The slow climb
The construction industry has suffered much uncertainty, but the worst is over, said Keith Fox, president, McGraw-Hill Construction, New York, at the Outlook 2011 Executive Conference, Oct. 28-29, in Washington, D.C. “Those of us who have survived, have fought hard,” he said.
In the manufacturing sector, construction took the biggest hit during the recession, said Julian A.J. Anderson, president, Rider Levett Bucknall, Phoenix, at the conference. “Unemployment was at 17 percent and 2.275 million jobs were lost,” he said. “Construction employment is expected to rise 19 percent over the next eight years.”
Last year was another tough one for the construction industry, with mixed performance by project type, according to the firm’s “Construction Outlook 2011” report. Single-family housing moved upward in first quarter 2010, before settling back in the spring. Healthcare construction seemed to be stabilizing after 2009’s steep decline, and transportation terminal work picked up. However, tighter lending conditions and high vacancy rates continued to suppress commercial building, while state and local budget cuts negatively impacted institutional building and educational facilities.
The value of new construction starts for 2010 was estimated to be $411 billion, down 2 percent, following 2009’s 24 percent slide, according to the Outlook 2011 report. This marked the fourth straight year that construction starts fell, bringing the level of contracting 40 percent below the 2006 peak of $689.3 billion. The overall level of construction starts in 2011 will advance 8 percent to $446 billion.
“MHC starts did seem to be picking up, but dropped back in the first and second quarters of 2010,” said Robert Murray, vice president, McGraw-Hill Construction, at the Outlook conference. “Construction employment was down 6 percent in the first six months of 2010. Single-family housing went into a stall after the homebuyer credit ran out. Commercial building was down 43 percent [in 2009], and [was] estimated to be down 17 percent at the end of . Institutional building was down 15 percent in 2009, and another 7 percent [in 2010]. Public works was essentially flat last year , but a little up this year .” (See Fig. 1)
Multifamily housing was a pleasant surprise in 2010—gaining 5 percent in units—in another down year for construction, Murray said. “The construction decline has ended in multifamily housing, and it’s now edging up,” he said. “2011 will see an increase of 23 percent in starts. Stimulus money is providing support. Looking at the big cities, it’s a mixture of pluses and minuses in terms of new dwelling units, which tells me the market is beginning to turn.”
Looking at individual market segments, McGraw Hill Construction predicts the following for 2011 (See Table 1):
Single-family housing will climb 27 percent in dollars, corresponding to a 25 percent increase in units to 565,000. See Page XX for related article.
Multifamily housing, comprising both apartments and condominiums, will rise 24 percent in dollars and 23 percent in units. The sector gained 5 percent in units in 2010, after being down 57 percent in 2009. Project financing will remain tight, but less so than in the commercial building sector, given the more stable revenue stream from multifamily projects. The stimulus act and affordable housing projects benefitted multifamily housing in 2009-10, Murray said. A push for downtown redevelopment also helped this sector. “Rental vacancy rate is still high, but is easing,” he said. “Empty-nesters are supporting the growth of this sector.”
Commercial buildings will increase 16 percent, following a three-year decline, which dropped contracting 62 percent in dollar terms. However, activity levels for stores, warehouses, offices and hotels will still be weak. “Commercial building starts in 2007 were at an all-time high,” Murray said, “but there was a sharp retreat in 2008-10. Store starts in 2011 will go up 19 percent, after a 17 percent decline in 2010; warehouse starts will see a gain of 30 percent in 2011, after a 32 percent decline in 2010; hotels will see a gain of 13 percent in 2011, after a 37 percent decline in 2010; offices saw less overbuilding than past cycles and will gain 13 percent in 2011, after a 28 percent fall in 2010. While new construction for offices and stores fell substantially in 2009, the pattern of major alteration projects for each category has been more stable.”
The institutional building market will slip an additional 1 percent, retreating for the third straight year. School construction will continue to be down, but healthcare facilities should see moderate growth. “This sector will see a negative 6 percent in starts in 2011,” Murray said. “Numerous states in recent years have passed school construction bond measures, especially California and Texas. Texas remains the leading state in school construction. Major universities increased capital spending plans, but are now under re-evaluation.”
Healthcare starts will gain 6 percent in 2011, after leveling off in 2010. “Healthcare facilities fell sharply in 2009, but stabilized in 2010,” Murray said. “Hospital chains were hard-hit by tight credit conditions. Debate over healthcare reform created near-term uncertainty. The sector is still supported by ongoing need to replace aging facilities and growth of elderly population. U.S. military Veterans Administration projects will help to ease some of the near-term slowdown.”
Public buildings will see a 6 percent decline in 2011. This segment had a strong 2007-09, but experienced a steep 31 percent drop in 2010, Murray said.
Amusement and recreational buildings will see a 1 percent decline in 2011, after an 18 percent decline in 2010. Religious buildings will level off in 2011, after a 39 percent decline in 2010, Murray said.
Airport terminal work will see an 8 percent decline in 2011 in terms of square footage, after a 25 percent decline in 2010. The segment will decline 5 percent in dollar amount in 2011, after a 20 percent decline in 2010. Work picked up in 2009, and was expected to stay close to improved activity in 2010, Murray said.
Manufacturing buildings will increase 9 percent in dollars and 11 percent in square feet. Capacity utilization will continue to pick up, and the low value of the U.S. dollar will support export growth.
Public works construction will drop 1 percent given the fading benefits of the federal stimulus act.
Overall, total construction starts will be up 8 percent in 2011. This follows a four-year decline that saw activity drop by 40 percent, Murray said. While the dollar amount of construction starts is forecast to see moderate growth, the same is not expected for construction spending, which lags the pattern of construction starts. “It’s estimated that construction spending in 2011 will drop an additional 3 percent,” he said. For nonresidential building, construction starts in dollars will rise 4 percent in 2011, helped by a 16 percent gain for commercial building from an extremely depressed 2010, although dampened by an additional 1 percent decline for institutional building, he said. “In terms of construction spending, nonresidential building in 2011 will be down another 6 percent, given the lagged relationship of spending to starts. More substantial gains for construction starts will have to wait until 2012. Nonresidential building in construction start terms could see yearly growth in the range of 20 [percent] to 30 percent by 2012-2013, assuming the U.S. economy is able to achieve more solid footing in 2011, accompanied by stronger job growth and less restrictive bank lending,” he concluded.
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