Norton On Real Estate: Despite woes, N.H.’s glass is still half full

I was asked to meet with a prominent New Hampshire construction company’s field management team, mostly project managers, field superintendents and foremen. I spoke about and answered questions regarding the state of New Hampshire’s economy, the impacts of rapidly rising energy costs on the construction sector, and how long I thought this “correction” would last.

Energy costs (natural gas, electric, LP, oil and even wood) continue to rise. Likely they could be 50 percent higher by the end of 2008 than they were in the fall of 2007. This means it could cost $800 to $900 to fill an oil tank. More importantly, it could be on a cash-only basis. For working folks, this is going to be tough. Add in $200 to $300 for gasoline in the vehicles, along with electric bills well over $100 per month, and the impacts of the energy costs on households are huge.

For contractors, getting workers to and from jobs is one expense. Another is the construction equipment on site. For sites requiring lots of earth-moving, fuel costs are significant.

Another component is asphalt. I have been told that suppliers will not hold a price on asphalt more than a week, perhaps two. Of course, steel used in rebar, structural joists, roof decking, electrical boxes and conduit — you name it — keeps increasing, largely due to global competition for these products.

So it is a very challenging time to be bidding construction work. Things have slowed down, especially in the residential sectors, so there appears to be more labor available, which can mean lower prices due to competition. But the tighter labor costs do not come close to offsetting the increase in materials costs — yet.

Construction is a significant component of our state economy. First, there are the jobs and wages. Another positive impact is the value of the completed construction, which translates into new or increased tax base for cities and towns.

Of course, with the public sector under fiscal stress, they reel in their spending by delaying or canceling projects. Schools are one piece, but just as significant are municipal buildings, county jails and nursing homes, state buildings — including the university system.

Another economic engine in the construction sector is health care. The expansion of medical facilities has been humming for several years. Virtually every hospital in the state has some capital project under way. This too will abate because hospitals have taken on more debt, and we are already paying 13 percent to 16 percent of gross state product on health care. This figure is projected to increase to 16 to 18 percent.

It is a real concern. As the state’s economy slows, revenues slump and the budget shortfalls grow. Without growth and development the ability to pay for such needs as public education — first K-12 and then post-secondary — public health-care obligations, and last but not least, infrastructure repairs and replacements is severely stressed. (We could add an under-funded retirement system, too.)

The slowing economy also is manifested in a loss of some population, about 200 to 300 per month. It also yields little, if any, job growth. No new jobs mean empty buildings stay empty, and we do not need to build new ones for growing companies. The exception has been medical uses, along with some high tech, biotech and R&D space.

From our perspective, we see the sagging regional economy as a correction. We have had a great run for quite a while, from 1995 or maybe late in 1994. Our best guess is six more quarters of flat, or perhaps sagging, economic indicators. If we can adjust to the new energy and transportation costs during this period, we should see moderate growth late in 2009 or early 2010. We need to hunker down and wait this one out. But as of this writing, the glass is still half-full, not half-empty. nhbr

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at wbn@nortonnewengland.com.