USGlass -2008 January

Volume 43, Issue 1 - January 2008

2008 Construction Outlook
Commercial Construction to Decline

by Tara Taffera

This year marks the first decline in construction starts since 1991, according to the Department of Commerce, said Robert Murray, vice president of economic affairs for McGraw-Hill. These comments were made during McGraw-Hill Construction’s Outlook 2008 Executive Conference held in Washington, D.C., on October 24. Murray presented the 2008 outlook for U.S. construction activity.

Overall, Murray is predicting commercial building construction starts to drop to $91.1 billion from a total of $97.3 billion in 2007.

The 6-percent drop in commercial building dollar volume corresponds to an 11-percent slip in square feet. Tighter lending standards and the slower absorption of space are expected to contribute to a measured downturn for stores, warehouses, offices and hotels.

Murray predicated a bigger drop in store construction than has occurred recently, down 10 percent in 2008 to 270 millions of square feet (msf). Wal-Mart, one of the major players in retail construction, has announced plans to scale back expansion, and that sentiment seems to be echoed by big box retailers Home Depot and Lowe’s. There is also a continuing shift to smaller venues, known as “lifestyle centers.”

After a pause in 2005, when many projects were reassessed due to higher costs, office construction strengthened once again. However, Murray is predicting an 8-percent drop in the msf constructed in 2008, from 215 msf in 2007 to 197 msf.

While hotel construction soared in 2006, 2007 showed a leveling off. 2006 and 2007 showed broad expansion, with numerous projects in Las Vegas and a number of convention center and “condo” hotels. The hotel sector is expected to pull back on expansions in 2008, as revenues per available room are showing slower rates of growth.

2008 is expected to see a 4-percent increase in the dollar volume of educational building construction, and a 1-percent increase in square footage. Numerous states, most notably California, have passed school construction bond measures in recent years. Major universities have increased their capital spending plans, keeping college and university construction on an upward track.

While construction of healthcare facilities reached a new high in 2006, that market is now settling back. 2006 saw 109 msf built in the healthcare arena, while 2007 saw an 8-percent drop to 100 msf; that downward trend is expected to continue with a 4-percent drop in 2008 to 98 msf.

“The credit crunch that emerged at mid-2007 continues to be a major concern for construction and the overall economy,” said Murray. “As a result, we’re now predicting downturns in the previously resilient multifamily and commercial segments, as well as continued weakness in single-family home construction.”

Housing Market—No Sign of Recovery in 2008
“I don’t think anyone is looking for housing to turn around in 2008,” said Murray (for more on the housing market, see the December 2007 issue of DWM magazine or go to www.dwmmag.com). The bleak forecast is due in part to tighter lending conditions and high inventories, according to Murray. Many speakers addressed the inventory problem including Kermit Baker, chief economist for the American Institute of Architects (AIA), who presented an outlook for the housing and remodeling markets. He cited the statistic that inventories of vacant for sale homes have ballooned—with an increase over 2005-2006 estimated at 750,000-800,000.“This is the problem we have to work off until things get back to normal,” said Baker.

He said a recovery could be possible in 2009, but was tentative with that prediction.

Though homebuilding is in the midst of a significant downturn, Baker said, “With every day this is becoming more significant than first expected.”

Though the next few years may look bleak, he did say that the long-term housing outlook is positive as there is strong household growth (which should be even greater in the coming decade than in the last), a vibrant second home market and a more efficient industry as a whole. Negatives include affordability, land-use restrictions and high energy costs.

While new construction falters, Baker says remodeling does offer opportunities. Positives for the long-term remodeling outlook are the aging housing stock, rising land prices/energy costs and high homeowner equity levels. “Often this translates into home improvement spending,” he said.

Building Materials to Remain Relatively Flat
John Mothersole of Global Insight offered his predictions for building materials pricing.

“Collectively, pricing is projected to be flat in 2008,” he said. Following are a few key predictions:

Aluminum: “Aluminum markets in North America look terrible. Extrusions are even worse. The problem with aluminum is that alloy metal prices have been going through the roof.”
Steel: “The next couple of months look problematic. Price increases are coming—they’re inevitable.”
Lumber: “The story here is the production cut backs. There is not an oversupply and that will help stabilize market pricing.”

Economic Outlook: Fair
David Wyss, chief economist for Standard & Poor’s, offered his economic outlook and said the U.S. economy has slowed after three strong years. “Housing is the only major weakness; the rest of the economy is still growing near 3 percent,” he said.

He noted that the weaknesses aren’t found in the high-priced markets; rather, the default rates are highest in the Midwest and the South. He said that employment is finally improving, which is helping construction. However, he questioned whether or not the consumer can keep spending and said the saving rate will remain low.

“A risk of recession remains if further terror attacks damage confidence, while oil prices soar. Financing problems push the dollar down and U.S. bond yields higher,” he told attendees. This falling of the dollar value has some companies like Canadian door manufacturer Harring Doors concerned.

“As a Canadian manufacturer who sells into the United States, the presentations given confirmed that the dollar will decline, which won’t help us,” said Sandy McTavish, vice president, manufacturing, who attended the conference for the first time this year.

Tara Taffera is a contributing editor for USGlass magazine.

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