Mortgage Fallout

Dec 1, 2007 12:00 PM, By Beck Ireland, Staff Writer

According to Murray, warehouses are the one non-residential sector that's getting bigger. There's greater demand for warehouses from global trade. In addition, larger regional facilities are being built by major retailers, and there's a need for updated facilities to handle improved inventory management practices.

The decline in residential growth has also played an important part in the loss of interest in public projects associated with residential areas, particularly water and sewers, as well as private projects that derived demand from the housing market.

Amid questions about the solvency of the highway trust fund and the federal highway bill, Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), the U.S. Chamber of Commerce recently reported that the funding shortfall will reach $1 trillion by 2015. Although some states are trying to make up for this with tolls and private funding, others have experienced legislative disapproval. For example, Texas recently passed legislature to impose a moratorium on private equity for two years.

Although the collapse of the I-35 bridge in Minneapolis in August called attention to the run-down state of the nation's infrastructure, many industry experts say the limelight was short lived. “It was an issue that was brought to the forefront, and it quickly dissipated,” Sullivan says. “I have absolutely no extra spending on bridges integrated into the report.”

Although PCA is predicting a 2.1% increase in the value of construction put-in-place for public construction, Sullivan has reservations. “You could get the re-emergence of fiscal pressure in 2009,” he says. “Slowdown in job creation means a state revenue slowdown and state fiscal crisis.”

The biggest differences in forecasts for the 2008 construction economy lie in how industry experts treat the sub-prime mortgage crisis. Some believe the damage to be largely over and confined to the single-family housing market. Others argue that the tighter lending standards brought on by the mortgage crisis will spill over into the non-residential sector. “I have it touching everything,” Sullivan says.

However, even with this major difference of opinion, most projections are predicting a bottoming-out of the residential sector, with a possible recovery by 2009 or 2010. For the non-residential markets, there is slow growth ahead, especially for sectors intrinsically linked to the residential market, such as retail and public projects, especially water and sewer, yet market fundamentals for the non-residential sector remain strong.

The 2008 forecasts allocate the chance of recession between 30% and 45%, yet they all depend upon the economy avoiding a recession, which is the one factor that could cause major corrections to this year's forecasts. Consumer confidence, the price of oil, interest rates, the value of the dollar, and employment and wage rates will all play a part as 2008 unfolds. “There's certainly a lot of uncertainty going around,” Murray says.

Sidebar: A Green Future

By 2010, green buildings are expected to comprise 5% to 10% of U.S. non-residential buildings. Currently, new federal energy legislation with green building provisions is making its way through Congress. The provisions would require new federal buildings to decrease consumption of fossil fuels in stages, with the goal of achieving “carbon neutrality” by 2030. The version of the bill currently in the House would also require private utilities to provide at least 15% of their electricity from renewable sources, such as wind and solar, by 2020.

“We are in the midst of one of the biggest societal shifts since World War II,” says Rick Fedrizzi, president, CEO, and founding chairman, U.S. Green Building Council (USGBC), Washington, D.C. “Then, everyone came together at that one moment. I think we're there today, realizing the energy crisis and the health crisis are all environmentally linked. The green movement addresses this.”

In 2006, it's estimated that 2% of the non-residential buildings in the United States were certified under USGBC's Leadership in Energy and Environmental Design (LEED) credentials. According to the USGBC, there are LEED-certified buildings in at least 25 states and 100 cities in the nation. Currently, USGBC has 11,185 corporate members and 40,471 LEED-accredited professionals. “LEED taught people a language,” Fedrizzi says. “People want this basic knowledge about the boxes we live, work, and play in.”

This could mean a double behavior change for the construction industry. With “green” catching on around the country, the pressure is on to change what it builds as well as how it builds. The building sector is the single largest contributor to carbon dioxide emissions. To make matters worse, the construction industry is No. 1 for landfills. “We know what buildings use: energy, water, waste, CO2,” Fedrizzi says. “But we also know the effect of green buildings, which is 40% less CO2. If you can buy a $1.39 box of animal crackers that can tell you the amount of fat and calories, why can't you do that with a $90-million building?”

Driving green building are the manufacturers that collaborate on technology to associate activity with energy consumption and cost, says Fedrizzi. “There is a collective consciousness equating green with safety and controls.”

This allows owners and developers to look at buildings in a holistic sense. “A $4-per-square-foot investment in building green could net a $58-per-square-foot benefit over 20 years,” Fedrizzi says. “This is immediate and measurable.”

This also gives the private sector the incentives it needs, instead of mandates that direct energy efficiency.