Notwithstanding recent lower-than-expected employment numbers and a mid-year stall in the housing market, the general U.S. economy has been showing some signs of recovery since the recession ended in June 2009. However, with its 12- to 24-month lag behind the general economy, non-residential construction is not expected to experience a substantial uptick in 2011. “The overall improvement in the economy has not yet turned around the non-residential construction sector,” says Kermit Baker, Hon. AIA, chief economist for the American Institute of Architects (AIA), Washington, D.C. “Our construction forecast panel expects the weakness in the construction sector to continue well into 2011.”
In June, the AIA’s construction forecast panel predicted a 20% decline in non-residential construction spending for 2010, dragged down by declines around 30% in the commercial sector, 20% for manufacturing, and 12% for institutional buildings (click here to see Table 1). For 2011, the panel estimates slight increases in spending, which could total just over 3%, with more than 5% in the commercial sector, 4% for institutional buildings, and a less steep decline of 2% for manufacturing. However, commercial buildings are expected to see the strongest growth with retail (7.6%) and hotel facilities (8.7%) leading the way, while the health care (5.1%) and amusement and recreation (8.1%) markets will be the best performers for the institutional sector. “Next year is projected to finally show some relief in the construction sector,” says Baker.
According to Raleigh, N.C.-based FMI Corp., provider of management consulting and investment banking to the worldwide construction industry, non-residential construction will follow a 13% decline in 2009 with an 18% drop in 2010. For 2011, it is predicting a loss of 1% (click here to see Table 2). Transportation (6%) and health care (5%) will lead the overall non-residential construction sector, which will remain bogged down due to declines in manufacturing (-20%), commercial (-6%), and office (-4%) markets. “The construction industry should prepare for another year of decline in non-residential construction,” according to FMI’s “Construction Outlook 3rd Quarter 2010” report. Still, the consulting firm adds in its fourth-quarter report, “expectations for markets are improving slightly.”
Although the period of record declines may finally be coming to an end in 2011, construction economists are forecasting non-residential construction in 2011 to remain stagnant near the bottom of the cycle. “The bottom line is the non-residential construction recession is largely over, but 2011 will be associated with grudgingly slow progress,” says Anirban Basu, chief economist for Associated Builders and Contractors, Inc. (ABC), Arlington, Va., who is predicting non-residential construction spending in 2011 will decrease by 0.1% (click here to see Table 3).
For 2011, ABC is estimating that power (5.5%) and health care (0.7%) will be the only two segments positioned for growth. The organization is predicting any segment closely linked to state and local government spending, particularly education (-2.0%), to experience a decline. “With many states and localities trimming both operating and capital budgets, the expectation is that construction volumes in these categories will slip next year,” says Basu.
In its 2011 Construction Outlook, New York-based McGraw-Hill Construction, part of The McGraw-Hill Cos., is predicting a 4% increase in overall U.S. non-residential construction starts for next year, following four straight years of decline (click here to see Table 4). “While the economy is still facing headwinds, the stage is being set for construction to see modest improvement in 2011 from this year’s very weak activity,” says Robert Murray, VP of economic affairs at McGraw-Hill Construction. “We’re turning the corner, slowly — 2011 will be the first year of renewed growth for overall construction activity, and 2010 becomes the final year of a very lengthy and unusual construction cycle.”
The organization is anticipating commercial buildings, following a three-year decline that dropped contracting 62%, will rebound by 16%. “There are still projects reaching the starts stage, such as corporate headquarters,” says Murray. “Firms with good financial reports will be looking for investment opportunities.”
Some of the more financially viable commercial enterprises with established brands are in the middle of an overhaul to be more competitive, according to Murray. For instance, Dunkin Donuts is preparing to build 350 new stores, and retailers such as Target, IKEA, Menards, Kohl’s, and Nordstrom began extensive construction in 2010. “Some hotel operations are seeing this as a good time to spruce up, hoping to gain a competitive advantage,” says Murray.
Therefore, McGraw-Hill Construction is expecting gains in the value of construction starts for stores (14%), offices (13%), hotels (13%), and manufacturing buildings (9%), which is moving a little bit ahead of where it had been — at the bottom— in the recent past (click here to see Table 5).
Yet, 2011 will still be quite weak by historical standards. “Because activity is so low now, it’s very easy to get double-digit gains,” Murray says. “Essentially, we’re going from the lowest level in 50 years to the second-lowest level. It’s going to take time for these starts to have an effect on spending. We’re looking at another down year for construction.”
Furthermore, the report is predicting the institutional building market will drop an additional 1% in 2011, for a third straight annual decline. “The difficult fiscal climate for states and localities will continue to dampen school construction, although the health care facilities category should see moderate growth,” says Murray, who believes now that the uncertainty over the health care
reform debate has subsided, smaller-scale health care projects will assume a greater share going forward.
In addition, electric utility work will fall 10%, down for the third year in a row, and public works construction will drop 1%, given the fading benefits of the federal stimulus act for highway and bridge construction. “At the moment, we’re seeing the lift from the stimulus bill fading,” says Murray.
Despite what may seem like a large amount of funding, the American Recovery and Reinvestment Act of 2009 (ARRA) only “lifted” the public works sector in 2010, according to McGraw-Hill Construction, and the stimulus bill’s final impact is turning out to be smaller than anticipated. In part, this was due to a shift from “shovel-ready” projects to more complex endeavors that take more time to bring to start. “These projects take a slower time getting going,” says Murray.
According to Ken Simonson, chief economist for the Associated General Contractors of America (AGC), Arlington, Va., the bulk of the construction-related stimulus funding (around $135 billion of the estimated $862 billion) has gone toward the transportation sector, followed by buildings, energy and technology, and water and environment (click here to see Fig. 1). The main push, according McGraw-Hill Construction, was transportation — particularly highway projects. “We’ve seen that in construction starts figures, states made their obligation toward highways, but we should see transit and rail going forward,” says Murray.
Environmental projects, including Environmental Protection Agency (EPA) cleanup and U.S. Department of Energy (DOE) environmental cleanup make up the second stage of stimulus funding. Energy, such as the electrical grid and renewable energy projects, is the third push. “The impact of the energy sector has been more diffuse,” Murray says. “But one of the surprising developments this year has been a surge in wind power projects.”
Funding for public buildings, including energy-efficiency upgrades, which are “still very much a work in progress,” according to Murray, may make its way into the numbers for 2011 (click here to see Fig. 2). Institutional buildings were hit particularly hard by both the recession and the financial crisis in 2008, which shrank endowments at major universities and cut down on charitable donations (click here to see Fig. 3). However, through the State Fiscal Stabilization Fund, ARRA provided indirect support to the institutional sector by allocating $53.6 billion for state and local governments facing fiscal stress. This funding may allow for a recovery in the sector by 2012 (click here to see Table 6).
The expectations for 2011 represent a stark contrast from what occurred in 2010, according to ABC. In fact, 2010 marked a period of widely variable performance between construction segments as some sectors grew through the availability of federal stimulus funds and privately financed activities experienced depleted capital availability and excess supply. Privately financed construction levels are projected to decline 0.2% while publicly financed construction levels are projected to remain at their 2010 level (click here to see Table 7).
“To the extent that there has been recovery in non-residential construction, it has been concentrated in segments closely tied to federal funding and the stimulus package passed in February 2009 in the midst of the recession,” says Basu. “The deepest downturns registered in construction were related to lodging, manufacturing, office, and commercial. ABC expects that the lack of access to capital will continue to deter economic progress in 2011.”
Next year, the variable in performance between segments will be less prominent, at least in terms of percentage changes in spending volumes. ABC is expecting that 2012 will be better for privately financed construction. Credit conditions will improve by that point as large, well-capitalized banks become more aggressive in their pursuit of industry market share. Finally, certain leading indicators have “turned the proverbial corner,” according to the organization, including its own Construction Backlog Indicator (CBI), which has been indicating a steady improvement in the commercial and industrial construction outlook.
Contractors shouldn’t count on funds from the federal government for projects in 2011, according to the fourth-quarter report from FMI. Next year, work is most likely to come from the private sector. “As we begin the new year, non-residential contractors will focus less on chasing stimulus projects and more on finding private work to fill their backlogs,” says the report. “No new stimulus bill appears likely when the new Congress is seated.”
Surprisingly, the residential sectors are on the rise for 2011. Single-family housing in 2011 will climb 27% in dollars, corresponding to a 25% increase in the number of units to 565,000, according to McGraw-Hill Construction. In addition, it is predicting multi-family housing will rise 24% in dollars and 23% in units, continuing to move gradually upward (click here to see Fig. 4).
This momentum is being carried forward by low interest rates, pent-up household formations, stabilizing prices, and budding employment growth, according to the National Association of Home Builders (NAHB), Washington, D.C. Although, the homebuyer tax credit held up residential real estate activity in many districts, its demise at the end of April was accompanied by a corresponding slowing of activity in May. Therefore, much of the residential sector’s growth depends on the jobs market, which should improve enough in the next year to effect household formations, according to NAHB.
However, foreclosures will linger as a problem in many of the largest housing markets. Typical post-war recessions have been followed by a rebound in both economic output and housing — achieving “a teeter-totter balance” — unfortunately, it’s not going to happen this time, according to NAHB Chief Economist David Crowe, who claims the key to recovery is job growth. Average monthly employment growth following recessions in the 1980s and 1990s was in the range of at least 200,000 new jobs. Unfortunately, by comparison, the first six months of this year averaged 139,000. “We need to add about 100,000 to 125,000 jobs just to keep up with growth of the labor force,” says Crowe. “We’ve got a lot of people right on the edge who will soon form households. They are ready to move out and begin to absorb the housing stock that’s out there.”
In a recent NAHB poll, about 68% of home builders reported that their business was being hurt by customer reluctance, and 60% cited competition from foreclosed properties and short sales as a cause for caution. When asked why buyers were remaining on the sidelines, almost 85% of the builders surveyed by NAHB said it was because they could not sell their existing home, and 78% said it was due to uncertainties over employment and the economy.
At 200,000 units, the level of unsold new homes is the lowest since 1968. “Builders have been careful about adding any additional inventory until they are certain they have a sale,” says Crowe.
The supply of unsold existing homes is significantly higher because it includes foreclosures, half of which in this year’s second quarter were concentrated in five states — Florida, California, Illinois, New York, and New Jersey. Fifteen states were responsible for 77% of the 2 million foreclosures in that period.
With signs looking favorable that new home sales will be gradually improving, Crowe is forecasting a 37% increase in single-family starts in 2011 to 655,000 units and a further 48% climb to 970,000 units in 2012 (Fig. 5). Starts this year are expected to rise to 470,000 units, an 8% gain from 2009 but lower than originally anticipated.
Multi-family construction made a surprisingly decent rebound midyear,” Crowe adds. “It had been expected not to do as well in 2010 as in 2009, but that is now reversed.”
The latest NAHB forecast shows multi-family housing starts bottoming out at 112,000 units in 2009 and then rising 12% this year to 125,000 units, 19% in 2011 to 149,000 units, and 41% in 2012 to 210,000 units. With increasingly more households entering the rental housing market, Crowe expresses concern over eventual shortages in available rental properties.
Owner-occupied remodeling, which declined along with the downturn in housing starts (although not as steeply), will continue to post gains, he says, supported by those who decide to make improvements on their homes instead of moving.