In Florida and elsewhere, thank smart politics for a thriving construction sector

The construction sector has experienced a wildly dramatic, challenging market these last several years.

From the near-shutdown during COVID to the sputtering economy we see or hear about now, and in between, rampant demand and acceleration of major projects has transpired. During this oscillating period, shipping delays and irregularities, material and labor availability issues, and a high degree of market price volatility and inflation has also plagued this sector.

Somehow construction, which is so critical to the U.S. economy, still thrives today. Thanks in part to smart politics – both the current political climate and recent ground-breaking legislation – certain sectors in construction are actually flourishing. This column will highlight a few salient examples where the intersection of compromise politics and the business community, irrespective of where you are on the political spectrum, is actually working.

Affordable housing

The need for affordable and workforce housing in America is overwhelming.  In Florida, we are taking industry-leading measures to promote development in this sector. On March 29, Gov. Ron DeSantis signed into law SB 102, otherwise known as the Live Local Act, representing the largest investment for housing efforts in Florida history.

The legislation implements a myriad of new measures to spur growth; the most game-changing is the zoning preemption framework on commercial and industrial zoned land, with deference given to affordable housing projects.

These particular measures provide for expedited approvals and favorable consideration of densities, height restrictions, and use. Also important are the expanded scope of property tax incentives, additional state funding and tax credits, and the public registry requirement, where local government must prepare an index of publicly-available land that can be used for affordable housing.

While demand for affordable housing had already accelerated in this sector, the favorable legislation coupled with the favorable political climate to address these obvious needs, new projects are being planned despite the otherwise highly unfavorable capital markets.

Some Florida counties and municipalities are also proactively making industrial and commercially zoned lands specifically available for immediate, affordable housing development and demonstrating an openness to public-private partnership (P3) ventures under Florida's leading-edge P3 legislation. 

The likely next big step will be P3 being used as a progressive delivery methodology by local governments to promote affordable housing development, similar to how it is has been used in recent times to redevelop blighted neighborhoods and downtown urban zones. 

Indeed, Florida’s innovative P3 legislation actually allows developers to submit unsolicited P3 proposals to urge local governments to implement this very concept.

On the heels of Florida’s new affordable housing legislation, and across the other side of the country and the political spectrum, California has followed Florida’s lead with its own pieces of affordable housing legislation signed into law by Gov. Gavin Newsom. 

California’s SB 6, also known as the Middle Class Housing Act, codifies very similar principles of favorable zoning and density considerations for affordable housing. Among other things, a developer can use a site currently zoned as commercial or parking for affordable housing without having to go through a rezoning process. The corresponding AB 2011 legislation enacted at the same time, has a focus on urban infill development in commercial corridors.

With the Florida and California affordable housing legislation now signed into law, other major states are sure to follow.  According the U.C. Berkeley research and summary of how states are incentivizing local housing production, released in February, many states are trending in this direction already, but Florida and California are certainly leading the way. 

Federal and state infrastructure funding

On November 15, 2021, President Biden signed into law a historic infrastructure bill, the Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Law), which allocated approximately $1 trillion to a broad array of much-needed infrastructure, including evolving sectors of green energy, electric vehicles, and technology.

The law has already allocated billions for Florida, with some projections ranging into the tens of billions, covering highways, airports, and utility infrastructure, among other things. As recently as June 26, the National Telecommunications and Information Administration announced its list of recipients for high-speed internet infrastructure funding, with Florida being allocated approximately $1.2 billion. 

Florida, in a July 7 announcement, immediately disclosed the allocation of $247 million of this funding to approximately 60 specific projects across the State. Some additional and notable examples of Bipartisan Infrastructure Law funding include $69 million to Orlando International Airport, over $42 million to Miami International Airport, and over $32 million to Fort Lauderdale International.

Not to be outdone, DeSantis had announced the allocation of an unprecedented additional $14.7 billion to the Florida Department of Transportation – the Framework for Freedom Budget Proposal - for roadway and infrastructure expansion under the 2023-24 budget.

This funding was in addition to the January 2023 "Moving Florida Forward" infrastructure initiative, which added $7 billion to the DOT budget to expedite 20 transportation projects in Florida. The intent was to allocate a significant portion of the Florida budget surplus to necessary infrastructure needs, which will continue to spur economic stability and growth in Florida.  

The benefits to Florida from both of these government actions are incalculable. Leaving aside the significant infrastructure development that will benefit the citizens of this State, these investments will directly benefit the infrastructure and construction sectors, in addition to many ancillary services (such as manufacturing). The benefits are based on the broad array of new Florida infrastructure projects already in development and many already under construction.

Manufacturing and 'Buy America' requirements

Though recent headwinds are being encountered, manufacturing in America has experienced an amazing resurgence.

According to the U.S. Department of the Treasury, real manufacturing construction spending has doubled since the end of 2021. Prospects for increasing strength in manufacturing for construction would appear high as Engineering News-Record recently reported that manufacturing construction starts increased by 185% last year.

The "Buy America" provisions in the Infrastructure Law ensure that these federally-funded projects use materials and products manufactured in the country. One of the Infrastructure Law’s provisions requires that all the iron, steel, manufactured products, and construction materials used in infrastructure projects are produced in the United States.

While federally-funded projects have always had some degree of protectionism built in, the new Infrastructure Law enhances those manufacturing requirements by requiring a waiver to be submitted that is then placed online for public review. As a consequence of these requirements, industrial development is spurred as well.

While Florida does not offer as many direct economic incentives as some other states, there are financial incentives that the State provides to manufacturers. One is a tax exemption for all sales and use taxes on investments in machinery and equipment used in manufacturing and research.

Florida also offers performance-based grants for manufacturing companies in "high-impact" sectors. These incentives are yet another way that the political climate of Florida is helping the construction industry continue to grow.  

Space Florida is perhaps of the best examples of this economic opportunity; indeed, even Jeff Bezos located his Blue Origin space launch platform and rocket manufacturing plant here.

Florida's shortened period of repose

On April 13, DeSantis signed SB 360 into law, which significantly reduces the time limit for owners to file suit against contractors and design professionals for construction defects, and imposes a more stringent standard for bringing a claim under the Florida Building Code.

The Bill specifically cuts Florida’s period of repose – the outside period of liability on defect claims – from 10 years to seven years. The statute of limitations period remains four years, generally running from the date of completion. The period of repose relates to latent defects, meaning that claims for latent defects carry a period of limitations of four years from date of discovery, but in no even greater than seven years.

While the changes here are nuanced, what is clear is that this legislation will influence construction pricing in a positive, albeit hard to quantify, way.

Contractors price risk. When their period of liability drops by 30% from 10 to seven years, perhaps their pricing for risk drops as well. It may also affect the size of contingency buckets that contractors normally require, as the size of that contingency turns in part on their risk register.

The insurance costs, in theory, may also go down. Contractor Commercial General Liability policies, through Completed Operations coverage, generally provide, either through project-specific policies or required renewals, for insuring the 10-year period of risk under Florida's repose period. Lowering the risk period should directly translate into lower coverage costs.

Some concluding thoughts...

While division and political posturing has become the norm, so too has a need for the construction market to continue to grow and prosper. Thanks to some of the recent political decisions and actions, we are seeing a resurgence and continued trend upward in various sectors of the construction industry. 

Some of these trends will carry this sector through a recessive economy and one challenged by availability of capital and significant higher interest rates.