Construction Forecasters Look for Good
News in 2011
By Megan Headley, Ellen Rogers and Tara Taffera
“As we meet again next year, I hope we’ll be able say, yes, an expansion
is close at hand.” So were the closing words of Robert Murray, vice president
of economic affairs for McGraw Hill, during the McGraw Hill Construction
Outlook Executive Conference in October.
As one might infer from these remarks, it’s become clear that, for the
nonresidential construction industry, 2010 was not that year.
Forecasters are cautiously predicting that 2011 will be the year of expansion.
Murray predicts single-family housing will see a 25-percent increase in
new 2011 construction starts, and nonresidential will see an 8-percent
Kermit Baker, chief economist for the American Institute of Architects
(AIA), on the other hand, says there are a lot of reasons to be optimistic
about the future for the construction market.
“The first quarter of this year the direction of the economy changed and
that’s when we started hearing more about the possibility of a double
dip recession,” Baker says. “But the numbers are starting to look positive
and seem as though we are starting to pull out of the downturn.”
Inflation-adjusted total nonresidential construction spending numbers
are projected to be down 20 percent this year and about 30 percent on
the commercial side. Baker says the industry can expect recovery for 2011
as a whole, but probably a very modest one, with a weak first half and
a stronger second half for construction spending. Overall growth will
be about 1 percent, though a bit stronger on the commercial side.
“Finally, it looks like we’ll emerge from the construction downturn and
see some growth as we move in the latter part of 2011,” Baker says.
Ken Simonson, chief economist for the Associated General Contractors of
America (AGC), says 2010 will show that nonresidential spending is down
15 to 20 percent and residential will range anywhere from up 5 percent
to down 5 percent. Total construction spending will be down 10 to 15 percent
and material costs may be up by about 4 percent; labor costs will increase
less than 2 percent.
As far as 2011, he expects nonresidential will finally hit bottom in most
categories. And both single- and multi-family should be positive, bringing
total construction spending up between 3 and 7 percent.
A Look Back
Rather than greeting his audience with “what a difference a year makes”
Murray found himself looking at last year’s forecast (see December 2009
USGlass, page 28) and asking “what happened?”
That isn’t to say last year’s predictions weren’t correct—the predicted
declines were simply much steeper than expected. Murray had projected
a 4-percent decline for commercial buildings in 2010; in actuality that
became a 17-percent decline. “Institutional building also has shown a
greater loss of momentum than expected,” he notes. Rather than the expected
marginal gains, this segment saw a 7-percent decline in starts, with a
further 1-percent decline projected for 2011.
In other words, instead of moderate improvement in new construction starts
for 2010, “we’re looking for, at best, stability and predicting a 2-percent
decline,” Murray says.
Murray did try to offer his audience a “ray of hope.” He notes that commercial
building in 2010 is estimated at down “only” 17 percent, compared to a
43-percent decrease in starts for 2009. “So the slope of descent is easing,”
Looking at these past predictions, 2011 is coming in with its share of
uncertainty. The economy is still facing headwinds, Murray says, adding,
“There is still the risk of a double-dip recession taking place.” In addition,
“If you look at spending and employment, the downturn is still underway.
Looking at [construction] starts, it’s a little more indeterminate whether
we’ve leveled out …”
Consumers and businesses continue to bring down debt, so little spending
is occurring for construction, he elaborated. The effects of the economic
stimulus are fading further impacting spending. His expectation is that
it will be roughly mid-2011 before hiring begins to pick up.
The forecasters continue to watch spending for signs of improvement.
Recent surveys of bank lending officers show, “Lenders are now easing
lending standards and that represents a change and ultimately that should
have a positive impact [on construction],” Murray says. This change should
be setting the stage where lending can begin to pick up for business loans,
although not necessarily real estate loans. He predicts that lending will
begin to improve in the 2011, 2012 timeframe.
Jim Haughey, chief economist for Reed Construction Data, says credit continues
to be a problem.
“As low as rates are, a lot of people still cannot get credit—and it doesn’t
matter what the rate is if you can’t get it or your banker doesn’t have
it,” he says.
Haughey explains that typically, when times are good, commercial developers
put up 20 percent of the anticipated price of the development and the
banker would provide the balance. Now those requests are for 40 percent.
“Most homeowners and a lot of small contractors and developers borrow
from regional and local lenders and many of these have no money at all
available for real estate loans,” Haughey says. “In the case of many smaller
lenders, no re-capitalization is taking place and they are carrying a
huge excess of bad real estate loans.”
Haughey also points out that public construction funds will be declining
in 2010-11, followed by slow growth for several years. Total construction
spending, he says, is near the bottom, likely by the end of 2010 or start
“We’re anticipating this year construction spending will be down about
10 percent and up about 5 percent next year. It should be up 12 to 13
percent in 2012. This is about a year late compared to what happened in
most economic recoveries,” Haughey says.
According to Simonson, the construction industry can expect to see “less-than-trend
growth” in the coming months, “bad news for construction.”
Simonson says total construction spending has been tailing off since early
2006 and in last 12 months (August 2009-2010) it’s down 10 percent.
“Private nonresidential held up great until the economic and financial
miseries of late 2008 and since then it has been sagging,” he says. “Private
residential started falling in early 2006, tumbled all the way until the
housing tax credit took effect in early 2009 and then rose until the tax
credit went away and is now tailing off again. In the last 12 months it’s
down 2 percent.”
As far as public construction, Simonson says it has been rising since
the beginning of 2010 and in the last 12 months is down just 1 percent.
On the other hand, Baker points to trending in commercial property values
as a reason for some optimism about the construction outlook. “We did
see a very steep decline in commercial property values during this cycle.
It peaked after the housing prices peaked in mid-2007, but fell harder
than the housing prices decline; commercial property values fell about
40 percent, peak to trough, and housing prices nationally fell about 30
percent,” he says.
As far as commercial property values now, Baker says the second-quarter
numbers released by the MIT Center for Real Estate are very positive.
“We think there is some hope that the significant decline we saw in commercial
property values may turn around faster than the decline in housing prices,”
Multi-family housing was one of the pleasant surprises of 2010, forecasters
say. “Multi-family has made a surprisingly decent rebound mid-year, compensating
for the single family lull,” says David Crowe, chief economist for the
National Association of Home Builders (NAHB). He acknowledges that the
rebound had come as a surprise, as earlier this year he’d predicted that
multi-family construction starts in 2010 wouldn’t surpass those seen in
Last year Murray had predicted a slight increase in construction starts
of 5 percent, which became a 9-percent increase in actuality. He expects
that segment to see further growth in the area of 24 percent in 2011.
“Multi-family has picked up in part because of the tax credits for condos,”
Crowe notes that another contributing factor is, not surprisingly, increasing
number of renters who have had their credit destroyed as homeowners.
According to Crowe, this area is among those leading in recovery. “It’s
only retardant is the same as in single-family [construction], and that’s
that builders are having trouble getting credit.”
Among the hot spots Murray sees for this segment, based on construction
starts in 2010, are New York, followed by Washington, D.C., Boston, Houston
Looking back, however, Simonson says that multi-family spending was down
52 percent from August 2009-2010, while improvements, additions and renovations
to existing single- and multi-family are up 4 percent.
As far as permits, Simonson says multi-family appears to be bobbing up
and down and is now up over the past 12 months. It, however, took another
dive in September. Simonson says we’re starting to see markets where affected
rents are rising and vacancies are dropping … “eventually we’ll see developers
of apartments back on the market; the condo market will remain depressed
until 2011, and maybe beyond.”
In focusing on specific nonresidential segments, Murray notes, “Because
activity is so low right now it is very easy to get double-digit [percentage]
gains—but you also have to look at the absolute increases in terms of
For stores, Murray expects a nearly 18-percent decrease in 2010, followed
by a 19-percent increase in square feet started in 2011.
“There’s no question we’re looking at an over-stored nation,” he says,
adding, “still … we are seeing some activity take place.”
Rather than starting construction on new stores, Murray says, “Some of
the more financially viable retail chains are engaged in some renewal
of formats in order to be competitive.” For example, Walmart is considering
constructing smaller stores in urban areas in order to continue its expansion.
Hotel construction is facing difficulties as well. While Murray forecasts
an 11-percent increase to 20 million square feet in 2011, “20 million
square feet for this category is still pretty paltry,” he says.
Following a 28-percent decline in office building construction in 2010,
Murray predicts a 13-percent increase in 2011 to 59 million square feet.
“The stage is being set for some resumption of the office building market,”
Murray says, pointing to a few early signs.
According to Murray, a number of large corporations are beginning to post
gains in their earnings, and if those companies want to continue growing
some investments in buildings, and people, will be necessary. He points
to facility expansions begun for Cox Enterprises in Atlanta and the Canon
headquarters in Melville, N.Y. Data centers in particular, Murray says,
are breaking ground on new buildings. By region, Murray notes, D.C. continues
to be the most active in terms of the square footage.
“In thinking about the office market you have to step back and look at
the fundamentals,” he says. He points to expectations that office employment
will start to pick up in 2011 or 2012. “The market is still in bad shape
but we are seeing signs [it] is leveling off,” he adds.
Overall, Murray says he expects “stronger gains taking place in the 2012,
If multi-family construction was a pleasant surprise in 2010, institutional
starts were a glaring disappointment. Overall that category saw a 17-percent
decrease in construction starts in 2010, with a predicted 2-percent decline
“Schools essentially have lost momentum,” Murray says. “This year we’re
looking at an 18-percent decline and it’s going to continue in our estimate
in 2011.” He points to the dampening of state and local budgets as a contributor.
School districts facing decisions to lay off more teachers are clearly
holding off on more construction. Fortunately, he adds, “The college and
university segment has not seen as steep a drop as has K through 12.”
Health care was flat last year at 68 million square feet in starts, and
Murray predicts a modest pickup in 2011 of 6 percent.
Murray admitts the forecasted 1-percent drop in institutional buildings
overall is a best case scenario, with the potential for a 5- to 10-percent
decrease as a worst case possibility. The saving grace for this market
segment, he comments, is that it is not as volatile as single-family or
Overall, nonresidential construction is predicted to have an 18-percent
decrease in construction starts in 2010, followed by an 8-percent increase
in 2011. Compared to the peak in 2007, “you’re still talking about pretty
low levels,” Murray says.
In looking back at previous downturns, Murray says, “I guess what’s different
is the size of the downturn in terms of the most recent construction cycle.”
He adds, “There’s no question this has been a real landmark downturn …”
The good news is that increases in commercial construction are in sight.
“Personally, I think commercial building could pop in a positive way in
2012, 2013,” Murray says. To get to that point, he added employment growth
must strengthen and banks must start lending.
The bad news? There’s a lot of uncertainty regarding the long year ahead.
Megan Headley is the editor and Ellen Rogers and Tara
Taffera are contributing editors for USGlass.
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