National Construction
Outlook
(4th Quarter 2009)
The end of 2009 brought down the curtain on the most recent seven-year
business cycle with a resounding thud. Like with the overall economic cycle,
the loss of jobs in construction lags the start of the contraction in
construction by six to twelve months, and at year’s end the deepest
construction job losses in a generation had occurred. According to the
Bureau of Labor Statistics, construction employment is 15% lower than
October 2008. Maintaining the cyclical trend, losses in non-residential
labor and crafts were even with the average monthly loss of the past year,
or slightly more than 50,000 jobs, while losses in residential employment
had slowed to about one-third the average monthly loss over the same period.
If the cycle holds form, non-residential job losses should ease in coming
months as a recovery begins.
Looking towards the other side of this recession, a quartet of national
construction economists weighed in on their view of how this business cycle
would unwind.
Robert Murray has been the vice president of economic affairs for
McGraw-Hill Construction (MHC) for over 15 years. McGraw-Hill has been
reporting modest improvement in several construction sectors since spring,
but has seen the overall level of construction decline precipitously. The
company’s forecast is for the first stages of a rebound in 2010. Their
forecast is for the level of construction starts in 2010 to climb 11%,
following the 25% decline predicted for 2009.
“The U.S. construction market in 2010 will be helped by growth for several
sectors, following three straight years of decline that brought total
construction activity down 39% from its mid-decade peak,” says Murray. “The
benefits from the stimulus act will broaden in scope, lifting not just
highway construction but also environmental public works and several
institutional structure types. With continued improvement expected for
single family housing, after reaching bottom earlier this year, the overall
level of construction activity should see moderate expansion in 2010.”
MHC predicts that single-family housing for 2010 will advance 32% in
dollars, corresponding to a 30% increase in the number of units to 560,000
(McGraw-Hill Construction basis). Multifamily housing will improve 16% in
dollars and 14% in units, after steep reductions in 2008 and 2009.
Commercial buildings will drop 4% in dollars, following a steep 43% drop in
2009. The weak employment picture will further depress occupancies, making
it even more difficult to justify new construction. Institutional buildings
will begin to stabilize after losing momentum in 2009. Square footage will
retreat another 2% after sliding 23% this year. The dollar amount of
construction for this sector will edge up 1%, helped by a growing amount of
energy-efficiency upgrades to federal buildings and continued strength for
military buildings. Manufacturing buildings will drop 14% in dollars and 3%
in square feet, hampered by the substantial amount of slack manufacturing
capacity. Public works construction is expected to rise 14%, given more
wide-ranging strength across all project types. Electric utility
construction will slip 3%, continuing to settle back after a record high in
2008.
Murray warns that the monthly data continues to suggest that any improvement
in 2010 is not likely to follow a straight line. “The September decline for
construction starts is one more reminder that the very modest upward trend
that seemed to take hold during the spring will be uneven and at times
halting,” he says. “More of this uneven performance can be expected in
coming months, given the divergent behavior from construction’s main
sectors. On the plus side, the steep decline for single family housing has
reached its end, and funding from the stimulus act is beginning to have a
broader impact beyond highways and bridges.”
Ken Simonson, economist for the Associated General Contractors of America (AGC),
sees opportunities for building contractors from the delayed impact of the
ARRA funding, but his forecast is for continued softening in demand for
construction.
“Expect to see some improvements in areas that are consumer or stimulus
driven, like retail, higher education and hospitals, but not enough to
offset further declines in office, hospitality, warehouses and spending at
the state and municipal levels,” predicts Simonson. AGC sees an overall
decline approaching four percent, with non-residential down about five
percent, offsetting an expected increase in residential spending.
Simonson again encourages contractors that the stimulus impact will be
greater in the building sector in 2010.
“Even though there was $35 billion in ARRA to go directly to building
construction, the distribution was spread among many more agencies than the
infrastructure spending, and many were not prepared,” he says. “I talked
with a contractor in Lexington, Kentucky, for example, who told of winning a
contract to do a renovation at a national park. There were no problems, but
the contracting officer asked if he could wait six to eight weeks for the
preconstruction meeting because he was swamped processing other contracts.”
Simonson says that the consolation is that more stimulus dollars are still
to come in 2010 for buildings than for infrastructure. His biggest worry
heading into 2010 is the specter of rising material costs, which he predicts
will top five percent, and could go higher if some of the larger nations see
recovery early in the year. Such a run up could derail a fragile real estate
recovery here if costs get ahead of budgets.
Business conditions will improve in 2010 because cyclical automatic
recessionary correction mechanisms will go into effect, rather than more
government intervention, according to James Haughey of Reed Construction
Market Data. Haughey believes that most businesses took their medicine in
2009, drastically reducing inventories and cutting back production. The
result will be positive cyclical corrections going forward. But, he warns,
no significant growth is in the offing.
“The stimulus impact is now mostly behind us. Certainly there will be less
impact in 2010,” Haughey says. “The major economic improvements will come
from cyclical recovery factors. I think we’ll see GDP begin to recover in
the third quarter of this year, maybe as much as three percent. There is
already GDP growth in the economies of some of our foreign trading partners.
Credit is starting to ease, and the credit problems next year will be with
smaller and regional banks, and specialty credit firms, like retail
factoring companies.”
Haughey’s forecast is for modest improvement; however, not all sectors will
see it. Reed predicts double digit declines in office, warehousing, hotels
and power generation, which grew well ahead of demand over the past few
years. Moreover, he sees an extended period of cyclical correction,
especially for sectors in the most distress.
“Although there will be improvements, credit problems will persist
systemically through 2011-2012, but the headaches should be more steady than
dramatic,” he says. “There will be surplus space through next year,
foreclosures will continue to rise until mid-2010, public construction will
be well off due to sharply lower tax revenues and costs will begin to rise
ahead of inflation. It looks as if it will be 2012 before we regain the peak
level of construction of 2006.”
The housing market is the area that offers the most optimism (or least
pessimism) for 2009, according to Kermit Baker, economist for the American
Institute of Architects. He points out that the extended period of low
construction has helped reduce the inventory of houses for sale, a
precondition to the resumption of housing appreciation. Baker offers one
catch though:
“The number of vacant homes for sale went from 2.277 million in the first
quarter of 2008 to 1.916 million in July 2009, a significant reduction in
the inventory,” he said. “The unknown factor is the number of homes that
have been off the market waiting to go up for sale when things improve. An
unexpected increase in inventory would keep housing prices from rising
again.”
Baker also sees a trend emerging from the housing bubble that will influence
the future of residential construction. “AIA surveys residential architects
each year about their business. The AIA Home Design Trend Survey for 2009
confirms a couple of interesting trends,” Baker revealed. “First is that the
home size is getting smaller again. Architects reported that 42% of their
clients were building bigger homes in 2005, but only 4% in 2009. During the
same time, 13% of clients were building smaller in 2005 but 50% were
downsizing in 2009. While homes are getting smaller, energy efficiency and
aging accommodation features are growing in use, even when including them in
the design adds to the cost.”
Baker’s conclusion is that the combination of the demographic shift and the
economic impact of the 2008 market crash have altered the face of the
housing market for the near term, requiring less home with more
accommodations for accessibility and efficiency.
The AIA also provides one of the better trend indicators for the coming
health of the construction industry. Kermit Baker developed the
Architectural Billing Index to measure the relative health of the member
firms’ business now and in coming months. The survey asks each month whether
members’ billings and inquiries are higher or lower than the previous month.
A score of 50 indicates flat performance. Since design tends to lead
construction by six to twelve months, and improving ABI, especially one over
50, is a positive sign for contracting. Unfortunately, the current ABI
offers uneven indications about 2010.
(Above: AIA’s billing index shows weak improvement, even after eight months
of increased inquiries)
“September is
43.1, which is much better than the January index of 33.3; however, in
absolute terms it’s not an indication of real improvement,” explains Baker.
“The best news is that the index for inquiries remains above 50 (September
was 59) going back to February. But even that data may not be entirely
positive, since the recession has spurred increased marketing activity among
AIA firms, and the higher inquiry index could be an indication of more
architects pursuing the same amount of work.”
Declining commercial property values, recessionary pressures on consumer
demand and business growth, tepid housing recovery and lingering credit
problems all are weighing on the forecasts for 2010. Getting four economists
to agree on the market is unusual, but their scenarios may have the best
analogy in battlefield terms: 2009 marked the retreat, and 2010 will be a
time of retrenching and reclaiming earlier positions. None seem to expect a
charge again until another year has passed.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
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Indianapolis, Indiana 46240
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