Volume 46, Issue 11 - December 2011

feature

Changing Winds Forecasters Readjust Predictions for Nonresidential Construction Recovery
by Sahely Mukerji

The expected recovery for nonresidential construction has been pushed back to the middle of 2012, according to several leading economists.

Weak gains should improve in national GDP, personal income and jobs, said Ken Simonson, chief economist of Associated General Contractors of America in Arlington, Va., during Reed Construction Data’s economic forecast webcast, “Flat, Down or Up? Where is Construction Heading?” on October 13. “Sluggish growth in GDP has kept private sector hiring down, and has put a damper on all kinds of growth. No double-dip recession in my forecast,” Simonson said.

According to the 2012 Dodge Construction Outlook, there is a 40-percent chance of double-dip recession, up from a 20-percent chance at the start of 2011. In presenting the Dodge Outlook at McGraw-Hill Construction’s (MHC) 73rd annual Outlook Executive Conference on October 19, Robert Murray, vice president of economic affairs, predicted the construction industry will remain flat in 2012, with a GDP growth of 1.6 percent this year and 2 percent next year. “Nonresidential building had a steep drop in 2009, and hasn’t shown a lot of movement,” he said, “but the expectation is that if the economy can avoid another recession, it might grow. The one bright spot for the nonresidential sector is multifamily housing … The corner is being turned, but in a very slow and hesitant manner.”

Simonson agreed. Construction will depend on a lopsided activity, he said. “On the positive column there’s power and energy construction. Manufacturing construction has had a recent upturn and will continue strongly in 2012,” he said. “Warehousing construction has good prospects and hospital construction has come up after a 3-year slump. Apartments should boom. Federal, state, local cuts will continue. There will be little inflation.”

The upward trend in multifamily housing could be attributed to the growing number of renters. “The number of renters is growing by 1.5 million per year, and the number of owners is falling by half a million per year,” said Kermit Baker, chief economist for the American Institute of Architects in Washington, D.C. “There is a negative attitude toward home ownership: it’s constraining, and you can lose money.”

There’s strong rally in multifamily construction spending “with the latest 1-month change of 1 percent growth and 12-month change of 13 percent growth,” Simonson said. “Rental demand should rise as more people get jobs or move to military base realignment sites.”

Other than the sole bright spot in multifamily housing, recovery has been pushed back in the nonresidential segment, Baker said. “There’s a 9- to 12-month lead in design and turnaround activity. We expected the recovery in the beginning of 2011, but we went through a weak spell, so we’re still in the middle of 2012 before we see a full-blown recovery in the nonresidential front.”

Waiting for Recovery
Total construction spending has been dropping since 2006, Simonson said. “In August 2011 it was $799 billion, reflecting a 1-percent growth from August 2010 to August 2011. Nonresidential construction spending was $553 billion up until August 2011, reflecting a 0-percent net change in the last 12 months,” he said.

Total construction spending is estimated to go up 6 percent to 10 percent in the next 5 years, and private nonresidential spending will go from -2 percent to 2 percent, Simonson said. Material costs are also expected to go up 3 to 8 percent in the next 5 years, labor cost will rise 2 to 4 percent and bid prices will rise 2 to 5 percent.

Bernard Markstein, chief economist for Reed Construction Data, agreed with the growth in spending. “Total construction spending is already recovering, and will improve next year,” he said. “In 2011, total construction spending is $786.3 billion, down 2.2 percent [year-over-year], but by 2013, it will go up to $883.1 billion, up 7.2 percent,” he predicted.

Nonresidential building had a steep drop in 2009, and hasn’t shown a lot of movement, but the expectation is that if the economy can avoid another recession, it might grow.
-Robert Murray,
McGraw-Hill Construction

The overall level of construction starts in 2012 is expected to be $412 billion, following the 4-percent decline to $410 billion predicted for 2011, Murray said. The lengthy period of robust activity in the previous decade was first followed by steep declines in 2008 and 2009, and is now being followed by the extended low level plateau of 2010, 2011 and 2012.

Along with the starts, the confidence level of the constructioncommunity also is on the wane. In the first quarter of this year, the ENR Construction Industry Confidence Index showed the industry confidence from the business perspective was at 71; in the second quarter, it was 53; and by last month it was 38, said Harvey Bernstein, MHC vice president of Industry Insights & Alliance, one of the many speakers during the Outlook Conference. A score of 50 is stable for the construction industry. “Design firms are more positive than other industry players; contractors are most concerned with the present market,” he said.

A “Lost Decade” in the U.S.?

“Half-fast is how I would describe the U.S. economy,” said Beth Ann Bovino, deputy chief economist of Standard & Poor’s in New York City. “The pace of the economy has slowed and is likely to remain weak. After a recession ends, the usual growth the next year is 5 percent. We saw 3 percent growth in 2010, and estimating 1.7 percent this year, and 1.5 percent in 2012. Historically, unemployment usually doesn’t reach pre-crisis mode until 10 years after the recession is over. We have 9.1-percent unemployment now.”

For the economy to grow and avoid a double-dip recession, private financing is absolutely essential, Murray said. The other key factor is job growth. “We lost close to 9 million jobs since the recession began, and have only picked up 2 million since,” he said. “This year started off well with the addition of 179,000 jobs per month from January to April, but from May through September, it fell back to a pace of just 72,000 per month.”

For an economic recovery to be self-sustaining, employment gains at about 200,000 jobs per month are necessary, said Stella Dawson, U.S. specialist economics editor for Thompson Reuters.

The construction employment series issued by the U.S. Bureau of Labor Statistics was down 0.2 percent in the first nine months of 2011, compared to the last year. This follows the 8-percent reduction for construction employment reported for the full year 2010.

President Obama’s American Jobs Act, proposed on September 8, did not pass Senate vote in September, Murray said. “It is likely to be re-introduced piece by piece,” he said. The act includes a payroll tax cut extension for another year, and $105 billion for infrastructure work, including $25 billion to upgrade public school buildings, $5 billion to repair abandoned housing and commercial buildings, $10 billion to launch a national infrastructure bank and $50 billion for transportation. “Is this going to pass?” Murray was asked. “No way,” he predicted.

The lift from the stimulus act for buildings, as opposed to infrastructure, was modest with stimulus-related projects peaking at $2.1 billion in second quarter 2010, and retreating to $1.3 billion in this year’s third quarter.

On the positive side, corporate profits have been relatively healthy and firms are sitting on more cash, Murray said. “Back in 2008, corporate cash for U.S. nonfinancial firms had fallen to $1.4 trillion, but since then the level has gone up to $2 trillion.” The banking system is also healthier now than a few years ago. “In addition, low interest rates should remain low through next year,” he said.

The Federal Reserve’s July 2011 survey of bank lending officers showed continued easing of lending standards. For commercial and industrial loans, 22 percent of respondents indicated that they had eased lending standards to large and medium size firms during the second quarter of 2011, in relation to the previous three months. This marked the seventh straight quarter that lending standards on net eased, after tightening over the previous 30 months.

“On October 30, 2009, federal bank regulators issued guidelines on commercial real estate loans, encouraging banks to rework loans,” Murray said. “As a result, the volume of commercial and industrial loans went up 7 percent since October 2010.”

Commercial real estate lending fell off during the downturn and now seems to be lagging demand, Baker said. “During 2007-2009, owners/developers weren’t looking to borrow, but now the demand has started to pick up, but lending’s not easing up. In the last 6 to 9 months, 70 percent of architect firms nationwide reported stalled projects due to financing problems.”

Commercial property values fell further than house prices, Baker said. “House prices fell 30 percent from 2006 to 2009. Commercial property fell 40 percent from 2007 to 2009, but has recovered 15 percent of their loss.”

Two Forecasts for 2012: “Baseline” and “Recession”
Given the 40-percent chance of a second recession, Murray presented two forecasts for 2012: a “baseline” and a “recession” forecast. Per his recession forecast, total construction starts would decline 7 percent in 2012.

Commercial buildings will grow 8 percent per baseline forecast, but will be down 6 percent per recession forecast. Store construction peaked in 2007, then fell 75 percent over the next four years, Murray said. “Derived demand from housing market definitely true on upside of cycle; now true on the downside of cycle,” Murray said. “Slow retail sales, reduced store openings and more store closings—such as Borders book chain in 2011—are impacting the numbers. [However,] extreme discounters, such as Family Dollar and Dollar General, are still expanding.”

Certain companies, such as Walmart, Sam’s Club and Lowe’s, among others, are still building in the recession, Murray said.

“Construction fell sharply for warehouse in 2008-10, but a very slight upward trend is beginning to emerge,” Murray said. “Starts are estimated to be 17 percent up this year, and 18 percent next year.”

Hotel building saw steep declines in 2009-10, but is now seeing a slight upward trend, Murray said. “[We’re] estimating to see 34 percent increase in 2011 and 17 percent in 2012,” he said.

Tight credit conditions caused a lot of office projects to get deferred, Murray said. “Construction plunged in 2008-10, and leveled off in 2011,” he said. “Much of recent activity is in government office buildings, data centers and corporate buildings. Starts were down 2 percent in 2011, and are estimated to be up 4 percent next year.”

The baseline forecast for institutional buildings calls for a 2-percent decline and the recession forecast a 3-percent decline next year, after a 15-percent decline in 2011, Murray said.

“School construction continues to lose momentum,” he said. “Many states … have passed school construction bond measures, especially California and Texas. Major universities re-evaluated capital spending plans due to shrinking endowments.” K-12 school construction is larger than colleges/universities/community colleges, particularly in square footage terms, but less so in dollar terms, Murray said. “In 2010, square footage for K-12 school construction was 3.6 times the size for colleges/universities/community colleges,” he said. “In the same year, dollars for K-12 school construction was 2.3 times the size of colleges/universities/community colleges.”

Hospital chains were hard hit in 2009 by tight credit conditions, Murray said. “The debate over healthcare reform created near-term uncertainty, but the sector is still supported by ongoing need to replace aging facilities and growth of elderly population,” he said. “The U.S. military Veterans Administration projects helped to ease some of the near-term slowdown, but less support is expected in 2012.”

Healthcare facilities construction is expected to remain flat this year, and decline 1 percent next year.

Institutional public buildings “got clobbered” by the terminus of the stimulus finds, Murray said. “Public buildings had a steep drop in 2010 that’s continued in 2011,” he said. This year, construction is down 27 percent, and in 2012 will be down 9 percent.

Airport terminal work in square footage jumped in 2009 but then retreated in 2010, Murray said. “[In 2011] work in dollar terms has held close to strong 2008 amounts,” he said. The category is down 20 percent in square footage this year and down 5 percent next year; in dollars, it is up 5 percent this year and down 7 percent next year.

In the manufacturing building category, Murray’s baseline forecast shows an increase of 4 percent next year, but the recession forecast predicts a decrease of 5 percent next year, after a 35-percent gain in 2011. “Plant construction in square feet is turning up, and dollars are now turning up as well,” he said.

In nonresidential construction, remodeling did not decline as much as new construction/additions during recession, thus increasing percent share, Murray said.

Multifamily housing will rise 18 percent next year per the baseline forecast and decline 5 percent per the recession forecast. “Affordable housing projects received a boost from the stimulus,” Murray said. Both empty-nesters and now young adults are boosting the multifamily bottom line.

In Summation
Murray’s chart on Total Construction Activity by Cycle (see chart above) shows the path of construction cycles based on construction starts adjusted for inflation. It compares the pattern of the current cycle that began in 1991 to previous cycles that began in 1975 and 1982. The starting point (T) is the cyclical trough for each cycle, followed by how each cycle has proceeded from its cyclical trough to its peak and back. The current cycle has been longer than the prior ones, with greater movement heading up and also heading down.

One striking feature of the current cycle is the size of the drop from the cyclical peak in 2005 (T+14) down to 2011 (T+20), a slide of 55 percent that dwarfs the peak-to-trough declines of 1975-82, down 34 percent, and 1982-91, down 21 percent, Murray said. “What’s also noteworthy is how the rate of yearly descent has eased, moving from down 25 percent in 2009 (T-18) to down 6 percent in 2011 (T+20), to basically flat in 2012 (T+21),” he said.

Sahely Mukerji is the news editor for USGlass. She can be reached at smukerji@glass.com or follow her on Twitter @solarglazingmag.


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