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
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
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.
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.
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
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
“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
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.
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,
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.
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),”
Sahely Mukerji is the news editor for USGlass. She can be
reached at email@example.com
or follow her on Twitter @solarglazingmag.
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