Construction companies manage building projects for commercial and residential facilities, ranging from single-family homes to sprawling industrial complexes. The economy affects families' and companies' decisions to invest in new real-estate, which in turn affects the demand patterns seen by construction companies. While construction is generally a cyclical industry, meaning it gains strength during economic upswings, small construction businesses are uniquely positioned to take advantage of counter-cyclical opportunities that arise in times of economic weakness.
A strengthening economy has the general effect of raising individual incomes and encouraging entrepreneurship. Rising incomes stem from a self-reinforcing cycle of rising demand -- people spend more as they have more money to spend, resulting in increased business revenue that can be shared with employees. Aspiring entrepreneurs take advantage of this trend by opening new businesses. These phenomena lead to construction opportunities in residential, commercial and industrial real-estate, boosting demand throughout the industry.
The general effects of a weakening economy are the reverse of those caused by a strong economy. Lower incomes lead to more conservative spending and investing habits in families, and entrepreneurs are less encouraged to open new businesses. Even people and businesses less affected by economic downturns than others can be reluctant to invest in new construction projects during these times, preferring to delay capital investment until macroeconomic trends shift upward.
Although new-building construction generally suffers during an economic downturn, counter-cyclical demand patterns in real estate can create new opportunities for savvy builders. A counter-cyclical industry segment is one which gains strength during economic downturns, and the real-estate industry is full of them. Apartment housing is one example; when construction companies lose opportunities to build new single-family homes, they may find new opportunities to build apartment complexes or government-funded multi-family residences. An article from The Association for Union Constructors (TAUC) gives an example of this by pointing out opportunities for inner-city and close-suburb construction projects following the 2008 housing crash. As another example, when a struggling economy slows production of new office buildings, savvy contractors can find opportunities to renovate and repair older facilities.
Responding to Economic Trends
Small construction companies have the advantage of being lean and agile enough to proactively respond to macroeconomic changes by shifting their services towards projects in high demand. A local residential construction company is better positioned to switch focus to renovation and repair than a larger competitor entrenched in a single niche. In a strong economy, protect against a possible economic downturn by diversifying your services into a range of segments that do not all rely on economic strength. In a weak economy, focus on counter-cyclical opportunities while remaining ready to take advantage of a future upswing.
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