Most segments of the construction industry will enjoy slow to moderate growth at or near the peaks of one of the longest construction booms in recent history.
Robert Murray, vice president of economic affairs for McGraw-Hill's Construction Information Group, said higher interest rates will slow the construction industry's current nine-year expansion, but moderate growth will continue in 2001.
Murray's forecast was part of the F.W. Dodge Outlook 2001 Executive Conference from Oct. 17 to 18 at the Mayflower Hotel in Washington, D.C.
"The construction industry witnessed remarkably steady growth during the 1992-99 period, reaching new highs in both current and constant dollar terms," he said. "But no expansion goes on forever, and higher interest rates have begun to have some restraining impact this year and that trend should continue into 2001."
For 2000, Murray estimates that total construction activity will rise 3% to $462 billion. While not as large as the 10% increase reported for 1999, it still marks the ninth straight year of expansion, at least in current dollar terms. On a constant dollar basis, construction activity in 2000 will essentially match the previous year's robust amount.
He also believes there will still be a boost coming from expanding student populations and federal and state government spending. The rate of growth for total construction activity will recede, but the level of activity should be able to remain close to what was reported during 2000, with a slightly different mix.
The steady growth that construction economists see for 2001 is welcome news for electrical contractors, who had to be looking over their shoulders wondering if this would be the year when the party would end. From all signs, it looks like most markets will remain strong for at least another year. The following capsule summaries offer insight into the key markets for this industry.
Single-family housing. Single-family housing will continue to settle back from its torrid 1998-99 pace, with 2% slippage in dollar volume arising from a 5% decline for dwelling units. At a projected 1.125 million units, single-family housing next year will still be about 10% above the annual average for the 1990s.
Income properties. Income properties will post a slight 2% gain in dollar volume, although square footage will be down 1%. Multi-family housing should see greater activity, while tighter lending standards will exert a mild constraining effect on stores, hotels and offices.
Offices. Offices are a major component of this construction segment. Despite low vacancy rates in many major metropolitan areas, the McGraw-Hill Construction Information Group's forecast expects office construction to slide 4% in 2001 to 260 million square feet. A key reason for this decline is the lack of speculative building, which puts a lid on vacancy rates. This statistic has declined significantly over the past decade, according to the CMD Group's North American Construction Forecast. The cities with the lowest vacancy rates for the third quarter of 2000 according to the report were San Jose (1.2%), San Francisco (3.3%), New York (2.5%), Seattle (3.4%) and Boston (3.7%). Cities with above-average vacancy rates during that same time period were Los Angeles (12.4%), Phoenix (12.5%) and Dallas (15.3%). The average vacancy rate across the U.S. is now below 10%, compared to the 20% average vacancy rate during the early 1990s.
Stores. The construction of stores and shopping centers hit an all-time record of 310 million square feet in 1999, but slipped some in 2000. Economists expect construction in this segment to slip 5% to 295 million square feet in 2001. According to the 2000-2001 U.S. Markets Construction Overview published by FMI, Raleigh, N.C., total renovation work in stores will increase 5% to $14.6 billion.
Public works. Airport work will be strong, boosted by funding coming from the new federal aviation bill. During the past year, major airport projects were underway in Boston, Chicago, Detroit, Newark, N.J., Orlando and Philadelphia.
Utilities. Electric utility construction will essentially level off at the elevated volume achieved in 2000. About half the states have enacted deregulation plans, which in combination with capacity shortages, should keep power plant construction close to this year's robust amount.
Institutional properties. Institutional building should rise 3%, due to further growth for school construction, while religious building also remains strong. In contrast, health-care facilities will see more slippage for its clinic segment, while amusement-related projects (sports arenas, theaters and convention centers) will lose momentum in a more subdued business climate.
Because some solid demographic trends are still in place and are supporting high levels of school enrollment, school construction will expand 3% to 267 million square feet in 2001. According to the McGraw-Hill forecast, elementary school enrollment peaked in 2000 at 35.2 million students and is expected to drop slightly to 34.4 million students by 2006. The report said that the construction of secondary schools will rise from 17.8 million students in 2000 to 19 million students in 2006. Renovation work in the education market will increase 12% to $16.8 billion dollars, according to FMI's report.
Manufacturing buildings. Construction of manufacturing buildings is expected to rebound 6% to 132 million square feet in 2001 due to strengthening export markets, following the extended weakness of the 1998-2000 period.
Hospitals and health-care facilities. Industry observers do not expect construction in this market to expand much over the next few years because of continuing uncertainty over the transition of the health-care market. The McGraw-Hill report forecasts that construction of hospital clinics will decline sharply next year and that hospital construction will stabilize, resulting in a 6% drop overall in this segment to 87 million square feet. Renovation work in this market will 2% in 2001, leveling out at $11.7 billion, according to FMI.