Closer look: Overall construction levels to hold steady in 2012

Commercial building and multifamily to grow, as public works and institutional building continue to slide
By Katy Devlin and Jenni Chase
January 23, 2012
COMMERCIAL, RETAIL, FABRICATION : FORECASTS

Following several years of decline, overall construction spending is expected to hold steady, if not improve slightly in 2012, according to forecasters. “In 2012, the top-line numbers are not expected to show much change, but there will be variation within the major construction sectors, with some gains predicted for housing and commercial building, assuming the U.S. economy avoids recession,” said Robert Murray, vice president of Economic Affairs for McGraw-Hill Construction, in a release.

“Basically, we’re looking for total construction starts for 2012 to remain essentially flat. We do have some gains for the housing sector, some gains for commercial buildings, but when you look at public works and institutional building related to public sources of financing, you’re still looking at some further weakening taking place,” he said, when presenting the 2012 Dodge Construction Outlook. “2012 is looking at essentially the same level of overall activity, although the mix will be slightly different.”

Overall, U.S. construction starts for 2012 will total $412 billion, following a predicted 4 percent decline to $410 billion for 2011, according to McGraw-Hill Construction’s 2012 Dodge Construction Outlook. At their peak in 2006, total U.S. construction starts totaled $689.3 billion.

Economists participating in the Reed Construction Data forecast webinar, “Flat, Down or Up? Where is Construction Heading?” were a bit more optimistic. Reed Chief Economist Bernard Markstein predicted total construction would see gains of 4.8 percent in 2012 and 7.2 percent in 2013 (see Fig. 1* below), while Ken Simonson, chief economist for the Associated General Contractors of America, predicted total construction spending would increase between 6 percent and 10 percent during the 2012-2016 time period.

“Total construction spending is already recovering and will improve [in 2012],” Markstein said. “We can’t get too excited, but relative to the rest of the economy, [construction] does look better. We’ll see pretty good improvement once we get into 2012, relative to where we’ve been.”

These forecasts follow several years of painful losses in total construction spending: -7.3 percent in 2008, -11.1 percent in 2009, -11 percent in 2010, and a predicted -2.2 percent in 2011, according to Reed Construction Data.

Nonresidential construction

Nonresidential construction saw steep declines in construction spending during 2009 and 2010, diving 14.2 percent to $375.7 billion in 2009, and 23.1 percent to $288.9 billion in 2010, according to Markstein. While the sector will likely experience losses at the end of 2011—the Reed forecast shows spending down 4.5 percent for the year—the turnaround has started, he said.

Markstein forecasted that nonresidential construction will strengthen throughout 2012 and 2013, despite a few slow quarters in late 2011 and early 2012. However, “we’re not getting back to where we were [pre-recession],” he said. (See Fig. 2* below)

Forecasters agreed the nonresidential picture will continue to shift in 2012, as public projects dry up and the private sector begins to rebound. On the up side, commercial building is expected to increase 8 percent in 2012, with warehouses and hotels leading the way and offices and stores showing modest improvement, according to MHC’s 2012 Dodge Construction Outlook.

“I think the worst of the decline for commercial building has ended,” said Murray, when presenting the 2012 DodgeConstruction Forecast. “Basically, what [we saw in 2011 was] some improvement forwarehouse construction and also hotels.Overall, commercial building is expectedto be up 6 percent in dollar volume [in2011], although the level of activity stillremains quite bleak. Store construction continues to be beset by an excess supply of space, and I think retailers right now are focusing on alteration work as opposed to new construction. As far as offices go, we’ve certainly seen some help from government office building related to the federal stimulus spending but that’s going to be waning in 2012, and we’re going to need more support coming from the private office sector.”

On the down side, the institutional market will continue to slide, declining an additional 2 percent this year after falling 15 percent in 2011, according to McGraw-Hill.“The continued cutbacks we will see in federal spending and the tight budget situation at the state and local levels of government [will] have a dampening effect on the public works sector,” Murray said. “For institutional building, school districtsare still grappling with tight budgets, and it’s hard to see much in the way in improvementfor school construction [in 2012].”

Residential construction

Private residential construction has likely hit bottom and will see slight improvement in the coming year, according to forecasters.The Reed Construction Data forecast shows an uptick in new residential construction spending in 2012 and 2013 of 2.1 percent and 7.3 percent, respectively. The McGraw-Hill forecast predicts single-family housing in 2012 will improve 10 percent in dollars. However, residential construction is still “barely holding its own,” according to Markstein. The segment suffered huge losses during the recession, with new residential construction spending falling 39.1 percent in 2008 to $185.8 billion, 24 percent to $141.2 billion in 2009 and 3.5 percent to $136.2 billion in 2010, according to Markstein. The segment is expected to close out 2011 down an additional 6 percent at $128.1 billion.

While single-family construction will likely hover at low levels in 2012, multifamily housing will continue its upward trend, according to forecasters. McGraw-Hill predicts the segment will see a spending increase of 18 percent this year.

“Multifamily is the one relatively bright spot in housing,” Markstein agreed. After hitting bottom in late 2009 at 89,000 starts, multifamily construction has been on the rise, he said. In 2011, annual starts hit about 150,000. According to the Reed economist, the nation’s need for multifamily housing during the next decade ranges from a low estimate of 250,000 starts per year to a high estimate of 350,000 starts per year.

The remodeling market

Forecasters also see the remodeling market as a bright spot in 2012. Reed analysts predicted residential improvements, including remodeling, renovation and replacement work, would close out 2011 up 5.5 percent and continue the upward trend in 2012 and 2013, with 3.1 percent and 4.5 percent gains, respectively. According to Kermit Baker, chief economist for the American Institute of Architects, “two of the strongest sectors at present are energy efficiency upgrades and reinvesting in distressed properties.”

While home improvement spending declined about 20 percent during the downturn, it has recently stabilized, he said during the Reed forecast webinar. Based on data from the Joint Center for Housing Studies at Harvard University, the remodeling market was expected to slow during the last quarter of 2011 and the first quarter of 2012, but increase again in the second quarter of this year.

Construction employment and material prices

In terms of employment, the construction sector has been hit harder than the rest of the economy. During the height of the recession, construction unemployment rates topped 17 percent, while total unemployment reached about 9.5 percent. As of September 2011, total unemployment fell to 8.8 percent, and construction unemployment was at 13.3 percent. “We’re going to continue to have up and down months with employment,” Simonson said during the Reed webinar. “We’ll have months with minimal gains, or even a decline.”

As a consequence of the downturn, there are fewer experienced construction workers on the market, according to Simonson. Because construction employment has been down for several years, “former construction workers have found jobs in manufacturing, truck driving, have gone back to school or have been leaving the workforce,” Simonson said. “That’s a problem for contractors looking for workers in the future. Some skilled workers are not going to be there.”

This labor shortage could lead to an increase in wages and benefits. He forecasts an increase of between 2 percent and 4 percent for labor costs during the next several years.

Companies should also keep close watch on material and fuel prices. Simonson projects an increase of construction materials costs from 2012 to 2016, with prices rising 3 percent to 8 percent. He said companies should expect periods of 6 to 9 percent increases in producer price index for construction inputs. Prices have been on an upward trend since late 2009, and the PPI for construction inputs was up 7.9 percent in August 2011 over August 2010. Fuel, for one, increased sharply in 2010 and 2011—in August 2011, prices were up 33 percent year-over-year. Material costs should end 2011 up 4 percent to 9 percent.

*Copyright © 2011 Reed Construction Data, a division of Reed Elsevier Inc.

  • 2011: 'Somewhat of a disappointment'

     “In 2010, we saw the overall level of construction starts level off after a 24 percent decline in 2009. And so that raised the expectation that we might be on the verge of recovery,” said Robert Murray, vice president of Economic Affairs for McGraw-Hill Construction, when presenting the 2012 Dodge Construction Outlook. “However, what [we saw] in 2011 is that the construction industry has essentially bounced along the bottom. This has been somewhat of a disappointment because the expectation was that recovery was beginning to take hold in 2011 and that [did not occur]. At the same time, I think there were some bright spots to take note of in terms of what happened to construction activity in 2011. Apartment construction [was on] on a rising trend, certainly counter to what we’ve seen in the single-family sector.” These bright spots were not enough to outweigh the negatives elsewhere, however, Murray said. “As a result, total construction activity [for 2011] is expected to be down 4 percent.”

    Analysts at Reed Construction Data agreed, predicting a 2.2 percent loss in 2011 total construction spending, during the Reed Construction Data forecast webinar, “Flat, Down or Up? Where is Construction Heading?”.

    Looking at 2011 spending by segment, Ken Simonson, chief economist for the Associated General Contractors of America, said he expects a “very small change up or down in private construction, with steep declines in public construction.” Simonson presented his forecast as part of the Reed webinar. Simonson attributed the expected 5 percent to 10 percent decline in public construction in 2011 to less stimulus, military base realignment and closure activities, a wrap up of hurricane damage-related work, and continued weak state and local government spending. Simonson said residential construction would end 2011 between 0 percent and 5 percent up from last year, thanks to a slight increase in single-family starts and accelerating growth in multifamily.

    In regards to construction employment in 2011, it stayed steady with 2010, increasing just 0.1 percent from August 2010 to August 2011. However, state by state, the picture was quite diverse. Based on data from the Bureau of Labor Statistics state and regional employment report, as of August 2011, North Dakota was leading the pack with 20 percent gains in construction employment compared to August 2010. Michigan followed with 10 percent gains, and Illinois, Oklahoma, Tennessee and Texas saw 5 percent gains year-overyear. The states experiencing the largest losses included Alabama, Alaska, Colorado, Delaware, Florida, Georgia, New Mexico, Rhode Island and Wisconsin.