Volume 41, Issue 12 - December 2006

Optimism Ahead for Commercial Construction 
Construction Forecast Conference Addresses Construction Increases 
By Megan Headley

The experts weighed in with their expectations for growth in the construction industry in the year ahead during Reed Construction Data’s Eleventh Annual Construction Forecast Conference, October 10-11, at the National Press Club in Washington, D.C. 

Joshua Scoville, director of strategic research of Property and Portfolio Research joked that “One thing we know about forecasts, we will be wrong.” But the experts offered serious data showing continuing increases in commercial construction. 
During his presentation about the United States construction economic forecast, Jim Haughey, chief economist for Reed, noted that the nonresidential boom will continue although residential construction has slowed. In commercial construction, Haughey said that project starts have increased progressively since last spring. He noted that starts from January-August 2006 have been 9.5 percent higher than for the same period in 2005. He added that construction spending was 15.8 percent higher in July 2006 than a year earlier. 

“Construction spending has been [higher] than construction starts,” said Haughey.

The nonresidential starts forecast Haughey offered showed the highest overall growth in 2006 (11.8 percent) with less dramatic increases in 2007 and 2008 (see Nonresidential Starts Forecast chart on page 51). 

Growth By Sector
The speakers broke the commercial construction market down further into a few specific sectors where they expect some growth, notably: lodging, manufacturing, office and health care construction.

“Lodging is a hot market this year and office is the lagging market,” Haughey began. 

Ken Simonson, the chief economist of the Association of General Contractors of America offered the general contractor’s business outlook. He still expects six to 12 months of strong growth in lodging construction. High room rates and occupancy rates at hotels and resorts have continued to boost lodging construction—up 46 percent from July 2005 to July 2006, said Simonson. 

Haughey continued, “Construction in the office market probably won’t peak for two years.” 
According to Scoville, who presented the outlook for future development in commercial construction, “We’re seeing office [construction] pick up as well.” He noted that compared to apartment construction, office construction is experiencing a “slower but still steady recovery.” 
Simonson said that office construction has seen 12-percent increases from July 2005 to July 2006. 

Scoville added there is still a new supply of office buildings, and that supply never really “shut down,” one reason growth hasn’t increased more.

According to Haughey, construction in the health care sector will soon be fueled by a surge in health care insurance premiums and public medical programs. 

Simonson said he feels that health care construction is “catching up” after years of cutting back. He also said that he sees the health care industry increasing construction to “catch up” on new and changing technology. He expected that health care modernization plans could keep construction up in this sector for as long as a decade. 

With regards to manufacturing facilities, Haughey said that manufacturing capacity utilization is up near 82 percent, which is above the usual threshold for a surge in capacity investment. Simonson added that as production is strong, he still sees growth in manufacturing plant construction. Scoville said that most warehouse construction will be for large projects.

In addition, Haughey noted that the education arena is growing as state and local tax receipts have continued to rise strongly for three years following a depression-level plunge in 2001-2002. 

“Retail market is in fantastic shape and has been in fantastic shape for several years,” added Scoville. “We are seeing a slight increase in construction.” 

He said that there has been a lot of strength in retail due to the strong housing market. He added that in the past a great deal of retail construction has been redevelopment, but is “today focused more and more on new construction.” 
Another area Simonson added to the list was “energy-related construction;” he said that construction will increase for facilities working to develop alternatives to oil. 

So where is all of this construction taking place? 

According to Haughey, the construction slowdown has been deepest in the South and West, and the Rocky Mountain States are on the top of construction growth (see Regional Construction Starts Trends chart on this page). 
“That’s become the biggest growth area in the country,” Haughey said.
 
Construction Labor Outlook
The speakers also commented on the construction labor outlook. 

Haughey predicted that there will be 120,000 new jobs in 2007 (150,000 were added in 2006). Scoville noted modest job growth over the forecast. He said that monthly job growth has slowed from an average of 175,000 per month at the beginning of the year to around 125,000 per month recently. He noted that total employment growth was at 1.9 million in 2006.

The speakers noted that with lower rates of unemployment it’s going to become difficult not only to find skilled workers but workers in general.

“They’re having a lot of trouble finding contractors,” said Simonson. 

“Companies will be forced to move shops where the labor is,” added Scoville.

Haughey said that he feels the labor pool has been reduced in part by stronger immigration enforcement and in part by aggressive hiring by manufacturers and motor carriers. 

As a consequence of demand for skilled labor, Haughey noted that wage costs will rise significantly. 

“Wage rate gains have lagged the economy in nonresidential and heavy construction markets but will accelerate in 2007,” he said. 

Increasing Cooperation
Scott Simpson, FAIA, chief executive officer and president of the Stubbins Associates, offered an architect’s perspective on some of the trends that he sees.

He discussed making the work of the construction trades—from architect to general contractor to subcontractors—more synchronized. 

“In the past we have isolated and segmented that work,” said Simpson. 

He elaborated that in the past the architect has done his job, the builder has done his job, contractors have done their individual jobs and there is little intersection among the trades other than sharing the blueprints. He added that contractors don’t think like architects and architects don’t think like contractors—and that’s the good news, not the bad news.
What Simpson pushed was collaboration between the groups—starting with the design process. 

“A big mistake we make is we don’t get our contractors until late in the design,” said Simpson. 

He encouraged other design professionals to bring contractors in early into the process. 

“We’re in the leadership business, design is our medium,” said Simpson. “We need to get used to thinking of ourselves as conductors of a process.”

He offered an example of one project on which he had recently worked, when a curtainwall fabricator had been brought onto the project during the design phase. 

In fact, Simpson, said, “They are doing the design process.” 

He said that this offered several advantages. For starters, there were no surprises during the glass installation “because the people who are putting it up designed it in the first place.” He also said that it resulted in a “much better looking design.” For any questions the architect may have had during the design process, a resource was readily available. Simpson also said he’d had no claims on jobs he’s done with this process “because we’re all in it together,” collaborating to prevent problems that may occur. 

And finally, Simpson said, the collaborative process saved money.
 
“Every single time we’ve tried it the cost has gone down,” he said. 

He explained that involving contractors early in the process can “lock down the price” of that contractor’s service. 
He said that if this trend picks up, it could lead to more work being done before it reaches the job site. 
“I’m also going to predict that we’re going to see more prefabrication,” he said.

Simpson also discussed how advances in technology have offered new opportunities for collaboration between the trades. New building information modeling (BIM) software allows contractors to email revised plans or questions to the architects, and vice versa, with results coming almost immediately. “There’s no need for everyone to come back to the office to reexamine the plans and discuss their options,” Simpson noted. 

“You can take what used to be a week, 10-day process and turn it into 2 to 3 minutes,” he said. “That’s a really big thing.”
One member of the audience asked how authorship is handled if everyone involved on the project is able to make changes to the blueprints via a shared file. 

Simpson replied that he didn’t find it difficult to work around licensing issues, if agreements were made among the contractors upfront. 

“The more I share authorship the better my work is,” he said. 

Simpson compared this collaborative style of building to another trend: green building. He pointed out that green building is no longer questioned as a trend. 

“This is going to be second nature,” he said. 

Megan Headley is an assistant editor of USGlass. 

USG
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