Demographics Drive the Market
Analyzing key market fundamentals caused by changing demographics.
By Donald R. Boyken, CCC
In recent history, there has never been a better time to start a capital improvement program. Current market conditions provide a unique opportunity to capitalize on low interest rates, an abundant supply of money and a high degree of competition among design and contract service providers. While this window of opportunity is wide open, it will start to close in the upcoming months.
Since 2000, the development markets have been experiencing a contraction. At first it was slow, but in 2001 the contraction started to
accelerate and, as some suggest, fell off the charts in September 2001. The economy and development markets then limped along until late 2002 when we started to see a change of perspective. Since the beginning of 2001, the construction indexes have remained flat and even negative regarding any increases in construction costs and spending.
For the last 23 years, Boyken International's business has been predicting the cost impacts for building programs. We constantly review the construction industry fundamentals, especially in our key markets. It is from our most recent review of these markets that we see the underlying support for each market has remained constant. As believers that demographics drive a market, we analyze the key market fundamentals for changes caused by demographics.
Airports and Transportation
A business traveler's desire to arrive at his or her destination quickly and to maximize the time spent at the destination remains the key driver to airport transportation growth. As the leisure traveler returns to the air, passenger volumes are approaching or exceeding 2001 levels. Our review of the market indicates that every airport in the United States either has a major expansion program underway or in planning. Because of the long-term planning horizon necessary to start an airport capital expansion, the unchanged market fundamentals will continue to drive further expansion of the airport system.
Simply put, the "boomer's children" are heading to college. Demographics show that the baby boomer generation is the largest single generation that has ever driven the economy. Statistics show that the millennium generation (children born between 1980 and 2003) will be as large or larger than the boomers. It is also thought that 70 percent of the boomers went to college.
The American Dream that children will do better than their parents is underlying the thought that almost 90 percent of the millennium generation will go on to higher education. This represents a 25 percent growth over the largest student population ever experienced. Universities have anticipated this trend and have raised their entrance requirements to select the "cream of the crop," forcing more students to colleges and junior colleges. This single factor underpins the need to build adequate college facilities and upgrade existing campuses. This market is expected to remain strong into the next decade.
Medical Facilities and Biomedical Research
Several factors contribute to continued expansion in these areas. Not only are baby boomers aging, which puts a significant demand on medical facilities, but the continual evolution of technology in the field of healthcare puts a constant strain on the industry. The events of 9-11 emphasized the need for bioresearch and defense. These markets will remain strong growth areas.
Hotels and Casino Resorts
In the 1980s and '90s, boomers sought their entertainment with their children and visited a theme park. While they may rekindle their youth by repeating the trip with their grandchildren, their real passion has transferred to a new theme park for the 21st century—the casino.
Resorts, where wagering provides a thrill of winning, have quickly become the destinations of choice. At the slot machine
or the tables, boomers can take a risk and experience the thrill of victory, because they never consider the alternative.
The gaming industry is experiencing its greatest growth and not just in Las Vegas. Tribal gaming has become an easy way to find this kind of entertainment close to home. These thrill seekers are not just the wealthy because all can experience the thrill of placing a bet.
Boomers have money and want to be pampered. Destination leisure resorts are where they seek this type of entertainment. This market segment dramatically grew in the 1990s, and we are already seeing signs of a comeback as the leisure traveler returns to air travel.
Responding to this demand, spa
construction is up at four- and five-star resorts. The leisure resort will also include the traditional golf course or other leisure activities where every whim has been anticipated. This type of vacation becomes the escape from the everyday life, satisfying dreams of how the boomer would like to live, but just can't quite reach it on a full-time basis.
Cities, counties and states are still reacting to reduced collection of sales taxes and income taxes. Because of the reduced revenue, their future development program budgets have been trimmed or delayed for at least one year. Therefore, we expect new programs may be restarted at the beginning of the next budget calendar.
We see strong needs for water and sewage treatment facilities as our population expands. The aging infrastructure and constant growth in counties surrounding major cities drives these needs. We soon expect federal funding will drive this sector to new levels.
One of the key questions we are continuously challenged by is how long will this set of unique development conditions last (abundant money at low interest rates and high competition)? We foresee another 12 to 15 months of ideal conditions. Banks and lending institutions will continue to offer money at low rates. It is expected that interest rates will gradually creep up starting in the spring of 2004, if not sooner. Many economists tell us that we are currently at the lowest rate of interest we should expect to see in our lifetime.
The construction backlog is currently at the lowest levels seen in the last decade. Based on our understanding of the current volume of projects in design and planning, we foresee the construction industry
reaching a sufficient backlog in the fall of 2004. We define "sufficient backlog" as that point in time when companies become more selective in their bidding strategy. At that point we would expect to see the return of construction escalation as a factor in our cost projections.
In summary, construction pricing will remain relatively constant for the next 12 to 15 months. Now for the qualification: this prediction anticipates that a 9-11-type event will not occur during this time period. While many economists believe that the United States economy could endure another such event and survive, public sentiment would quickly shift to protection of key assets and fiscal restraint, causing a reduction in consumer spending. It is now clear that the American consumers' spending has pulled the economy through the last setback.
Donald R. Boyken is chairman and CEO of Boyken International, an international consulting firm to building owners, developers and other construction industry clients. Based in Atlanta, GA, with offices in Orlando, Houston and Kingston, Jamaica, Boyken provides strategic planning, development program management, cost estimating and management, scheduling, inspection services, due diligence and dispute resolution. For information, visit www.boyken.com.