Why non-residential sector may make construction market outlook worse before it gets better
After suffering through a few of the worst years many of us have ever witnessed in the construction industry, most everyone could benefit from some positive news. But is now the right time to start feeling cautiously optimistic? Can we finally let our guards down and allow ourselves to believe that anything more than a “pockets of growth” theory will play out in 2010? In other words, has the overall market finally bottomed out and left us with no place to go but up?
Unfortunately, it appears we must all hold our optimism in check for a little while longer, as the worst may not quite be in our rearview mirror just yet. Even if the residential market improves, as most analysts project it will this coming year, it seems the fragile non-residential market sector is still going to drag us down a bit further. This line of thinking is shared by most all of the construction economists, research firms, and associations we continuously monitor.
The most bullish industry forecast for 2010 comes from McGraw-Hill Construction, which is forecasting an 11% increase in the total contract value of project starts next year. The largest percentage gains are projected for the residential sector (+30%). But keep in mind, these improvements in residential are based on growth projections from historically low levels. Other market sectors showing signs of life include highways and bridges (+13%), environmental public works (+18%), and other public works (+11%). Unfortunately, the only non-residential sectors for which this group expects slight growth potential in 2010 are the health care (+5%) and other institutional buildings (+3%) categories. The group is forecasting a slight overall decrease (-2%) for the non-residential category.
FMI Corp. is less optimistic in its overall projections for 2010. This group predicts a slight improvement in the construction dollars put-in-place residential (+3%) and non-building structures categories (+5%), but is significantly down on the non-residential category (-16%). In fact, it's forecasting double-digit declines in some key categories, including lodging (-35%), office (-25%), commercial (-29%), amusement and recreation (-19%), and manufacturing (-35%).
Although the Associated Builders and Contractors association is also forecasting declines in most of the non-residential categories it tracks (up to 19% in some categories), the group does predict slight improvements in the health care and power markets. However, two sectors alone are not strong enough to offset the further declines it's projecting in lodging, office, commercial, education, and manufacturing, which results in an overall projected decline of construction dollars put-in-place next year of -7.2%.
Forecasts from the U.S. Department of Commerce and Portland Cement Association pretty much mirror the forecasts noted above.
While I would like nothing more than to report on only the positive aspects of these forecasts, it wouldn't do anyone any good to sweep this information under the rug and simply hope for the best. Although specific market segments will grow in size next year, allowing some of us to breathe a little bit easier, don't expect a widespread return of excitement and growth potential in the majority of market sectors. It looks like that won't happen until 2011.