Down but not out

Nonresidential construction forecast looks bleak with some bright spots
Katy Devlin
November 17, 2008
COMMERCIAL : FORECASTS

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U.S. economic growth will be slow through 2010, leading to two or three tough years for the construction industry, said Jim Haughey, chief economist, Reed Construction Data, Norcross, Ga., Oct. 15, during Reed Construction Data’s 2009 forecast webinar.

“There will be a depressing on the economy for several years. But … the crisis aspect of the [economy] goes away quickly and we get back to a kind of recession that will be rather mild—average at worst. People will stop talking like it’s 1929,” Haughey said. “But, there will be restricted credit access, investment spending will be weak, and it’s going to affect construction.”

Overall construction spending in 2009 will stay relatively flat with a slight 0.7 percent increase, Haughey forecasted. In 2010, spending will turn around and see a projected 7.7 percent gain.

The depressed residential market, which “started this problem,” will do better than the rest of construction for the next several years, Haughey said. Housing will fall slightly during the next several months, followed by a quick rebound.


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Nonresidential construction spending experienced a “steady uptick” in spending from early 2006 through most of 2008, Haughey said. The sector saw its first declines in August, continued to fall through the rest of 2008, and will stay slow through 2009.

“Commercial construction will be lower than many people expected a few months ago. … We expect to see a 12 percent gain in nonresidential this year, falling to about a 1 [percent] to 2 percent gain next year, picking back up slightly in 2010,” Haughey said. “We anticipate a period [that started in late 2008] in which activity levels in nonresidential decline for two or three quarters. For some types of projects, that [decline] could go on for longer.”

Jeff Dietrich, senior analyst, Institute fore Trend Research, Concord, N.H., offered a similar forecast during a presentation at the Glazing Executives Forum, Oct. 6, in conjunction with GlassBuild America in Las Vegas. "2009 is going to be a weaker, softer and [more] negative year than 2008," he said. He forecasted a negative growth of 2.9 percent for the economy.

Forecast by segment

The various construction market segments are affected differently by numerous factors, including supply, ownership type and, a factor of increasing importance, the availability of credit.

The credit crunch and overall slowdown of the financial markets has led to a slowing in transaction volumes, said Suzanne Mulvee, senior real estate economist for Property & Portfolio Research, Boston. “Transaction volumes are off by as much as 70 percent in the retail market, and 50 [percent] to 60 percent in apartments. Deals just aren’t getting done,” Mulvee said.

Some property types have fared better than others. “Office exuberance has subsided. On the other side, the apartment market has held up much better. Retail, with the consumer bust being so public, has come way in. The warehouse market hasn’t fallen much,” she said.

Nick Limb, partner, Ducker Worldwide, Troy, Mich., says the glass industry should brace for slowdown in all market segments. However, some segments will fare better than others. “The institutional categories such as hospitals, religious and education are all expected to decline but at single digit rates, compared to double-digit declines in industrial, office and retail, which tie more closely to residential markets, employment and private investment,” he said.

Public and institutional

By segment, public and institutional projects will stay strongest in the near term, but will begin to slow in the later part of 2009, Haughey said.

“For education construction, for example, schools that started [construction] this summer are spending money collected in 2007 with taxes from 2006. There’s a delayed impact,” he said. “So, in the near term, these areas, especially health care and higher education, will stay strong. As we get beyond a year from now, we’ll see tax problems and budget reserve problems catching up.”

Haughey and Mulvee offered a more positive picture for health care construction than Limb. Health care construction could dip during the worst of times in 2009, Haughey said, but “we won’t see fall-off on the same order as commercial properties.” 

Mulvee agreed, calling health care construction, including medical office buildings a “safe harbor” for 2009. “We’re seeing our clients move to health care as they are looking at niche plays—ways they can insulate themselves,” she said.

Apartments and condominiums

Multifamily residential has done better, and will continue to do better than single family construction with much of the weakness in the segment concentrated in a few cities, Haughey said.

Apartment construction will fare better than condominium construction, Mulvee said. “The apartment market will benefit from a reduction in supply. Developers stopped building apartments to build condos and converted existing apartments into condos,” she said. “So, demand should hold up better for apartments. The condo market will stabilize after the broader housing market stabilizes.”

While the apartment market will likely “struggle in the near term,” Mulvee said demographics bode well for the segment. “The eco boomers are going to be coming out to rent in the next few years. That is going to help the apartment market recover quicker than other property types from the demand perspective,” she said.

Several geographic locations will benefit most from the eco boom boost. “[Eco boomers] are moving to places that are warm, inexpensive to live and, frankly, where it’s cool to be,” Mulvee said. Austin, Texas; Charlotte, N.C.; Orlando, Fla.; Palm Beach County, Fla.; and Raleigh, N.C. are possible growth markets, she said.

Office

The office market, a traditionally volatile segment, will experience declines in the coming year, but not the same extent as the recession of 2001, Mulvee said. The recent losses in the financial sector will create a “huge pull back” in the office market, hitting financial centers such as Charlotte, N.C., New York City and Seattle the hardest, Mulvee said. “This is something reminiscent of the previous recession when the office market was killed in 2001.”

While the recession will be similar to 2001, the losses to the office market should be less severe this time around, Mulvee said. ”That recession was led by technology companies that did not have products they were actively marketing and certainly didn’t have profits. Today we’re seeing companies with real products and, up until a week ago, real profits. There’s less glut in the office market this time around and … the give-back of jobs will be much more modest. It creates a much different picture,” she said. 

The office market also is less overbuilt than during previous recessions, which will lead to a faster recovery, Mulvee said. “The pullback may not be as severe as in 2001. … We’ll see very few projects going forward, but it will stabilize relatively quickly, and we’ll see a need in 2010.”

Green

Green construction will continue to grow through 2009. “Green is a trend that’s here to stay, and demand will continue to ramp up,” Mulvee said. “First, the cost of construction to get LEED [Leadership in Energy and Environmental Design] certification is not as large as people imagine. Secondly, corporations want to report to their consumers that they are a green company. They need to be in a LEED-certified space to do that.”

Commercial glass company owners and managers began to feel the pinch of the tightening economy during the last few months of 2008, and things likely won’t get easier until 2010. “Many glass businesses are trying just to stay afloat with sound business practices of cash management, minimizing non-essential expenditures, emphasizing customer service, and exploring new marketing and sales channels,” Limb said.

Companies can work to stay on top through sound planning and being open to change. “One key is to anticipate as far ahead as possible and plan accordingly, balancing production capacity with anticipated short-term demand, but also trying to maintain the ability to take advantage of longer term growth opportunities,” Limb said. "In addition, glass companies should look to new markets, including geographic expansion, particularly for specialty fabricated glass products where freight costs are less significant.” Glass manufacturers and fabricators could look to new industry segments such as solar power, and glazing contractors could consider metal panels and other high-value wall systems, he added.

Katy Devlin is editor for Glass Magazine. E-mail Katy at kdevlin@glass.org.