 2023. So I'm not completely naive, but you know, we economists like to say that the cure for high prices is high prices. And so with prices so high and demand so high, producers have an incentive to expand capacity, add shifts, make investments in equipment, which in fact they are doing in large numbers. I'll give you an example here, Chad. Globally, we had more container cargo ship orders this year in 2021 than in any other year in history. 

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Speaker 2

23:03

So suppliers are trying to bulk up their capacity and that should provide some benefits to consumers of various goods sometime next year. 

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Speaker 1

23:13

Awesome. That's extremely interesting to hear. Stacy, what else we got? 

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Speaker 3

23:20

What do you think about the term the great resignation? Can you comment on that and how people, the unemployment, like when are people expected to get back to work, that kind of thing? 

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Speaker 2

23:33

I have no idea. You know, when the pandemic began, labor force participation in this country was 63.3%. And I thought that people were pretty happy. Not with the politics necessarily, they just, you know, but they were happy with the economy and some people were happy with the politics, I suppose. But the point is now no one seems to like their job. No one seems to want to come to work. I hear so much complaining, so much resignation among educators and construction workers and many others. The so called quits rate hit a record of 3% during the most recent month, which we have data. 4.4 million Americans quit their jobs in one month, many of them leaving small businesses behind. Any restaurateur you talk to says, where are my workers? I can't get them back. 

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Speaker 2

24:14

And it's very hard to hire help wanted signs everywhere. So, you know, my thinking is that there's a semi permanence to this. People have rethought what's important to them. And one of the ways to deal with this is through stepped up legal immigration. You know, I'm a big fan of legal immigration. I mean, look at this. What I got going on here, it's no secret. And so I'd love to see America step up and bring some of that fresher blood in that motivated blood back. Because I think that's when America is at her best, is when you've got those really hardworking immigrants working alongside Americans who have been here creating a really dynamic marketplace. But we just don't seem to have that dynamism in the labor market right now. 

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Speaker 1

24:55

I think that's 100% right. And I'll toss another. In addition to increased legal immigration. Another. Another thing that feels particularly relevant to me is that in. In an effort, I think, to help people, Really. I think in an effort to help people, policymakers have a desire to expand the social safety net. But I feel like every time the social safety net exp. It reduces the responsibility of the economy, the American corporation, the. The, you know, small businesses, the large businesses to, you know, incentivize people to, you know, move into the labor force. So it's kind of like, you know, the more social safety net we're providing, the more problems, like, we perpetrate, perpetuate. I mean, on accident. What's your response to that? I know I'm crazy, but what's your response to that? 

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Speaker 2

25:53

You're straight up nuts, Chad. But what you've said is correct, I think, which is that I think that some of our work ethic has been dulled, in fact, during the pandemic. So people got lots of checks. 68%, for instance. 68% of workers who lost their jobs earlier in the pandemic were making more on unemployment, thanks to those federal subsidies, than they were prior to the pandemic, I mean, at their previous job. And so when you pay people to not work, then they get used to it, and they want that. They prefer it, you know, and my guess is that the Chinese government loves it when we pay Americans to not work. We need to get back to work. 

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Speaker 2

26:30

And work is one of the ways that we contribute to this country, that we grow our gdp, we grow our tax base, we contribute to each other effectively. We help finance our national security, our homeland security, our, you know, our infrastructure, all that, you know, investment in education or human capital formation generally. I mean, and we just do not have that right now. And so, you know, it's often said that millennials strive for work, life, balance. That's code in my mind, for not much work, much life, you know, And I want to have. I don't. You know, I would like to not work so hard and have more life, too. But to have my life that I have, I've got to work. In fact, I've got to work really hard. And that's. That kind of motivation is good for America generally, I think. 

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Speaker 2

27:14

You know, larger economy, more powerful economy, more influence globally. But there are a lot of folks out there who are not pulling the rope. 

S

Speaker 1

27:22

Thank you, Stacy. We probably have time for two more quick ones. 

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Speaker 3

27:26

Okay. The pandemic has forced change across the board. What do you think the growth will be in the Prefabrication, volumetric modular construction and manufacturing practices in the construction process over the next year. 

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Speaker 2

27:43

Yeah, I think the pandemic has been an accelerant to modular construction and prefabrication. Again, a lot of this relates to the workforce dynamic. So it's just hard to find construction workers these days. Many people don't want to work outdoors. They prefer to work in a controlled indoor setting. And modular construction offers that and therefore offers greater opportunity for flex time and other kinds of things, just more comfortable. And the workforce seems to be really concerned about comfort these days. And so I've been surprised that module construction has not gained even more market share in recent years than we have observed. But I think that you'll see significant market share gains going forward. And the pandemic is part of the reason for that. 

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Speaker 1

28:22

Yeah, I would just echo that. You know, I hope that the industry and that the audience watching doesn't look at large scale events like the collapse of Katera as an example, that modular and your volumetric building isn't going to happen. It is, it's happening right now. And in fact, I would, you know, posit that there are thousands of amazingly qualified people who worked for Katera who are going to be doing some incredible things in that world, you know, more on a localized, regionalized, in small business way. So I definitely see that trend continuing and stay very plugged into it myself. All right, one more. Stacy, what do we got? 

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Speaker 3

29:03

Okay, this one's from Brewster. Do you see any technology disruptors ahead of the construction industry? 

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Speaker 2

29:10

Oh, many of them. I mean, you know, construction is famous for not generating meaningful productivity improvements over the course of decades. So we've seen utter transformation of financial services and retail trade and of course logistics, so on and so forth. Just have not seen that in construction. The typical construction job site probably looks a lot like it might have looked like several decades ago. And so lots of technologies, 3D printing and drones. And obviously on the design side, we've seen the effects of BIM and other emerging technologies. But yeah, the revolution is yet to occur. We just talked about modular construction, for instance. But you know, robotics, you know, robots that can lay brick, for instance, they're coming, driverless vehicles to drive materials to job sites, all those kinds of things. And so yes, the revolution is coming. 

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Speaker 2

29:56

And I suspect that the strongest technology companies, or I should say the strongest construction firms, will be the strongest technology companies as well. And by the way, technology can be expensive and training people on technology can be expensive. So that's another one of the factors that will drive more industry consolidation going forward. So if you see, if you think you've seen a lot of industry consolidation in the last few years, I don't think you've seen anything yet. 

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Speaker 1

30:17

In our conversations on iban, one of the things that really sticks out is I remember talking about just this topic and I said, you know, if you were a construction company today making a strategic plan for five years from now, would you be planning to get bigger? And you said something that I thought was, you know, exactly what I felt and told my clients, which is, only if you plan to be in business. Right. Only if you plan to be in business. In other words, if you're. If you. It's totally reasonable and acceptable to look at the current market circumstances and say, you know what, now is actually a pretty good time to exit. Things are about to get. It's a. The revolution wave. It is coming. There are a lot of major investments that I'm going to need to make. 

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Speaker 1

31:02

And if I'm not prepared to make major investments in my company to buy those, buy that equipment and expand my presence and all these things that I'm going to have to invest in, getting out is a reasonable option. But if I'm not getting out, I should be making a plan to grow. 

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Speaker 2

31:19

Yeah, it is a good time to get out. I think it's a good time to sell business. Business valuations are generally quite high. Again, people are paying a lot for net income. But, you know, there's a sort of notion, go big or go home. And I think basically that defines construction during the years ahead. Go big or go home. Because again, technology is expensive and recruitment is very difficult. How do you induce the greatest talent to work for one's firm? While often a lot of people are looking for that financial stability that comes with a large established firm. And so go big or go home. I think that's part of the mantra going forward for the US construction industry. 

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Speaker 1

31:57

This has been the fastest 30 minutes that I've spent all month. Anibon, thank you so much for being here. I hope you don't have something right on the back of this. I hope you get a chance to relax. I'm sorry to pull you in so early, but I'm really glad that you were able to do it and I think provided a ton of value to the audience here today. And so thank you for being here. 

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Speaker 2

32:20

Thank you very much, Chad. 

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Speaker 1

32:21

Yeah, so I'm gonna just briefly intro next week. We have. Please join us on December 14th. We have Steve Yelland and Bruce Jones, two very good friends of mine. The first time that we're gonna have two guests at once, they're gonna be on talking about a successful acquisition that occurred. Steve's business bought Bruce's business about four years ago. That provided a bunch of lessons learned that we're going to talk about. When it comes to exiting your construction business, I think this is relevant for the people who want to exit. This is relevant for the people who are thinking about getting out. This is relevant for people who are a part of a business that was just rolled up and also just going to be generally a lot of fun discussion about merging cultures and, you know, being successful post acquisition. 

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Speaker 1

33:11

So we'll look forward to talking about that. Stacy, anything that you want to say before we part ways today? 

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Speaker 3

33:19

Well, I look forward to seeing a lot of you this evening and we'll get this awesome episode up on YouTube in the next, like 30 to 40 minutes. So if you need to rewatch it or send it to somebody, I'll send a link. I'll post it on LinkedIn so you guys can find it. It was great discussion. 

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Speaker 1

33:38

Thanks so much. Yeah, spread the word, guys. Please spread the word. If you know anybody that wants to speak, if you know it right. That would love to join us that you. If you know somebody that should join us, please pass their information along. We'll reach out to them. And, you know, if you want to make sure that you're on our email list, send me a private message with your email. I'll get you added to our email list, which goes out every week with a YouTube link to the previous week with a registration for the upcoming week. And we're going to keep on doing this through the end of this year into next and look forward to seeing you guys next week. Thanks so much. Have a great week. Thanks, Stacey. See you.