It's not too complex. Naturally, the power of the surety market strongly correlates with the success of the construction industry. The stats show that when the construction industry is down – so are the surety markets.
With over $5.5 billion in 2008, the construction markets took a dive following the recession. Once the economy improved, the markets rebounded, and construction activity increased to over $5.5 billion once again in 2015. Looking at statistics isn't the only way to know the markets have bounced back.
According to Susan Hecker, director of national contract surety and area executive vice president, Arthur J. Gallagher & Co:
"One way I measure what's going on in the construction industry is how many tower cranes I can count on my drive to work every day. Over the past few years in the San Francisco area, it has gone from a handful to more than 50."
Understanding the Upswing
Private projects are thriving, and more bonds have been issues on these plans as of late. Most see this as a great thing for sureties, as lending institutions have started to require bonds for financing projects in the private sector.
However, spending on public projects has not found the same level of bounce-back. State and local governments don't have the funding that they did before the recession. While there is still a demand for projects, the government has to get creative in finding ways to meet their needs.
Enter P3s. One creative manner many government entities are working on is public-private partnerships or P3s. While the name is self-explanatory, the surety side has been working to offer bonds that fill this ever-growing market. Typically, a P3s bond offering will need to be more liquid.
Is All Growth Good?
While the upswing in the construction and bonding demand is a good thing, there are still concerns. Many worry about the availability of high-skilled employees and workers. It can be hard to find a qualified workforce for many construction companies these days.
The lack of skilled workers comes from a few factors. First, baby boomers are retiring. This leaves a lot of knowledge at the trade level off the table. There is a void to fill. And while the unemployment rate for construction workers is lower than it has been in the last decade, the available labor force has been strained. According to Ed Titus, senior vice president of surety for Philadelphia Insurance Cos:
“We see the Texas, California, and Florida construction markets struggling with not having enough of an available trained, skilled workforce for contractors to start bidding on new projects."
Cause & Effect
With a lack of skilled labor, most sureties have been keeping a close eye on the industry. Many have found a rise in claims. A lack of workers makes it difficult to finish on time. Projects that take longer often find more damages, too.
Plus, the flow of money slows down. Often, owners can't pay sub-trades until things get completed. When this happens, a claim can be triggered. Bonds often guarantee labor providers and suppliers are paid. If the flow of cash is slow, then it comes back to the claims.
Energy Sector Issues
Construction isn't the only industry sureties work heavily in. The energy sector has been problematic for the surety markets lately, too. Bankruptcy in the energy sector has become all too familiar.
The largest surety loss of all time was an energy company, Enron. Thus, when sureties see a number of energy companies file for bankruptcy, there's a legitimate call for concern.
Understanding the Surety Marketplace
With the construction industry coming up, sureties are looking to expand their business. Professionals in the space are hungry for new business. But with pricing becoming hyper-competitive, one can expect the industry to remain active and engaged – if profitable results are to continue.
For more information on bonds and surety contact Skyline Risk Management, Inc. at (718) 267-6600.