The Olympics will provide plenty of work over the next six years, but what happens afterwards? Could there be a major downturn, or are we overestimating the impact of the Games on the market? Roxane McMeeken weighs up how painful the 2012 hangover could be

Imagine it’s 12 August 2012. We’re in London’s Olympic stadium and we’ve just watched the closing ceremony. The final puff of smoke from the inevitable firework display has just disappeared into the night sky... What happens next?

Right now in 2006 you might be all set to take on the slew of work emanating from the Olympics and from clients wanting to get other big projects finished in time for the event. Or perhaps instead you plan to take on work left behind by the big fish while they’re distracted by 2012 projects? Either way, construction consultants are in for a busy six years.

But what about the morning after the party? Construction has been growing steadily for 11 years, bar a temporary dip in 2005, so if you add in another six it would mean an unprecedented 17 years of rosy conditions for the industry. How likely is this to continue?

It’s worth thinking now about how to tackle the possibility of a post-2012 “hangover”. That process must start with an assessment of how the market could look.

Experts agree there will be a downturn in construction after 2012 but there is a debate over how severe it will be.

Only one of those we ask is prepared to put a figure on the downturn. Peter Fordham, associate in Davis Langdon’s cost research department, reckons there will be a fall in output of roughly 2% for one year after the Olympics. But he adds the caveat that there are many unknowns between now and 2012 that could affect this figure. These are chiefly the global economy, which will drive private sector investment, and government policy, which will drive public sector investment. At this stage we do not even know which party will be in government, Fordham points out.

Joe Martin, director at the BCIS, believes there will be a “significant slump in demand” after the Olympics. He says while the programme to build the facilities to host the event does not in itself constitute a huge project, there will be a rush of projects throughout the UK all aiming to finish before the Games. Martin points to the extension to the Tate Modern. The £215m project is not directly linked to the Olympics but its finishing date is 2012. Martin says: “If you are going to put a new ride in a theme park, you're going to do it before the influx of visitors in 2012.”

As a result, in the run up to the Games we will see a drain on resources and competitive market conditions and then half way through 2012, a sudden slump in workload. He says there will be a particular impact on infrastructure and house-building resources before the Games, due to work needed on the Olympic park, transport systems feeding the park and the Olympic village.

Graham Matthews, partner at EC Harris, argues that although there will be a downturn it will be short-lived. He reckons it will last between six and nine months.

He predicts the UK economy as a whole will see a dip in activity during this period. This will result in, for example, fewer hotel room bookings and a fall in volume of food going through restaurants.

But Matthews says: “While the Olympics is big, it’s not that big: as a percentage of construction volume in the Southeast it is small, plus it’s spread over five years and country-wide.”

He adds that construction of Heathrow’s terminal 5 is a project of a similar size and it is not “having a major meltdown effect on the market either”.

Graham Kean, partner and head of public sector at EC Harris, adds that similar fears of a downturn in the UK after the Millennium, which also sparked a flurry of activity, were unfounded. “There was a hiatus after the Millennium but it was short-lived,” he says, although he concedes a handful of Millennium projects went on long after 2000 passed. The Spinnaker Tower in Portsmouth, for example, was only completed this year. The deadlines for Olympic projects are clearly not negotiable.

Matthews argues that over the long term the post-Olympic effect will be a boost to construction because hosting the Olympics tends to raise a country’s profile and attract investors.

Martin at the BCIS adds that some big projects are likely go on after the Olympics, such as the redevelopment of Kings Cross and Stratford City. “The people working on Stratford may well say they don’t want the area to be a building site during the Games, so lets not build until after 2012. And look at Crossrail – is it sensible to be digging a load of holes in London when all these visitors are in town or would it be better to wait?”

The Olympics itself will also provide a significant chunk of post-Games work. The many temporary sports venues will need dismantling and the Olympic Village must be converted into a residential development. The athletes’ dwellings will need to have kitchens added, for example.

But this alone won’t be enough to keep the entire construction economy afloat, admits Matthews at EC Harris. He says in order to minimise the post-Games downturn the construction industry should already be thinking about which projects must be kicked off in the period immediately after the Olympics. “We should think about procuring them in 2010 and starting onsite in 2012”, he says. Davis Langdon’s Fordham adds that firms could try to pick up more work abroad. Rather like lining your stomach before the party, forward planning now will minimise pain later.

Construction in Sydney: The effects of hosting the 2000 Games

Of the Olympic hosts of recent years, Sydney probably has a construction industry most directly comparable to that of the UK. Ron Moir, managing director at WT Partnership in Sydney, says after the 2000 Games “there was no slump in Sydney, only a bit of a slowdown while we all took a breather in late 2000”.

He says a pre-Olympics spike in costs and dearth of labour hit the market from mid-1999 to mid-2000.

He adds that prices rose by around 7% during this period and then remained at the mid-2000 level until early 2002 when they started to escalate sharply.

The Sydney construction market appears to have been saved from a slump by buoyancy in other sectors – first residential, which was booming before the Games and for around four years after them, and later by retail and infrastructure.

Benefits of the Olympics and how to prolong them

Post Games positives for UK construction:

  • Increased profile/exposure:
    Hosting the Olympics puts countries on the map and gives them the chance to showcase their attributes

  • Development of new urban infrastructure: Often needed before the country can attract spending for major projects

  • Opportunities for urban redevelopment: The Games can act as a catalyst for ongoing redevelopment. This could happen in the UK with projects planned for the rest of the Thames Gateway

Environmental issues:
The Olympics often gives countries the chance to show off an attractive environment (e.g. Sydney) or to tackle difficult environmental problems (e.g. Athens).

How to prolong the Olympic party:

  • Competitive business environment:
    Quality of the labour force and business infrastructure will be critical to attracting occupiers. Sydney and Atlanta did well in this regard.

  • Quality of tourism attractions:
    Cities with higher quality attractions are likely to do better. Sydney and Athens did better than Atlanta, for example

  • Ongoing promotional campaign:
    Recognition of the need for a prolonged and well-funded campaign continuing well after the event is critical in translating the short term interest into long term benefits.

From a report by Jones Lang LaSalle called Reaching Beyond the Gold: The Impact of the Olympic Games on Real Estate Markets

Source

QS News