This year should stay even with 2003, with a dip in housing and an upward blip in nonresidential. However, 2005 may be a big year all around.
Bureau of Labor Statistics data claims 781,400 field workers were employed in electrical construction, on average, from July through September of 2000. That average fell to 772,533 for the summer of 2001. What’s your guess for the 2003 figure?
Initial BLS estimates put the 2003 summer average at 711,167. While not as spectacular as the 2000 figure—an all-time peak—field employment in electrical construction is down just 9 percent.
So after a recession, a first-ever attack on our nation and a weak early recovery, employment is down less than 10 percent from an all-time high. While that is not cause for celebration, equally there seems no reason for gloom.
Will 2004 be better? Answers from economic and construction forecasters ranged from a strong maybe to a weak yes. Here’s the consensus:
• A slight downshift in residential construction, as interest rates drift up as the recovery strengthens.
• Nonresidential construction is projected to increase. The gain won’t be as good as we will see in 2005—and it might not become evident to all until this year’s second half.
• Public works construction will struggle during 2004, as some needed facilities are built (education), while others might be delayed due to state and local government budget cuts.
Here’s a quick look at how this shakes out numerically:
• McGraw-Hill Construction sees total construction increasing by 1 percent, to $508.9 billion, in 2004. See Table 1.
• New housing construction is seen decreasing only slightly from a very high level in 2004 and 2005, according to the National Association of Home Builders (NAHB). See Table 2.
• Merrill Lynch’s economic forecast, as of Sept. 28, was for 3.4 percent growth in real Gross Domestic Product in this year (up from 2.4 percent in 2002 and an estimated 2.5 percent last year). It includes a projected decline in residential investment and an uptick in nonresidential spending; see Table 3.
• ELECTRICAL CONTRACTOR obtained other forecasts; Table 4 presents a summary.
Housing construction’s share of all new construction starts is up from more than one-third of dollar value to 44 percent. Had residential grown with overall construction, it would be $35 billion short.
Forecasts are for a not-so-bad dip. Here’s how Robert Murray, vice president and chief economist for McGraw-Hill Construction’s Dodge operations, sees it:
“A 2 percent drop in dollar volume is forecast [for single-family housing], corresponding to a 5 percent decline in the number of dwelling units... This still represents a very healthy amount. The number of dwelling units [started] in 2004 would be the third-highest in the past 25 years.”
Many forecasters seem a bit “in the dark” on housing, having been too low in recent years.
Those at the NAHB—who might know this field better than anyone—did not see the 2001-03 boom coming.
Mortgage volume steady
David Seiders, vice president and chief economist at NAHB and a former Federal Reserve Board staffer, noted in October that housing’s growth “has been outlandlishly strong.” At his association’s fall forecasting conference, Seiders commented that “the numbers are hard to sustain... but they keep going up!”
Financing drives housing. The Mortgage Bankers Association of America projects a 50 percent decline in mortgage originations in 2004—from $3.32 trillion last year to $1.55 trillion this year.
But that’s not all bad news for construction, as refinancings bear the brunt here. Where $2.19 trillion in refis are estimated for 2003, only $434 billion are seen in the coming year.
Taking refinancings out, the MBAA 2004 forecast is for $1.1 trillion in conventional and adjustable-rate mortgages, identical with last year.
Of course, that begs the question: What will a decline of $1.75 trillion in mortgage refinancings do to the U.S. economy?
There is no “nonresidential” market, as such—that’s become clear during the 2001-03 period, as various niche markets went their separate ways.
Healthcare, education and retail markets have been good to great. Office construction has gone down further than anyone might have believed just a few years ago.
Here’s a quick view of these markets, as seen by the various forecasters:
• Healthcare—McGraw-Hill sees a drop in healthcare new construction from 97 million square feet of construction starts in 2002 to 88 million last year and 83 million 2004. That’s a 14 percent drop in two years.
The good news is that FMI Corp., which provides data and forecasts new construction and building improvements, predicts improvements. Table 5 provides an overview of numbers form this source, the leading construction industry consulting firm.
FMI’s figures for healthcare show improvements running around $12.5 billion in each of 2002/3/4, with new healthcare construction at about $8 billion each year. For 2005, the figures diverge—new healthcare construction is forecast at only $7.7 billion, while improvements are estimated at $13.3 billion.
Overall, the FMI forecast for healthcare runs at $21.1 billion last year, $20.6 billion this year, and $21 billion next year.
• Education—The “Baby Boom Echo” has driven education construction, but McGraw-Hill’s square footage estimates say it is on the downswing. Here are the company’s actual, estimated and forecast data for recent years:
2001: 274 million square feet (all-time high)
2002: 253 million
2003: 240 million estimated
2004: 223 million is forecast
Economist Murray notes that renovation work has remained strong in this sector. FMI’s numbers actually show Education to be the largest nonresidential market, with $43.7 billion in new construction and $20.7 billion in modernizations forecast for this year, roughly the same as 2002 and 2003.
• Retail/commercial—The Census Bureau this past summer reclassified how it reports construction spending information. The “commercial” category—which includes retail stores, warehouses and other items—is by far the largest of the nonresidential categories, at $42 billion of real spending in the nine months ending with September.
McGraw-Hill’s square footage data in its “stores and shopping centers” category show an increase from 257 million square feet in 2002 to 285 million forecast for this year (a 3 percent gain over 2003). FMI’s data show an increase from $26.4 billion in retail new construction in 2002 to $32.2 billion in 2005 (with 2003 higher than 2002, and this year higher than last, etc.).
Retail has been the leading performer for property owners, according to special report from National Real Estate Investor magazine and the real estate brokerage Marcus & Millichap.
Average retail vacancy rate in the top 40 U.S. retail markets sat at 10.5 percent in mid-2003, the report said, up from 8.5 percent two years earlier. The outlook from respondents was for a flat 2004.
• Office buildings—A look at square footage starts for office buildings gives one vertigo. McGraw-Hill says construction was started in 2000 on 300 million square feet of office space. The figures for 2002, 2003 and 2004 are 156 million, 140 million and 147 million.
So while this year is projected to gain on 2003, we still won’t be at half the figure for the year 2000. Reporting on an October survey, the National Association of Industrial and Office Properties said that “more than two-thirds... reported the lack of demand as the biggest threat to local office markets ...72 percent of respondents reported that rents are dropping in their local office market.”
Marcus & Millichap projects a rise in the national office vacancy average to 17 percent for the end of 2003, up from 16.8 percent as of the end of the second quarter. The market is seen as one in which overcapacity has stayed in place, as the aforementioned report notes:
“As a direct result of low interest rates, owners of office properties have been able to refinance and continue to operate properties with high vacancies and negative cash flow. So there have been few ‘forced turnovers’ of office properties that might have provided investors with bargain prices.”
• Hotel/motel—As if the economic malaise were not enough, this sector suffered the worst from the attack on America. But its widely believed to be on the comeback trail—with McGraw-Hill projecting 50 million square feet of new construction starts here, up from 40 million in 2002.
TortoWheaton Research provided Table 1, which shows estimated room nights lost (by full-service hotels) due to travel and safety fears. But TWR projected (in a June 30, 2003 article) an increase of 9 percent in “lodging demand” in 2004. “Combined with the very slow supply growth pace of 1.7 percent [this] should lead to a near-500-basis-points gain in occupancies and roughly 11 percent gain in revenue per available room.”
What this means: The “slow supply growth” is the low rate of hotel construction completions. TWR projects demand growth to outpace supply growth again in 2005-which means higher hotel room rates. That’s likely to be followed up by a rebound in hotel construction.
•Manufacturing—It’s almost not worth breaking industrial new construction out as a category. Only 70 million square feet are projected (by McGraw-Hill) to be started new this year. That’s just four one-hundredths of a percent (.0004) of all new nonresidential square footage projected.
In dollars, the McGraw-Hill numbers project $6 billion of new construction on manufacturing in 2004—a bit more than 1 percent of the total. Through Sept. 30, the Census Bureau’s report put manufacturing construction at $10.6 billion—out of a total of $663 billion.
On the positive side, industrial renovations are higher, according to FMI. But even this company’s combined figures for new construction and improvements are down—from just over $23 billion in both 2000 and 2001 to $13.7 billion last year, $14.6 billion this year, and an estimated $15.3 billion next year.
Figures for China, while not obtained for this report, would be a lot more interesting!
Here’s a quick look at smaller markets:
• Multifamily apartments—While vacancy rates have increased in existing buildings, construction continues at a relatively high rate. The reason: Those “Echo Boom” children will soon be spilling out of high schools (and colleges), and those who don’t move back in with mom and dad will increase demand for rental space.
• Public works—Generally referenced as “nonbuilding construction,” this segment has been harried by two major developments. The first is the delay in action by Congress on highway funding reauthorization. The other is the decline in state tax revenues.
McGraw-Hill puts total nonbuilding construction at $88 billion in 2004, a 12 percent decline from the $99.7 billion in 2002 (and about flat with last year). Half ($41.8 billion) of this year’s spending is projected to go into highways and bridges.
• Electric utility construction—Estimated at $7.5 billion for 2004, it is included by McGraw-Hill in the nonbuilding figures above. Utility construction was put at $12 billion in 2002.
A recent Wall Street Journal article noted a “surprise” glut in power-generating facilities; one anecdotal item was the fact that Entergy has an 80 percent surplus of capacity serving Texas, Arkansas, Louisiana, and Mississippi.
While that’s all about generation, it’s not clear that any source has made public an estimate of increases in transmission and distribution spending for 2004 and beyond. But most observers see big gains coming in that market niche. EC
SALIMANDO is a Vienna, Va.-based freelance writer and frequent contributor to ELECTRICAL CONTRACTOR. He can be reached at email@example.com.