RLB’s Julian Anderson on Construction Costs and Trump’s Infrastructure Pledge

The 61-year-old Anderson lives in Scottsdale, Ariz., with his wife and is based out of RLB’s Phoenix office, but on a recent trip to New York he sat down with Commercial Observer to discuss the firm’s activities, why the North American construction market is suffering from a labor shortage and the Trump administration’s mooted infrastructure stimulus plan.

Commercial Observer: You helped establish RLB’s North American practice in the early 1990s, breaking the company into an entirely new market. What was that like for you, and did you face any challenges along the way?

Julian Anderson: On a personal level, I had to learn how to spell again [laughs]. And then I had to go back and learn about imperial measurement—feet and inches—because Australia and the rest of the world had largely gone away from that.

The U.S. construction system is quite different to British Commonwealth systems; for example, in the U.S. there’s no such profession as a quantity surveyor, and the way projects are procured is slightly different. I think the biggest thing was the cultural difference; there’s a big cultural difference between Australia and the U.S. generally and between Australia and different parts of the U.S. in particular. So it was learning about those things that are the big challenges, I think, for anybody.

The firm’s first inroads in the North American market were in the cost management sector—traditionally RLB’s bread and butter. Does that remain the case, or has your business evolved through the years?

In North America, our business is now about 50 percent cost management and about 50 percent owner’s representative project management. For us, [project management] involves helping an owner, usually at the very start of their project: We’ll help them find architects and engineers; we’ll help manage that team through the design phase; we’ll help them find contractors, arrange the bidding process and manage the contract through construction. And then at times we’ll even manage the end of construction process: the handover, the warranty period. It is all consulting; we do not do design, we do not do contracting.

The other aspect of what we do, which is probably only 5 percent of our business but growing, is expert testimony work in disputes, mediation, arbitration. So it’s evolved; initially our work was virtually all cost management, and then it morphed into project management and litigation support.

RLB has worked on major projects around the world, but New York doesn’t seem to be a core market. Why not more of a presence here? Is it a barrier of entry issue?

It’s a historic issue; historically we started in the west and moved east. Our first real successful office [in the U.S.] was out in Honolulu, and we used that model to move to California, the West Coast, Phoenix. The New York market is a very particular market; we’ve done projects in New York for the best part of 20 years and have had an office here at different times. We closed it up during the recession, but we’re recruiting now for a new lead for an office here because New York is terribly important for us globally. If you’re going to be a global player, you need to have an office in New York.

On a global basis, where is the company looking to increase its exposure and grow its business?

Obviously the North American market is a prime focus for us because it’s the U.S. and Canada: first-world countries, huge markets. We think we have a lot of opportunities here, and it’ll take us another 30 years before we’ll build out to where we want to be in this market. We take a long-term view on these things; we have a business plan, and we’re executing it.

There’s obviously Europe, where we have an alliance system at the moment that we’re now starting to build out as RLB businesses. Africa is another place that we’re starting to build up in from our base in South Africa; there’s huge population growth in Africa, and if everything evolved the way it could, then it could be another China. India, we’re investigating; difficult market, some high levels of corruption at times, so that makes it difficult for a company like ours to work. And then beyond that, Central and South America. So lots of opportunities and lots of places to consider, and we’re starting to push out into those markets slowly.

Do you see the rate of growth in the North American development market leveling out at all, or will it continue to strengthen?

I have some doubts that it will continue at the rate that it’s been going because it’s supply constrained in terms of labor. We see this in the uptick in construction costs—you just can’t get enough labor. Labor hasn’t recovered since the Great Recession, even as activity has picked up. That’s a real constraint.

Another issue is, how long can this uptick in the economy go? A lot of people have a view that [economic] cycles are seven to eight years [long]; what isn’t quite so well known is that there are actually two economic cycles. There’s the short cycle, which is typically seven to nine years, and there is a long cycle is which something around 23 to 25 years. You get big booms when your short cycle and your long cycle coincide, and that’s what we had happening back during the housing boom.

I don’t expect the trough to be as deep when we come off, but as for the question of “Will there be a slowdown?”—yes. Will it be a recession? I don’t know. I suspect it will be, but if you look at the Australian economy, they haven’t had a recession in 28 years.

Looking at RLB’s Crane Index, construction activity in North America appears to be very much residentially driven. Constraints in housing supply seem to be prevalent in a lot of major urban markets, including New York. Is that what’s driving this construction?

You’re right that residential is the king of the heap in terms of high-rise buildings, particularly along the East Coast and in places like Toronto—just huge amounts [of construction]. Eventually, history would tell me that the cycle for building high-rise condos comes to an end when the market gets saturated, when there’s a downturn or when there’s a change in government policy related to something like mortgage deductibility. So any of those things could end that cycle, and then you’ll get a change in the crane count.

But the dynamic does seem to be that there’s more demand for multifamily housing, particularly affordable rental housing, than there is supply—especially in urban areas.

If you’re talking about affordable multifamily, then that’s certainly the case—there’s lots of demand. The difficulty is delivering a product that you can call affordable, and so you see developers are having to go to micro-units to deliver a product that meets that demand.

From a private investment perspective, where do you see the capital that’s driving the construction market coming from these days?

Publicly traded companies are enormously important because they are continuing to invest in properties and develop properties. There’s an enormous amount of money being spent by the big IT companies—the Googles, the Microsofts, the Facebooks and Amazons need lots and lots of space to house their people.

Up until six months ago we were seeing lots of Chinese money coming to the U.S., and then the Chinese government sort of turned that tap off—not completely but slowed it down significantly. I haven’t seen so much money coming out of the Middle East in recent times, but I still see money coming through Europe, and I expect that will continue. There’s still money coming out of the United Kingdom from companies and investors, but I think they need to figure out what’s going to happen with Brexit before they sort out where they’re going to move next.

Going back to labor, you said that the labor market is understaffed at the moment—there are basically not enough hands on deck. What would you say is the main contributor to that dynamic?

The issue is apprenticeships and training and how you get people to come into working construction, whether it’s in trades or consulting positions. But coming back to the people actually undertaking the work itself, the number of people in the construction industry dropped dramatically when the housing bubble burst. If you look at the most recent statistics, there is more construction now than there was at the height of the previous boom, [but] the number of construction workers is less. So you’ve got a national [labor] shortage.

Now you’re doing more work with fewer people; what gives? We’re seeing that trades that are heavily undertaken by Hispanics—dry wall painting, tiling, etc.—have been hurt because people who were maybe of questionable immigration status have left [the U.S.]

Is that something you’ve seen in the past year, under the Trump administration?

We’ve been seeing it for a while, but it’s really starting to become evident. We ran a roundtable recently with contractors from a number of trades, and one of the trade contractors, when we asked him, “What’s the thing that we could do to solve your business problems,” he said, “Fix immigration—number one.”

The other issue is that, as this upturn has happened and the labor force hasn’t been there, the mix of skilled to unskilled workers in trades has changed. We’ve seen this on lots of jobs where you might have had a crew of a couple of skilled workers and one laborer working on a particular trade; well, you can’t get two skilled workers anymore. What you can get is one skilled worker and maybe two semi-skilled workers and a laborer—so you’ve got more people doing the same amount of work less effectively and maybe having to do rework because the skill levels aren’t quite there.

I noticed from your Twitter feed that you’re particularly interested in the Trump administration infrastructure plan that was pledged during the campaign. You’ve consistently wondered where this infrastructure plan we were promised is going to come from.

Yes, I know the answer [laughs].

Do you foresee any government investment in the infrastructure sector that could potentially boost construction, or is that fabled plan not forthcoming? And have things changed for you, from a business perspective, under this administration? [Note: After CO spoke to Anderson, Bloomberg reported that the Trump administration plans to roll out an infrastructure initiative in January.]

The Trump administration has made an effort to roll back regulations. The question is how much that really affects what happens at a state and local level, where state and local governments also have their own regulations. In terms of government investment, I do not see this administration increasing investment in buildings or infrastructure today. I think they seem more concerned with cutting red tape and minimizing expenditure rather than building out, and you can see that the General Services Administration’s pipeline is very small compared to what it was, say, 10 years ago.

With regards to infrastructure, I think what has dawned on the administration is that public-private partnerships are not going to be the mechanism for funding $1 trillion of expenditure, and the reason for that is absolutely obvious: For most types of infrastructure spending—repairing roads and bridges, for example—there’s no dollar stream to be monetized from the private perspective. If I’m going to invest in a road, it better be a toll road, or something that the government is going to lease back from me. Bridges are worse; if I’m going to repair a bridge, how am I going to monetize that if I’m in the private sector? If you put a toll on it, then if I’m a politician, I’ve got a whole lot of unhappy constituents driving over the bridge. So there’s no political will there, and I think they’ve figured this out in terms of the big infrastructure plan.

What would you say is the one project RLB is working on that you’re most excited about?

Well my top three I can’t talk about, which is kind of awkward [laughs].

Then what about finished projects that you can talk about?

We were very happy to work on the Tower at PNC Plaza [in Pittsburgh]; that was a great project—and extremely green. The Falcons’ stadium [in Atlanta] was a project we worked on, from helping them select a site through negotiating and reconciling the costs with the general contractor. Obviously [MetLife Stadium in the] Meadowlands was a big one for us. And then all the work we’re doing in Honolulu around Waikiki and Ala Moana Center with renovations of hotels and new builds.