Construction industry going through tough times

The island’s battered construction industry showed continued deterioration during 2008.

The sharp downturn in public infrastructure projects as a result of the government’s fiscal crisis since 2006, coupled with a laborious permits process, a recessionary economy and sky-high prices for construction materials has hampered what just a few years ago was one of the most thriving and dynamic industries on the island.

During the 1990s, the local construction industry, without question, one of the pillars of Puerto Rico’s economy, with high demand for housing units the main driving force behind the industry, followed by significant public investment in infrastructure projects.

The construction sector significantly contributes to the island’s economy, responsible for an estimated 90,000 direct and another 90,000 indirect jobs. Since 1999, total investment in construction has surpassed $6 billion year after year, reaching a record high of $6.9 billion in 2000.

During the past decade, this sector contributed 15% to the island’s gross national product, equivalent to $7 billion, much more than the tourism and agricultural sectors.

In the past couple of years, environmental groups and other outspoken sectors have increased attacks on the construction industry, claiming private developers are turning the island into a concrete jungle or are building on public-domain land and taking construction cranes hostage for several days, as was the case with the Paseo Caribe project in Puerta de Tierra.

Nonetheless, both developers and environmentalists agree a large degree of unplanned (and illegal) development has taken place on the island, which has contributed to urban sprawl and a haphazard distribution of infrastructure and basic services such as water and electricity.

As a result, recent years have seen growing concern about adequate urban planning, specifically developing enough projects to satisfy the huge demand for housing, estimated to be close to 20,000 units a year and, at the same time, striking a reasonable balance to conserve the island’s natural resources.

The government has tried to play a key role in this process through the drafting of a controversial Land Use Plan, which is supposed to attempt to classify every scrap of land on the island to determine which areas are suitable for development. However, the Land Use Plan faced strong opposition from the industry because it was put together in a rush, using outdated data and with barely any resources. This has created an air of uncertainty that has further hindered the industry.

Like the rest of the world, the drastic increases in the cost of construction materials, such as copper, steel, aluminum and wood, have contributed to the industry’s woes. This has been provoked mainly by drastic increases in the cost of petroleum-based products, which make the transportation of such materials more expensive.

In addition, a spike in demand for raw materials in such countries as China and India has lowered the supply of key construction materials and thus further elevated their costs.

However, local factors have played the biggest part in the sector’s current condition, according to industry leaders, who cite the costly, slow and laborious permits process as the main problem in the industry.

Under the current permits system, on average, it takes approximately five to eight years to approve a project, which translates into added expenses for the developer and results in higher costs to consumers. It is estimated bureaucracy (from central and municipal governments) increases housing costs by 25%.

The central government started working on a master plan to untangle the permits web through a re-engineering of the permits process, but visible results haven’t yet been seen. In spite of that, most industry leaders are hopeful the initiative will bear fruit and applaud the government’s efforts.

Estimates by local Advantage Business Consulting (ABC) indicate nearly half the island’s housing demand (44%) is for social-interest housing (i.e., units priced less than $100,000), while 51.3% is for units with prices of $100,000 to $499,000. Less than 5% of the housing demand (4.7%) is for high-priced units ($500,000 and higher). The average annual income in Puerto Rico is $24,000 ($2,000 a month), according to Puerto Rico Department of Labor & Human Resources statistics.

For Puerto Rico as a whole, the ABC report projected a total of 98,428 new units for 2006 through 2010, an average of 19,685 units per year. Previous ABC projections had envisioned an annual average demand of 21,856 new units. According to the report, this is due to the weakening economy, fewer people with purchasing power, lower employment and slower income growth added to people’s uncertainty about the island’s overall situation.

In all, the construction sector has steadily declined in activity, which has only intensified in recent times, and not just regarding public infrastructure projects.

During Fiscal 2008, which ran July 1, 2007 to June 30, 2008, the island’s battered construction industry showed continued deterioration over the number of construction permits and housing units approved.

Furthermore, the number of permits for housing units during Fiscal ’08 registered its biggest drop in seven years while the total value of approved permits experienced a jump of 12.9% compared with Fiscal ’07, according to the Planning Board.

In absolute terms, the increase in total value of approved permits in Fiscal ’08 was $283.1 million, from $2.19 billion to $2.47 billion. The private sector reflected an increase of $86.5 million, or 4.8%, when compared with Fiscal ’07. Meanwhile, the value of public-sector projects grew $196.6 million, or 48.7%, in a similar comparison.

The number of approved permits in Fiscal ’08 experienced a reduction of 1,101 permits, or 12.2%, from 8,997 permits in Fiscal ‘07 to 7,896 permits in Fiscal ’08. The private sector reported a 12.6% drop while the public sector showed a 7% decrease in the number of permits during the same comparative period.

During Fiscal ’08, the number of housing units reflected a reduction of 2,101 units or 15.2%, from 13,849 units in Fiscal ’07 to 11,748 units in Fiscal ’08—the biggest decline in seven years. Housing units by the private sector declined 14%, or 1,831 units, when compared to Fiscal ’07 (13,058 in Fiscal ’07 to 11,227 in Fiscal ’08). Meanwhile, housing units by the public sector decreased 34.1% or 270 fewer units with respect to Fiscal ’07 (791 units in Fiscal ’07 to 521 units in Fiscal ’08).

For Fiscal ’08, cement sales (measured in 94-pound bags) decreased 10.7%, from 39.8 million 94-pound bags in Fiscal ’07 to 35.5 million 94-pound bags in Fiscal ’08—the lowest level in seven years. Meanwhile, cement production declined 2.8%, from 34.2 million bags in Fiscal ’07 to 33.2 million bags in Fiscal ’08—also a seven-year low.

Cement sales and production are considered key construction-industry indicators.

However, there are signs this segment will see more activity in the near future, with the unveiling of such massive infrastructure projects as Mayagüez 2010, destined to be the site of the Central American Games in 2010, the Ciudad Red initiative for development around the Urban Train line, extensions to the Urban Train to Caguas, Carolina and Old San Juan as well as the so-called Knowledge Corridor.

A number of tourism projects are also envisioned as are plans for redevelopment of urban centers in selected municipalities. Granted, such projects are dependent on the successful implementation of Law 212, which would give substantial tax benefits to developers working on projects in the so-called casco urbano or urban center.