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March 1, 2010

CONSTRUCTION OUTLOOK

Construction in 2010 faces a bleak outlook.

The outlook remains bleak for put-in-place construction for 2010. Credit remains tight, unemployment remains at a high level and the risk of commercial mortgage-backed securities looms. Total construction in 2010 will be down 4% after declining 13% in 2009. While 2009 was likely the bottom in terms of percent decline, 2010 will be the bottom in terms of dollar volume. Residential construction is expected to begin recovering in 2010. Nonresidential construction will decline 15% in 2010 after declining 10% in 2009. Non-building construction will continue to be a positive contributor, increasing another 5% in 2010, driven mostly by conservation and development construction.

PUT-IN-PLACE CONSTRUCTION

Contractors reported backlogs of eight months in 4Q09 (down from 11 months in 1Q08), according to FMI’s Nonresidential Construction Index. Tight credit continues to cause cancellations and delays. Project delays continue to be four times the normal rate and early this year were at 20% (up from 15%, or three times the normal rate, in 3Q08). Project cancellations are five times the normal rate with 10% of backlog being canceled (doubled from 3Q08). Credit is expected to remain tight throughout 2010, and delays and cancellations are likely to increase beyond 10%, compared with the normal cancellation rate of 2%.

While there are some positive signs for the general economy, the construction industry should prepare for another year of decline in nonresidential construction employment. Construction lost 28,000 more jobs in November. It was the 28th consecutive month of significant job losses, bringing the construction unemployment rate to 19.4%. That means there are 1.8 million construction workers out of work, and that 1.9 million construction jobs have been lost since start of the recession. An increase in residential construction in 2010 could begin to turn the employment situation, but it is unlikely that it would do much to offset the losses from nonresidential construction.

The residential sector is expected to begin to recover in 2010. Single-family put-in-place construction, valued in dollars, will recover at a slower rate than single-family housing starts, measured as a number of units. This year the two measures will be vastly different due to the declining size and decreasing price of homes. The number of square feet per start is declining, meaning that new homes are getting smaller. They are also getting less expensive. (Ed. note: Census data shows the U.S. average home size fell 7% from 1Q08 to 1Q09 and the average home price has fallen 20% since 2007, says the National Association of Realtors.) The first-time home buyer credit and recessionary environment were contributing factors to this decrease. Multi-family construction has been impacted severely by tight credit and will not recover until credit loosens. Residential improvements construction is expected to increase slightly in 2010 as consumers make improvements rather than moving up, and the age of the housing stock requires improvements.

The nonresidential sector will see another year of double-digit decline in 2010. Health care, education and transportation are the only segments that will remain near flat. These segments are less dependent on the general economy and transportation is receiving a boost from the American Recovery and Reinvestment Act (ARRA) and potentially the Jobs for Main Street bill. Public safety construction will be the only segment likely to see actual growth. This growth is driven mainly by military construction that is funded by ARRA and the Defense Base Realignment and Closure Commission. The lodging, office and commercial segments are highly cyclical and will experience severe declines in 2010. Lodging construction has gone through several cycles of overbuilding and corrections. This cycle of overbuilding began in 2004 and ended in 2009. Low occupancy rates, declining revenue per available room (RevPAR) and average daily rates will suppress lodging construction until 2012. Office construction is highly dependent on employment. It will take several years until there is enough employment growth to spur new construction. Commercial construction relies heavily on consumer spending and new housing construction. Consumer spending will not return to high levels until the employment situation improves. Commercial construction will follow a turnaround in the housing market by 12 to 18 months. Manufacturing construction, which has remained strong mostly due to refinery work, will turn down as many of these mega projects are completed.

The non-building sector will remain positive again in 2010. The largest contributors to this growth are power and conservation and development construction. Highway and street construction is expected to remain flat as the remaining stimulus funds are used and the highway bill continues to be extended. Water and wastewater construction should see a slight increase in growth rates as some stimulus money is finally put in place.

The economy may show some signs of improving, but it is just the beginning of the downfall for nonresidential construction. Nonresidential construction typically lags the general economy by about 18 months. Intense competition that has been bringing down prices has been reported. This is good for owners, but not so good for contractors. Non-building construction will remain positive for the forecast period with power and conservation and development leading the sector.

CONSTRUCTION AND THE SUPPLY CHAIN

Mega projects and massive spending bills have a large impact on construction materials. As these projects are put into place, large amounts of specific materials are in demand. The highway spending bill is up for reauthorization. At its current level, it averages around $38 billion per year in federal funding. The current Jobs for Main Street bill calls for an extension of the highway bill and includes an additional $27 billion in funding for highway and street construction. It provides that neither the extension nor the additional funding require matching state funds.

The General Services Administration saw a huge bump to its program from ARRA. The $5.5 billion increase will drive demand for construction materials at a local level in several areas as some federal projects are infused with hundreds of millions of dollars per project. Washington, D.C., in particular will see an increase in federal building projects.

Steel superstructures are utilized in buildings across all market segments. The share of steel usage in superstructures has shifted very modestly toward the use of more steel, with favorable steel prices relative to concrete. (Ed. note: as of March, the cost of cement in construction rose 0.2% this year compared with last year, while the cost of steel in construction fell an average 2.7% during the same period, said Engineering News- Record.) However, these minor shifts in material share tend to be lost in much greater swings of construction demand. Steel superstructure design is historically most favored within the health care, office, commercial, education and manufacturing segments. Two of these segments, health care and education, will see put-in-place construction values expand by 1% in 2010. Unfortunately, the other three are expected to produce a combined decline of 30% in 2010 versus 2009.

On a more positive note, the usage rate of metals in roof and wall applications continues to show substantial growth. Industry initiatives together with strong promotion and technical support are convincing the design community of metals’ advantages in lifecycle cost, durability and as an environmentally friendly material. Since 2006, metal roofing has gained nearly seven share points in the institutional segment, a gain of more than 25%, and more than three share points, for a gain of more than 17% in commercial applications. The share of metal wall system usage is lower than for metal roofing, but the percentage gains in that share position are equally striking. Current economic conditions have caused us all great pain, but the metals industry can take a measure of pride in these share gains and look forward to the fruits of this effort as the construction industry cycles back.


Heather Jones is a construction economist for FMI Corporation, responsible for design, management and performance of primary and secondary market research projects and related research activities, including economic analysis and modeling, construction market forecasting and database management.

Randy Giggard is a senior consultant for FMI, with expertise in the areas of market sizing and modeling, competitive analysis, sales and market performance evaluations, buying practices and trends analysis from construction industry firms.